<PAGE> 1
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-12
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LYCOS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on the table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies: common
stock, par value $.01 per share, of Lycos, Inc.
(2) Aggregate number of securities to which transaction applies:
111,064,185 shares of Lycos common stock (representing the number of
shares of Lycos common stock outstanding as of September 19, 2000).
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The filing
fee of $1,418,956.03 was calculated pursuant to Exchange Act Rule
0-11(c)(1) by multiplying 1/50th of 1% by the aggregate value of Lycos
common stock to be received by Terra Networks, S.A., in the
transaction. The value of Lycos common stock was determined to be
$63.88 in accordance with Exchange Act Rule 0-11(a)(4) based on the
average high and low prices of Lycos common stock reported in the
consolidated reporting system on September 19, 2000.
(4) Proposed maximum aggregate value of transaction: $7,094,780,137.80
(5) Total fee paid: $1,418,956.03
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid: $2,366,467
(2) Form, Schedule or Registration Statement No.: Registration No.
333-12208
(3) Filing Party: Terra Networks, S.A.
(4) Date Filed: June 27, 2000
<PAGE> 2
[LYCOS LOGO]
Dear Lycos Stockholders:
As you may know, Lycos, Inc. and Terra Networks, S.A. have agreed to combine
to create Terra Lycos. We would combine to create the leading global internet
company that capitalizes on the convergence of internet services, new media,
branded content, e-commerce and next-generation communication technologies. We
believe this combination offers significant value to our stockholders both today
and in the future.
When the combination is completed, Lycos stockholders will receive for each
share of Lycos common stock Terra Networks American Depositary Shares
representing a number of Terra Networks ordinary shares based on an exchange
ratio which is calculated by dividing $97.55 by the average of the closing price
of Terra Networks ordinary shares on the New Market segment of the Spanish stock
exchanges for the ten trading days ending with the tenth trading day prior to
the completion of the combination. However, if the average price is equal to or
greater than $68.06, the exchange ratio will be 1.433, or if the average price
is equal to or less than $45.37, the exchange ratio will be 2.150. Terra
Networks American Depositary Shares are traded on the Nasdaq National Market
under the symbol "TRRA", and Terra Networks ordinary shares are traded on the
New Market segment of the Spanish stock exchanges. Each Lycos stockholder shall
have the option to receive Terra Networks ordinary shares in account entry form
in lieu of Terra Networks ADSs.
In order to create Terra Lycos, the stockholders of Lycos must approve the
proposal to adopt the amended and restated agreement and plan of reorganization.
The Lycos Board of Directors has unanimously approved the combination and
recommends that you vote for the proposal. Information about the combination is
contained in this proxy statement/prospectus. WE URGE YOU TO READ THIS DOCUMENT,
INCLUDING THE SECTION DESCRIBING RISK FACTORS THAT BEGINS ON PAGE II-1.
To vote your shares, you may use the enclosed proxy card or submit your
proxy by telephone or the internet or you may attend the special stockholders'
meeting that will be held for this important vote. The special meeting will be
held on October 27, 2000, at 8:00 a.m., local time, at Home Suites Inn, 455
Totten Pond Road, Waltham, Massachusetts.
Your vote is very important, regardless of the number of shares you own.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SUBMIT YOUR PROXY
AS SOON AS POSSIBLE TO MAKE SURE YOUR SHARES ARE REPRESENTED AT THE MEETING. IF
YOU DO NOT VOTE, IT WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE COMBINATION.
I strongly support the creation of Terra Lycos and join with our Board of
Directors in enthusiastically recommending that you vote in favor of the
combination.
Sincerely,
/s/ Robert J. Davis
ROBERT J. DAVIS
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities to be issued in the
combination, or determined if this proxy statement/ prospectus is accurate or
complete. Any representation to the contrary is a criminal offense. This proxy
statement/prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities in any jurisdiction where such an offer or
solicitation would be illegal.
This proxy statement/prospectus is dated September 22, 2000, and is first
being mailed to Lycos stockholders on or about September 28, 2000.
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[THIS PAGE INTENTIONALLY LEFT BLANK.]
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LYCOS, INC.
400-2 TOTTEN POND ROAD
WALTHAM, MASSACHUSETTS 02451
(781) 370-2700
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 27, 2000
We will hold a special meeting of the stockholders of Lycos, Inc., a
Delaware corporation, at 8:00 a.m., local time, on October 27, 2000 at Home
Suites Inn, 455 Totten Pond Road, Waltham, Massachusetts for the following
purposes:
1. To consider and vote on a proposal to adopt the amended and restated
agreement and plan of reorganization among Terra Networks, S.A., Lycos,
Inc. and Lycos Virginia, Inc. Under the amended and restated agreement
and plan of reorganization, the combination will occur in the following
steps:
- FIRST, Lycos will be merged with and into its wholly owned
subsidiary, Lycos Virginia, Inc., a Virginia corporation, whereby
each share of Lycos common stock, par value $.01 per share, will be
converted into one share of Lycos Virginia common stock, par value
$.01 per share.
- SECOND, immediately following the first step, Lycos Virginia and
Terra Networks will effect a share exchange whereby each share of
Lycos Virginia common stock will be exchanged for Terra Networks
ordinary shares, nominal value 2 euro per share, which will be
deposited in exchange for Terra Networks American Depositary Shares
unless you elect to receive ordinary shares in the exchange, based
on the exchange ratio described in the attached proxy
statement/prospectus.
In this document, the merger and share exchange described above are
referred to collectively as the "combination" and the amended and
restated agreement and plan of reorganization is referred to as the
"agreement and plan of reorganization". Following the completion of
the combination, Lycos Virginia will be a wholly owned subsidiary
of Terra Networks.
2. To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
We describe these items of business more fully in the attached proxy
statement/prospectus. Only stockholders of record of Lycos common stock at the
close of business on September 5, 2000, are entitled to notice of, and will be
entitled to vote at, the stockholders meeting or any adjournment or
postponement.
Your vote is very important, regardless of the number of shares you own.
Please submit your proxy as soon as possible to make sure that your shares are
represented at the meeting. To vote your shares by proxy, you may complete and
return the enclosed proxy card or you may be able to submit your proxy or voting
instructions by telephone or the internet. If you are a holder of record, you
may also cast your vote in person at the special meeting. If your shares are
held in an account at a brokerage firm or bank, you must instruct them on how to
vote your shares. If you do not vote or do not instruct your broker or bank on
how to vote, it will have the same effect as voting against the combination.
By Order of the Board of Directors
[EDWARD M. PHILIP SIGNATURE]
EDWARD M. PHILIP,
Chief Operating Officer,
Chief Financial Officer and Secretary
Waltham, Massachusetts
September 22, 2000
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE COMBINATION
Q: WHAT IS THE PURPOSE OF THIS COMBINATION?
A:Terra Networks and Lycos believe that the strengths of the two companies will
provide the combined company with the opportunity to become a global leader in
internet, new media and global communications. The combination of Terra
Networks, a leading provider of internet access and interactive content and
services to the Spanish- and Portuguese-speaking world, and Lycos, the
internet's leading multi-brand network, is expected to capitalize on the
convergence of internet services, new media, branded content, e-commerce and
next-generation communication technologies.
Q: WHAT WILL I RECEIVE IN THE COMBINATION?
A: Your shares will be exchanged for Terra Networks ordinary shares, which will
be deposited with Citibank, as ADS depositary, in exchange for ADSs (as
described below) (unless you elect to retain such Terra Networks ordinary
shares in account entry form). The number of shares (or ADSs) you will
receive will be determined by multiplying the number of shares of Lycos
common stock you hold by the exchange ratio. The exchange ratio shall be the
quotient equal to (1) $97.55 divided by (2) the average closing price of
Terra Networks shares on the New Market segment of the Spanish stock
exchanges for the ten full trading days ending on the tenth trading day prior
to the completion of the combination. However, if the average closing price
of Terra Network shares in (2) above is equal to or greater than $68.06, the
exchange ratio shall be 1.433, or if the average closing price of Terra
Networks shares in (2) above is equal to or less than $45.37, the exchange
ratio shall be 2.150. The closing price of Terra Networks shares on the New
Market segment of the Spanish stock exchanges on September 19, 2000 was
equivalent to $43.00. You will not receive any fractional shares or ADSs of
Terra Networks. Instead, you will receive cash in an amount equal to the
market value of any fractional shares or ADSs you would have otherwise been
entitled to receive.
Q: HAS LYCOS, TERRA NETWORKS OR THEIR BOARDS OF DIRECTORS APPROVED THIS
COMBINATION?
A: Yes. Both Lycos' Board of Directors and Terra Networks' Board of Directors
have unanimously approved the agreement and plan of reorganization.
Q: WHAT IS THE RIGHTS OFFERING?
A: Pursuant to an amended and restated rights offering agreement entered into by
Telefonica, S.A., Terra Networks and Lycos in connection with the agreement
and plan of reorganization, Terra Networks made a rights offering whereby it
issued to its shareholders rights to purchase Terra Networks ordinary shares
for an aggregate of E2.2 billion at a price per share of E62.00, which was
the closing price of Terra Networks ordinary shares on May 16, 2000. The
amended and restated rights offering agreement, which we refer to herein as
the "rights offering agreement", is attached to this proxy statement/
prospectus as Annex B. Under the rights offering agreement, Telefonica agreed
to subscribe for all shares not subscribed for by other shareholders in the
rights offering and to vote all of its Terra Networks ordinary shares in
favor of the transactions contemplated by the rights offering agreement and
the agreement and plan of reorganization. The receipt by Terra Networks of
E2.2 billion in proceeds from the rights offering, which is a condition to
Lycos' obligation to complete the combination, occurred on September 20,
2000.
Q: WHAT WILL MY TAX CONSEQUENCES BE AS A RESULT OF THIS SHARE EXCHANGE?
A: We expect that, for U.S. federal income tax purposes, the exchange of your
shares of Lycos common stock for shares or ADSs of Terra Networks generally
will not cause you to recognize any gain or loss. You will, however, have to
recognize income or gain
<PAGE> 6
in connection with any cash received instead of fractional shares.
Q: WILL I RECEIVE DIVIDENDS ON THE TERRA NETWORKS SHARES OR TERRA NETWORKS ADSS
I RECEIVE IN CONNECTION WITH THIS SHARE EXCHANGE?
A: After you surrender your shares of Lycos common stock, you will be entitled
to receive any dividends or distributions declared with respect to Terra
Networks' stock on or after the share exchange. However, Terra Networks has
not in the past paid, and does not expect for the foreseeable future to pay,
any dividends on its stock.
Q: HOW WILL MY RIGHTS AS A STOCKHOLDER CHANGE AS A RESULT OF THIS SHARE
EXCHANGE?
A: Some of the material differences that exist between the rights of Terra
Networks and Lycos securities holders are:
- Your rights will be governed by the Spanish Corporation Law, the by-laws
of Terra Networks and the deposit agreement relating to the ADSs, if
applicable;
- Terra Networks ADS holders do not have the right to attend the annual
general shareholders' meeting and Terra Networks shareholders right to
attend the annual general shareholders' meeting are subject to minimum
share ownership and certain administrative conditions; and
- If ADS holders do not instruct the depositary to vote the underlying
shares, a proxy will be given to a board designee, subject to certain
conditions.
The material differences are more fully described in this proxy statement/
prospectus.
Q: AFTER THIS COMBINATION, WILL I HAVE THE SAME OWNERSHIP AND VOTING
PERCENTAGES IN THE COMBINED COMPANY, TERRA LYCOS, AS I NOW HAVE IN LYCOS?
A: No. You will have a lower ownership and voting interest in Terra Lycos than
you currently have in Lycos.
Upon completion of the combination, Lycos stockholders are expected to own
and have voting power of between 37.5% to 51.6% of Terra Lycos. However,
Lycos has agreed in the agreement and plan of reorganization not to take any
action, including issuing new Lycos shares, that could reasonably be
expected to result in its shareholders owning or having voting power in
excess of 50% of Terra Lycos upon completion of the combination. Telefonica,
S.A., Terra Networks' majority owner, is expected to own between 33.6% and
43.5% of Terra Lycos upon completion of the combination (between 34.4% and
44.5% including 100% of the shares expected to be owned by affiliates of
Telefonica).
Q: WHAT IS A TERRA NETWORKS ADS?
A: A Terra Networks ADS is an American depositary share which represents one
Terra Networks ordinary share. Terra Networks ADSs have been created to allow
U.S. shareholders to more easily hold interests in Terra Networks on U.S.
markets and trade such interests on U.S. markets. Citibank, N.A. is the
depositary which will issue the Terra Networks ADSs and hold the Terra
Networks ordinary shares represented by the Terra Networks ADSs.
Q. HOW CAN LYCOS STOCKHOLDERS ELECT TO RETAIN TERRA NETWORKS ORDINARY SHARES?
A: After the companies complete the share exchange, each holder of Lycos common
stock will be provided with a letter of transmittal which will permit the
holder to elect to receive their Terra Networks ordinary shares in book entry
form instead of having them exchanged for Terra Networks ADSs.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the share exchange becomes effective pursuant to applicable law,
the exchange agent will send, together with the letter of transmittal,
instructions to Lycos stockholders whose shares were converted in the share
exchange. These instructions will explain how to exchange
<PAGE> 7
your Lycos stock certificates for Terra Networks ADSs or Terra Networks
ordinary shares, as the case may be.
Q: CAN I DECIDE NOT TO PARTICIPATE IN THIS SHARE EXCHANGE IF THE AGREEMENT AND
PLAN OF REORGANIZATION IS APPROVED BY A MAJORITY OF LYCOS' STOCKHOLDERS?
A: No.
Q. ARE THERE ANY CONDITIONS TO THE OBLIGATION OF TERRA NETWORKS TO COMPLETE
THIS COMBINATION?
A: Yes. Terra Networks' obligation to complete the combination is subject to a
number of conditions, including:
- adoption of the agreement and plan of reorganization by Lycos
stockholders;
- approval by Nasdaq of Terra Networks' application to quote the ADSs to be
issued in the share exchange;
- completion of the steps required for Terra Networks to issue new Terra
Networks ordinary shares or ADSs to Lycos stockholders in the
combination;
- the absence of any order, injunction, decree, law or regulation that
would prohibit the combination or make it illegal; and
- receipt by each of Terra Networks and Lycos of legal opinions to the
effect that, for United States federal income tax purposes, Terra
Networks, Lycos and Lycos stockholders who exchange all of their shares
solely for shares of Terra Networks common stock or ADSs will not
recognize any gain or loss as a result of the share exchange, except in
connection with the payment of cash instead of fractional shares. These
opinions will be subject to various limitations. We recommend that you
read the more detailed description of the combination's tax consequences
in Part Four -- The Combination.
Q: DOES TERRA NETWORKS REQUIRE ANY APPROVALS FROM ITS SHAREHOLDERS, ANY
GOVERNMENTAL AUTHORITIES OR ANY THIRD PARTIES IN ORDER TO EFFECT THIS
COMBINATION?
A. Yes. Terra Networks' shareholders approved the increases in its capital for
the issuance of shares pursuant to this share exchange on June 8, 2000.
Terra Networks must still register the new shares with the CNMV, file the
notarial deed evidencing the capital increase with the Commercial Registry
of Barcelona and the New Market segment of the Spanish stock exchanges must
accept the new shares for listing.
We are not aware of any other approvals that are required other than the
effectiveness of the registration statements of which this proxy
statement/prospectus forms a part and the listing of the newly issued ADSs
on the Nasdaq National Market.
Q: IS TERRA NETWORKS' FINANCIAL CONDITION RELEVANT TO MY DECISION TO APPROVE
THE AGREEMENT AND PLAN OF REORGANIZATION?
A: Yes. You will receive Terra Networks ADSs or ordinary shares in exchange for
your shares of Lycos common stock and so you should consider the financial
condition of Terra Networks before you decide how to vote. In considering
Terra Networks' financial condition you should carefully read this proxy
statement/prospectus because it contains detailed business, financial and
other information about Terra Networks.
Q: WHAT WILL BE THE ACCOUNTING TREATMENT OF THIS SHARE EXCHANGE?
A: The purchase method would apply to the combination. Under this method, the
excess of the acquisition cost, valued at the full market value of the
capital issued by Terra Networks in the combination, over the fair value of
the net assets acquired is treated as goodwill and amortized over a five-year
period.
<PAGE> 8
Q: WHERE CAN I FIND MORE INFORMATION ABOUT TERRA NETWORKS AND LYCOS?
A: You can find more information about Terra Networks and Lycos from various
sources described under "Part Eight -- Additional Information for
Shareholders -- Where You Can Find More Information".
Q: WHEN IS THE COMBINATION EXPECTED TO BE COMPLETED?
A: Terra Networks and Lycos expect to complete the combination in the fourth
quarter of 2000. Because the combination is subject to governmental
approvals, we cannot predict the exact timing of the completion of the
combination.
Q: HOW DO I VOTE?
A: After you have carefully read this proxy statement/prospectus, just mail your
signed proxy card in the enclosed postage-paid envelope to Georgeson
Shareholder Communications, Inc., 17 State Street, New York, NY, 10004, or,
if available, submit your proxy by telephone or internet as soon as possible
so that your shares may be represented and voted at the Lycos special
meeting. You may also vote in person at the Lycos special meeting. If your
shares are held in "street name", i.e., in the name of a broker, bank or
other record holder, you must either direct the record holder as to how to
vote your shares or obtain a proxy from the record holder to vote at the
special meeting.
Q: MAY I CHANGE MY VOTE?
A: Yes. You may withdraw your proxy or change your vote by delivering a later-
dated, signed written notice of revocation or proxy card to Georgeson
Shareholder Communications, Inc., 17 State Street, New York, NY, 10004,
before the Lycos special meeting or by voting in person at the Lycos special
meeting. If you submit your proxy by telephone or internet, you can change
your vote by submitting a proxy at a later date using the same procedures.
Q: WHO CAN I CALL WITH QUESTIONS ABOUT THE COMBINATION?
A: You can contact our information agent, Georgeson Shareholder Communications,
Inc., 17 State Street, New York, NY, 10004, (212) 440-9800,
[email protected].
ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Lycos from other documents that are not included in
or delivered with the proxy statement/ prospectus. This information is available
to you without charge upon your written or oral request. You can obtain the
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone from Lycos at the following address:
Lycos, Inc.
Attention: Investor Relations
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
If you would like to request any documents, please do so by October 18,
2000 in order to receive them before the special meeting.
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TABLE OF CONTENTS
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PART ONE -- SUMMARY
The Companies........................ I-1
The Combination...................... I-2
General............................ I-2
Reasons for the Combination........ I-2
Opinion of Lycos' Financial
Advisor......................... I-2
Exchange of Shares................. I-2
Conditions to Completion of the
Combination..................... I-3
Termination of the Agreement and
Plan of Reorganization;
Expenses........................ I-3
Termination Fees................... I-4
"No Solicitation" Provisions....... I-5
Waiver and Amendment............... I-5
Interests of Directors and Officers
in the Combination that Differ
from Your Interest.............. I-5
Lycos Stock Options................ I-6
Appraisal Rights................... I-6
Certain Federal Income Tax
Consequences.................... I-6
Accounting Treatment............... I-6
Material Differences in the Rights
of Securityholders.............. I-6
Management and Operations after the
Combination..................... I-7
The Rights Offering................ I-7
Risk Factors....................... I-7
Special Stockholders' Meeting of
Lycos........................... I-7
Recommendation of Lycos' Board of
Directors....................... I-7
Record Date for Voting............. I-8
Summary Selected Historical
Consolidated Financial Data........ I-9
Summary Selected Historical Terra
Networks Financial Data............ I-10
Summary Selected Historical Lycos
Financial Data..................... I-11
Summary Comparative Per Share Data... I-12
Terra Networks Per Share Data...... I-12
Lycos Per Share Data............... I-12
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PART TWO -- RISK FACTORS
Risks Related to this Combination.... II-1
Risks Related to Terra Networks...... II-3
PART THREE -- THE LYCOS SPECIAL
MEETING
Proxy Statement/Prospectus........... III-1
Date, Time and Place of the Special
Meeting............................ III-1
Purpose of the Special Meeting....... III-1
Record Date for the Special
Meeting............................ III-1
Vote Required for Adoption of the
Agreement and Plan of
Reorganization..................... III-1
Proxies.............................. III-2
Electronic or Telephonic Proxies..... III-2
Solicitation of Proxies.............. III-3
Absence of Appraisal Rights and
Dissenters' Rights................. III-3
PART FOUR -- THE COMBINATION
Background of the Combination........ IV-1
Reasons for the Combination........ IV-4
Terra Lycos Strategy............... IV-5
Recommendation of the Lycos Board of
Directors.......................... IV-7
Opinion of Lycos' Financial
Advisor............................ IV-9
Other Interests of Lycos Officers and
Directors in the Combination....... IV-16
The Merger of Lycos into Lycos Virginia... IV-19
The Share Exchange................... IV-20
Representations and Warranties....... IV-23
Conduct of Business Pending the
Combination........................ IV-24
Other Agreements..................... IV-25
No Solicitation...................... IV-26
Conditions to Completion of the
Combination........................ IV-27
Termination of the Agreement and Plan
of Reorganization.................. IV-29
Termination Fees................... IV-30
Other Fees and Expenses............ IV-31
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Extension, Waiver and Amendment of
the Agreement and Plan of
Reorganization..................... IV-31
Stock Exchange Listing............... IV-31
Restrictions on Resales by
Affiliates......................... IV-32
Management and Operations after the
Combination........................ IV-32
The Rights Offering Agreement........ IV-32
Material U.S. Federal Income Tax
Considerations..................... IV-32
General............................ IV-32
The Merger and the Share Exchange.. IV-33
Ownership and Disposition of Terra
Networks ADSs or Ordinary
Shares.......................... IV-34
Spanish Tax Consequences............. IV-36
General............................ IV-36
Comparative Share and Dividend
Information........................ IV-38
Share Information.................. IV-38
Dividend Information............... IV-40
Market Information................. IV-40
Pro Forma Financial Data............. IV-41
PART FIVE -- INFORMATION ABOUT TERRA
NETWORKS
Overview............................. V-1
History.............................. V-2
Lines of Business.................... V-6
Strategic Investments................ V-26
Corporate Services................... V-26
Competition.......................... V-27
Government Regulation................ V-29
Intellectual Property and Proprietary
Rights............................. V-32
Organizational Structure............. V-33
Subsidiaries....................... V-37
Property, Plants and Equipment..... V-37
Exchange Controls.................... V-38
Legal Proceedings.................... V-38
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... V-40
Selected Consolidated Financial
Data............................... V-40
Overview............................. V-41
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Revenues............................. V-44
Operating Expenses................... V-47
Goodwill............................. V-48
Foreign Currency Fluctuation......... V-49
Results of Operations................ V-49
Liquidity and Capital Resources...... V-56
Research and Development............. V-58
The Introduction of the Euro......... V-58
Year 2000............................ V-59
U.S. GAAP Reconciliation............. V-59
Quantitative and Qualitative
Disclosures about Market Risk...... V-59
Management........................... V-59
Biographies of Directors............. V-60
Executive Officers and Senior
Management......................... V-61
Biographies of Executive Officers and
Senior Management.................. V-62
Compensation......................... V-64
Board Practices...................... V-64
Employees............................ V-65
Share Ownership...................... V-65
Principal Shareholders............... V-66
Related Party Transactions........... V-67
Other Agreements................... V-68
PART SIX -- INFORMATION ABOUT LYCOS
Overview............................. VI-1
The Lycos Network.................... VI-1
Products and Services................ VI-2
Acquisitions and Strategic
Alliances.......................... VI-6
Strategic Investments................ VI-8
International Expansion.............. VI-8
Operations and Technology............ VI-10
Legal Proceedings.................... VI-12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... VI-13
Year Ended July 31, 2000 Compared to
Year Ended July 31, 1999........... VI-13
Results of Operations................ VI-13
Operating Expenses................... VI-14
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Liquidity and Capital Resources...... VI-15
Business Combinations................ VI-16
Investments.......................... VI-17
Year Ended July 31, 1999 Compared to
Year Ended July 31, 1998........... VI-17
Results of Operations................ VI-17
Operating Expenses................... VI-18
Acquisitions......................... VI-22
PART SEVEN -- LEGAL INFORMATION
Comparison of Rights of Shareholders
of Terra Networks and Stockholders
of Lycos........................... VII-1
Summary of Your Rights as Holders of
Lycos Shares and Your Rights as
Potential Holders of Terra Networks
Shares or ADSs..................... VII-1
Description of Terra Networks
Ordinary Shares.................... VII-12
General............................ VII-12
Attendance and Voting at
Shareholders' Meetings.......... VII-12
Preemptive Rights.................. VII-13
Form and Transfer.................. VII-13
Reporting Requirements............. VII-13
Foreign Investment and Exchange
Control Regulations............. VII-13
Description of Terra Networks
American Depositary Shares......... VII-15
Dividends and Distributions........ VII-15
Changes Affecting Ordinary
Shares.......................... VII-18
Issuance of ADSs upon Deposit of
Ordinary Shares................. VII-18
Withdrawal of Ordinary Shares upon
Cancellation of ADSs............ VII-18
Voting Rights...................... VII-19
Fees and Charges..................... VII-19
Amendments and Termination......... VII-20
Books of Depositary................ VII-20
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Limitations on Obligations and
Liabilities..................... VII-21
Pre-Release Transactions........... VII-21
Taxes.............................. VII-21
Foreign Currency Conversion........ VII-22
Legal Matters........................ VII-22
Experts.............................. VII-22
PART EIGHT -- ADDITIONAL INFORMATION
FOR STOCKHOLDERS
Where You Can Find More
Information........................ VIII-1
General............................ VIII-1
Incorporation of Certain Documents
by Reference.................... VIII-2
Statements Regarding Forward-Looking
Information........................ VIII-3
Currency Presentation and Exchange
Rates.............................. VIII-3
Enforceability of Civil Liabilities
under U.S. Securities Laws......... VIII-4
Spain.............................. VIII-4
PART NINE -- REGULATORY MATTERS
General.............................. IX-1
State Takeover Laws.................. IX-1
Antitrust............................ IX-2
Other Foreign Approvals.............. IX-3
PART TEN -- FINANCIAL STATEMENTS
Index to Terra Networks Consolidated
Financial Statements............... X-2
Index to Lycos, Inc. Consolidated
Financial Statements............... X-81
ANNEXES
Annex A: Amended and Restated
Agreement and Plan of
Reorganization..................... A-1
Annex B: Amended and Restated Rights
Offering Agreement................. B-1
Annex C: Opinion of Credit Suisse
First Boston Corporation........... C-1
</TABLE>
iii
<PAGE> 12
PART ONE
SUMMARY
The following summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that may be
important to you. To understand this combination more fully, you should read
carefully this entire proxy statement/prospectus. Unless otherwise indicated or
the context otherwise requires, references to "Terra Networks", "we", "us",
"our" and similar terms in this proxy statement/prospectus refer to Terra
Networks, S.A. and its consolidated subsidiaries and references to "Terra Lycos"
refer to Terra Networks, S.A. and its consolidated subsidiaries following
consummation of the combination.
THE COMPANIES
TERRA NETWORKS
We provide internet access and local-language interactive content and
services, concentrating on Spanish- and Portuguese-speaking residential and
small office/home office, or SOHO, customers, and we are a leading internet
company in those markets. We currently provide internet access services in
Spain, Brazil, Mexico, Peru, Chile, Guatemala, El Salvador and the United
States. We operate internet portals serving these countries and Venezuela,
Argentina, Costa Rica, Honduras, Nicaragua, Panama, Uruguay and Colombia. In all
of our markets, we are developing online interactive solutions for advertising
and marketing, as well as for electronic commerce and related activities.
Telefonica, S.A., the parent company of the Telefonica group, currently
owns our majority equity interest. As a member of the Telefonica group, we
benefit from our relationship with the largest and strongest telecommunications
group in Spain and Latin America, with approximately 60 million customers and
significant media assets. The Telefonica group controls full-service
telecommunications subsidiaries in Spain, Brazil, Argentina, Peru, Chile and
Guatemala and has additional telecommunications properties in several other
Latin American countries, Europe and Africa. In Spain and Latin America, the
Telefonica group also controls media properties, including Spanish soccer
broadcast rights and radio stations, and has significant media investments,
including interests in television, cable and film production companies.
Terra Networks' registered address and telephone number is:
TERRA NETWORKS
CALLE NICARAGUA, 54
BARCELONA, SPAIN
TELEPHONE: (34) 91-452-3000
LYCOS
Lycos, Inc. is a global web media company, operating one of the internet's
leading networks of separately branded websites. The Lycos Network is one of the
most visited online destinations in the world, reaching nearly half of all U.S.
web users. The Lycos Networks' comprehensive suite of integrated websites
enables users to quickly access and retrieve information, communicate with other
internet users, easily establish online communities and engage in commerce.
The Lycos Network offers a broad assortment of compelling content to a
large and diverse audience, targeted to a user's particular interests or
preferences. These products and services are offered free of charge to users as
Lycos derives revenues primarily from online advertising and electronic
commerce. Lycos' goal is to be the most visited and utilized global online
destination by increasing the size, frequency and duration of user visits to the
Lycos Network while providing a comprehensive and compelling advertising and
commerce platform for its partners.
Lycos operates its websites directly in the United States and Latin America
and, through joint ventures in 16 other countries throughout the world. The
Lycos Network includes three of the top 20 websites in the United States
including, among others: Lycos.com, Tripod, Angelfire, HotBot, WhoWhere,
MailCity, Wired News, Sonique, Quote.com, Gamesville and Lycos Zone.
The registered address and telephone number of Lycos is:
LYCOS, INC.
400-2 TOTTEN POND ROAD
WALTHAM, MA 02451
TELEPHONE: 781-370-2700
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<PAGE> 13
THE COMBINATION
GENERAL
Terra Networks and Lycos have entered into an agreement and plan of
reorganization to effect the combination of the two companies. Pursuant to and
subject to the conditions set forth in the agreement and plan of reorganization,
Terra Networks will exchange ordinary shares of Terra Networks for each
outstanding share of Lycos common stock. Stockholders of Lycos will receive a
number of Terra Networks ADSs or Terra Networks ordinary shares determined by
multiplying the number of shares of Lycos common stock that they hold by the
exchange ratio. The exchange ratio shall be the quotient equal to (1) $97.55
divided by (2) the average closing price of Terra Networks shares on the New
Market segment of the Spanish stock exchanges for the ten full trading days
ending on the tenth trading day prior to the completion of the combination.
However, if the average closing price of Terra Networks shares in (2) above is
equal to or greater than $68.06, the exchange ratio shall be 1.433, or if the
average closing price of Terra Networks shares in (2) above is equal to or less
than $45.37, the exchange ratio shall be 2.150. Each average closing price of
Terra Networks shares will be expressed in U.S. dollars using the noon buying
rate of euro for U.S. dollars as published by the Federal Reserve Bank of New
York as of each day on which the average closing price is measured. The closing
price of Terra Networks shares on the New Market segment of the Spanish stock
exchanges on September 19, 2000 was equivalent to $43.00.
REASONS FOR THE COMBINATION
Terra Networks and Lycos believe that the business combination transaction
represents a compelling opportunity to enhance value for both Terra Networks and
Lycos and their stockholders. After careful consideration the Terra Networks and
Lycos boards of directors have unanimously approved the agreement and plan of
reorganization. For a list of the factors considered by the Lycos Board of
Directors in making its determination, please see "Part Four -- The
Combination -- Reasons for the Combination" and "Part Four -- The
Combination -- Recommendation of the Lycos Board of Directors".
The original agreement and plan of reorganization between Terra Networks
and Lycos dated May 16, 2000 was amended and restated on September 20, 2000. The
amended and restated agreement and plan of reorganization, which we refer to
herein as the "agreement and plan of reorganization", is attached to this proxy
statement/prospectus as Annex A. Please read the agreement and plan of
reorganization. It is the legal document that governs the combination.
OPINION OF LYCOS' FINANCIAL ADVISOR
Lycos' financial advisor, Credit Suisse First Boston Corporation, has
delivered a written opinion to the Lycos Board of Directors as to the fairness,
from a financial point of view, of the exchange ratio provided for in the share
exchange to the holders of Lycos common stock. The full text of Credit Suisse
First Boston's written opinion is attached to this proxy statement/prospectus as
Annex C. We encourage you to read this opinion carefully in its entirety for a
description of the procedures followed, assumptions made, matters considered and
limitations on the review undertaken. CREDIT SUISSE FIRST BOSTON'S OPINION IS
ADDRESSED TO THE LYCOS BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO ANY MATTER RELATING TO THE COMBINATION.
EXCHANGE OF SHARES
Your shares of Lycos common stock will be exchanged for a number of Terra
Networks ordinary shares, which will be deposited with Citibank, as ADS
depositary, on your behalf in exchange for ADSs (unless you elect to retain your
Terra Networks ordinary shares), equal to the number of shares of Lycos common
stock you own multiplied by the exchange ratio once the conditions are met.
I-2
<PAGE> 14
You will have to surrender your Lycos common stock certificates to receive
Terra Networks ADSs or ordinary shares. You cannot surrender your Lycos
certificates until you receive further written instructions after we have
completed the share exchange.
After the companies complete the combination, we will provide each holder
of Lycos common stock with a letter of transmittal, which will permit the holder
to elect to receive Terra Networks ordinary shares instead of Terra Networks
ADSs in exchange for all or any portion of the holder's shares of Lycos common
stock.
Neither Terra Networks nor the Terra Networks Board of Directors nor Lycos
nor the Lycos Board of Directors makes any recommendation as to whether you
should elect to receive Terra Networks ordinary shares instead of Terra Networks
ADSs in the combination. You must make your own decision with respect to the
election.
Terra Networks will not issue fractional Terra Networks ADSs or ordinary
shares. Instead, Terra Networks will pay you cash for any fractional Terra
Networks ADS or ordinary share owed to you based on the exchange ratio.
CONDITIONS TO COMPLETION OF THE COMBINATION
Our obligations to complete the combination depend on a number of
conditions being met. These include:
- approval of the combination by Lycos stockholders;
- approval by Nasdaq of Terra Networks' application to list the ADSs to be
issued in the share exchange;
- registration with the Spanish CNMV of the ordinary shares to be issued
in the share exchange;
- registration of the capital increase of Terra Networks with the
commercial registry (Registro Mercantil) for the Province of Barcelona;
- the absence of any order, injunction, decree, law or regulation that
would prohibit the combination or make it illegal; and
- receipt by each of Terra Networks and Lycos of legal opinions that, for
United States federal income tax purposes, Terra Networks, Lycos and
Lycos stockholders who exchange all of their shares solely for shares of
Terra Networks common stock or ADSs will not recognize any gain or loss
as a result of the share exchange, except in connection with the payment
of cash instead of fractional shares. These opinions will be subject to
various limitations.
In addition, Lycos' obligation to complete the combination is subject to
Telefonica having performed in all material respects all obligations required to
be performed by it under the rights offering agreement at or prior to the
completion of the combination.
Where the law permits, either of Terra Networks or Lycos could choose to
waive a condition to its obligation to complete the combination although that
condition has not been satisfied. We cannot be certain when, or if, the
conditions to the combination will be satisfied or waived, or that the
combination will be completed.
TERMINATION OF THE AGREEMENT AND PLAN OF REORGANIZATION; EXPENSES
Terra Networks and Lycos can mutually agree at any time to terminate the
agreement and plan of reorganization without completing the combination, even if
Lycos stockholders and Terra Networks shareholders have approved it. Also,
either of Terra Networks or Lycos can decide, without the
I-3
<PAGE> 15
consent of the other, to terminate the agreement and plan of reorganization in a
number of other situations, including:
- the final denial of a required regulatory approval or the issuance or
enactment of a final non-appealable restraint prohibiting completion of
the combination;
- failure of the other party to obtain the securityholder vote needed to
approve the combination;
- an uncorrected material breach of the agreement and plan of
reorganization by the other party, so long as the party that is seeking
to terminate the agreement and plan of reorganization has not itself
materially breached the agreement and plan of reorganization;
- the failure to complete the combination by January 31, 2001; or
- if there has been a material breach of the agreement and plan of
reorganization on the part of the other party which would constitute the
failure of a condition.
Terra Networks can decide to terminate the agreement and plan of
reorganization if the Lycos Board of Directors:
- withdraws, modifies or changes its recommendation of the agreement and
plan of reorganization in a manner adverse to Terra Networks;
- refuses to affirm its recommendation of the agreement and plan of
reorganization after a bona fide acquisition proposal has been made;
- recommends to stockholders of Lycos an acquisition proposal by a third
party or resolves to do so; or
- fails to recommend against acceptance of a tender offer or exchange
offer for more than 15% or more of the outstanding shares of Lycos
common stock.
Lycos can decide to terminate the agreement and plan of reorganization if,
prior to the Lycos stockholder vote and after receipt of an acquisition proposal
from a third party, the Board of Directors of Lycos determines, in good faith
after consulting with outside legal counsel, that it is necessary to do so to
comply with its fiduciary duties.
Whether or not the combination is completed, Terra Networks and Lycos will
each pay its own fees and expenses, except that Terra Networks and Lycos will
evenly divide the costs and expenses that they have incurred in printing and
mailing this document. Terra Networks and Lycos will also evenly divide the fees
that we will have to pay to the Securities and Exchange Commission in connection
with the combination.
TERMINATION FEES
Lycos will be required to pay a termination fee of $347,556,960 to Terra
Networks if the agreement and plan of reorganization is terminated in certain
circumstances, including the following:
- the agreement and plan of reorganization is terminated by Lycos after
receiving a bona fide acquisition proposal from a third party if the
Board of Directors of Lycos determines, in good faith after consultation
with outside counsel, that it is necessary to do so to comply with its
fiduciary duties;
- the agreement and plan of reorganization is terminated by either company
due to the fact that (i) the stockholders of Lycos fail to approve the
combination, (ii) the combination is not completed by January 31, 2001
without the Lycos stockholders' meeting to approve the combination
having occurred or (iii) the Lycos Board of Directors withdraws,
modifies or
I-4
<PAGE> 16
changes its recommendation of the agreement and plan of reorganization
in a manner adverse to Terra Networks or resolves to do so if:
- at such time a third party shall have made a bona fide acquisition
proposal which is made known to Lycos stockholders; and
- within 12 months of termination, Lycos consummates or enters into a
definitive agreement for a transaction involving 40% or more of the
voting securities of Lycos or 40% or more of its consolidated assets;
or
- the agreement and plan of reorganization is terminated by Terra Networks
because the Lycos Board of Directors:
- refuses to affirm its recommendation of the agreement and plan of
reorganization after a bona fide acquisition proposal has been made;
- recommends to stockholders of Lycos an acquisition proposal by a third
party or resolves to do so; or
- fails to recommend against acceptance of a tender offer or exchange
offer for more than 15% or more of the outstanding shares of Lycos
common stock.
The circumstances under which the termination fee is payable and the amount
of such fee is described more fully below under "Part Four -- The
Combination -- Termination Fees".
"NO SOLICITATION" PROVISIONS
The agreement and plan of reorganization contains detailed provisions
restricting Lycos from seeking any acquisition proposal from another party.
These provisions prohibit Lycos and its subsidiaries and any of their officers,
directors, employees, agents and representatives from directly or indirectly
initiating, soliciting, encouraging or otherwise facilitating, or negotiating or
providing confidential information in connection with, any acquisition proposal
from another party. To the extent that the Lycos Board of Directors determines
in good faith after consultation with outside legal counsel that such action is
necessary to comply with its fiduciary duties under applicable law, however, the
Lycos Board of Directors may furnish confidential information to and negotiate
with another party in connection with an acquisition proposal, withdraw or
modify its recommendation to the Lycos stockholders with respect to the
combination or may recommend an acquisition proposal by a third party and
terminate the agreement and plan of reorganization in order to enter into a
definitive agreement with respect to an acquisition proposal by a third party.
These provisions are more fully described under "Part Four -- The
Combination -- No Solicitation".
WAIVER AND AMENDMENT
Terra Networks and Lycos may jointly further amend the agreement and plan
of reorganization, and each of Terra Networks and Lycos may waive its right to
require the other party to adhere to the terms and conditions of the agreement
and plan of reorganization. However, Terra Networks and Lycos may not do so
after you approve the combination if the amendment or waiver reduces or changes
the consideration that will be received by you or otherwise under applicable law
requires your approval, unless you approve the amendment or waiver.
INTERESTS OF DIRECTORS AND OFFICERS IN THE COMBINATION THAT DIFFER FROM YOUR
INTEREST
Some of Lycos' directors and officers have interests in the combination
that differ from, or are in addition to, their interests as stockholders in the
company. These interests exist because of employment or severance agreements
that the officers have entered into with Lycos, and rights that Lycos officers
and directors have under Lycos' benefit plans. These employment and severance
agreements provide the officers with severance benefits if their employment with
the combined
I-5
<PAGE> 17
company is terminated, and the plans provide for the accelerated vesting of the
benefits under the plans.
Additional interests of some of Lycos' directors and executive officers are
described under "Part Four -- The Combination -- Other Interests of Lycos
Officers and Directors in the Combination."
The members of Lycos' Board of Directors knew about these additional
interests and considered them when they approved the agreement and plan of
reorganization and the combination.
LYCOS STOCK OPTIONS
In the combination, each stock option to buy Lycos common stock granted
under Lycos' stock option plans that is outstanding and not yet exercised
immediately before completing the share exchange will be transferred to Terra
Networks and Terra Networks will issue as of the completion of the share
exchange, in exchange therefor, an option to purchase Terra Networks ADSs. The
number of Terra Networks ADSs subject to each new option, as well as the
exercise price of that option, will be adjusted to reflect the exchange ratio.
APPRAISAL RIGHTS
Under Delaware law and Virginia law, Lycos stockholders will not have
appraisal rights or dissenter's rights in connection with the combination.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
We expect that, for U.S. federal income tax purposes, the exchange of your
shares of Lycos common stock for shares or ADSs of Terra Networks generally will
not cause you to recognize any gain or loss. You will, however, recognize income
or gain in connection with any cash received instead of fractional shares.
This tax treatment may not apply to every Lycos stockholder. Determining
the actual tax consequences of the combination to you can be complicated. They
will depend on your specific situation and on variables not within our control.
You should consult your own tax advisor for a full understanding of the
combination's tax consequences.
ACCOUNTING TREATMENT
Terra Networks will account for the share exchange as a purchase for
financial reporting purposes. Under this method, the excess of the acquisition
cost, valued at the full market value of the capital issued by Terra Networks in
the combination, over the fair value of the net assets acquired will be treated
as goodwill and amortized over a five-year period.
MATERIAL DIFFERENCES IN THE RIGHTS OF SECURITYHOLDERS
The rights of Terra Networks shareholders are governed by Spanish law and
by Terra Networks' by-laws (estatutos). The rights of Lycos stockholders are
governed by Delaware law and by Lycos' restated certificate of incorporation and
amended and restated by-laws. Upon completion of the combination, Lycos
stockholders will become ADS holders or shareholders of Terra Networks, and your
rights will be governed by Spanish law, Terra Networks' by-laws and the Deposit
Agreement, if applicable. The combined company's by-laws will be identical to
Terra Networks' current by-laws, except that we will increase the number of
authorized shares. For a comparison of the rights of holders of Terra Networks
ADSs and ordinary shares with the rights of holders of Lycos common stock, see
"Part Seven -- Legal Information."
I-6
<PAGE> 18
MANAGEMENT AND OPERATIONS AFTER THE COMBINATION
Upon completion of the combination, Robert Davis, Ted Philip and one other
director of Lycos designated by Lycos and reasonably acceptable to Terra
Networks will become members of the Terra Lycos Board of Directors. In addition,
upon completion of the combination, Joaquim Agut will serve as Executive
Chairman of Terra Lycos, Mr. Davis will serve as Chief Executive Officer, Mr.
Philip will serve as Chief Financial Officer and Mr. Abel Linares will serve as
Chief Operating Officer.
THE RIGHTS OFFERING
Pursuant to a rights offering agreement entered into by Telefonica, Terra
Networks and Lycos in connection with the agreement and plan of reorganization,
Terra Networks made a rights offering whereby it issued to its shareholders
rights to purchase Terra Networks ordinary shares for an aggregate of E2.2
billion at a price per share of E62.00, which was the closing price of Terra
Networks ordinary shares on May 16, 2000, the date of the announcement of the
combination. Under the rights offering agreement, Telefonica agreed to subscribe
for all shares not subscribed for by other shareholders in the rights offering.
On June 8, 2000, the annual general shareholders' meeting of Terra Networks
approved the rights offering. The receipt by Terra Networks of E2.2 billion in
proceeds from the rights offering, which is a condition to Lycos' obligation to
complete the combination, occurred on September 20, 2000. Telefonica subscribed
for substantially all of the shares offered pursuant to the rights offering.
The original rights offering agreement between Telefonica, Terra Networks
and Lycos dated May 16, 2000 was amended and restated. We refer to such
agreement, as amended and restated, herein as the "rights offering agreement".
We have attached the rights offering agreement to this proxy
statement/prospectus as Annex B. It is the legal document that governed the
rights offering.
RISK FACTORS
In determining whether to vote to adopt the agreement and plan of
reorganization, you should carefully consider the risk factors described in this
document, including the risks that:
- your ownership and voting percentages in Lycos will be diluted as a
result of the combination;
- the market value of the Terra Networks shares or ADSs that you will
receive will not be protected to the extent that the price of Terra
Networks shares is below $45.37; and
- we may not be able to successfully integrate the two companies as a
result of geographic and cultural differences and language barriers.
SPECIAL STOCKHOLDERS' MEETING OF LYCOS
A special meeting of Lycos' stockholders will be held on October 27, 2000,
at 8:00 a.m., local time, at Home Suites Inn, 455 Totten Pond Road, Waltham,
Massachusetts. At the special meeting, the holders of Lycos common stock will
(a) vote on a proposal to adopt the agreement and plan of reorganization and (b)
act upon such other matters as may properly come before the special meeting.
Holders of a majority of Lycos' outstanding common stock entitled to vote must
adopt the agreement and plan of reorganization in order to complete the
combination. Under Delaware law and Virginia law, Lycos' stockholders do not
have appraisal rights or dissenter's rights in connection with the combination.
RECOMMENDATION OF LYCOS' BOARD OF DIRECTORS
The Lycos Board of Directors has unanimously approved the combination and
the agreement and plan of reorganization and declared it advisable for Lycos to
enter into the agreement and plan
I-7
<PAGE> 19
of reorganization. Accordingly, the Lycos Board of Directors unanimously
recommends that Lycos stockholders vote "FOR" adoption of the agreement and plan
of reorganization.
RECORD DATE FOR VOTING
You can vote at the special meeting of Lycos stockholders if you owned
Lycos common stock on September 5, 2000. On that date, there were 110,738,573
shares of Lycos common stock outstanding and entitled to vote.
Each share of Lycos common stock outstanding on the record date is entitled
to one vote. There are no other classes of voting securities of Lycos presently
outstanding. As of the record date, directors and executive officers of Lycos
and their affiliates owned approximately 3.19% of the outstanding shares of
Lycos common stock.
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<PAGE> 20
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following information is provided to aid you in your analysis of the
financial aspects of this combination. This information is derived from Terra
Networks' historical consolidated financial statements and Lycos' historical
consolidated financial statements. The information is only a summary. You should
read it together with Terra Networks' and Lycos' respective historical
consolidated financial statements and related notes which appear elsewhere in
this proxy statement/prospectus. In addition, we have prepared pro forma
consolidated financial data showing the effects of the combination. This
information can be found under "Part Four -- The Combination -- Pro Forma
Financial Data".
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<PAGE> 21
SUMMARY SELECTED HISTORICAL TERRA NETWORKS FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(THOUSANDS OF EURO, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Access.......................... 818 2,390 9,646 24,817 5,169 45,395
Advertising..................... -- 72 1,115 5,123 1,076 17,093
Other........................... -- 88 1,384 20,291 2,110 20,011
----------- ----------- ----------- ----------- ----------- -----------
Total revenues................ 818 2,550 12,145 50,231 8,355 82,499
Operating expenses:
Goods purchased................. (708) (1,054) (8,475) (31,044) (10,399) (57,811)
Personnel expenses.............. (661) (928) (3,175) (19,942) (3,424) (36,521)
Depreciation and amortization... (123) (464) (701) (6,272) (763) (26,884)
Other........................... (658) (2,144) (5,555) (83,904) (11,608) (142,039)
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses
before financial expenses... (2,150) (4,590) (17,906) (141,162) (26,194) (263,255)
----------- ----------- ----------- ----------- ----------- -----------
Operating loss.................... (1,332) (2,040) (5,761) (90,931) (17,839) (180,756)
Amortization of goodwill(1)....... -- (310) (339) (28,654) (3,227) (57,288)
Financial income (expense), net... (25) (81) (90) 1,839 (85) 321
Equity share of affiliate losses,
net............................. -- -- -- (60) -- (4,789)
Extraordinary income
(expense)(2).................... 14 97 (562) (1,425) 1 (486)
Corporate income tax credit....... -- 363 1,334 35,899 4,109 76,158
Minority interest................. -- 465 1,673 1,928 1,725 1,718
----------- ----------- ----------- ----------- ----------- -----------
Net loss (Spanish GAAP)........... (1,343) (1,506) (3,745) (81,404) (15,316) (165,122)
=========== =========== =========== =========== =========== ===========
Net loss (U.S. GAAP).............. (1,343) (1,899) (5,061) (139,310) (21,836) (267,262)
Basic and diluted net loss per
ordinary share (U.S. GAAP)...... (0.007) (0.010) (0.026) (0.684) (0.112) (0.955)
Weighted average ordinary shares
outstanding..................... 193,525,585 193,525,585 193,525,585 203,763,953 194,085,972 280,000,000
Dividends per share............... -- -- -- -- -- --
</TABLE>
---------------
(1) Under U.S. GAAP goodwill amortization is included in operating expenses.
(2) Extraordinary income (expense) items under Spanish GAAP would not qualify
as extraordinary items under U.S. GAAP.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------ AT JUNE 30,
1996 1997 1998 1999 2000
------ ------ ------ --------- -----------
(UNAUDITED)
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ 232 1,753 148 20,439 28,188
Working capital............................................. (2,122) (246) (3,701) 501,260 164,340
Total assets (Spanish GAAP)................................. 1,683 11,797 18,617 1,405,465 1,345,113
Total assets (U.S. GAAP).................................... -- 11,390 16,884 1,301,359 1,055,614
Total long-term obligations (Spanish GAAP).................. -- 183 221 15,183 41,597
Shareholders' equity (Spanish GAAP)......................... 1,190 2,998 3,593 1,233,527 1,071,173
Shareholders' equity (U.S. GAAP)............................ 1,172 2,603 1,882 1,129,471 835,561
Capital stock (excluding long term debt and redeemable
preferred stock).......................................... 150 1,332 5,589 560,000 560,000
</TABLE>
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SUMMARY SELECTED HISTORICAL LYCOS FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising................................... 4,478 17,668 42,854 96,459 191,653
Electronic commerce, license and other........ 779 4,856 14,292 42,081 99,297
------ ------ ------- ------- --------
Total revenues........................ 5,257 22,524 57,146 138,540 290,950
Cost of revenues................................ 2,901 4,467 12,758 29,273 52,800
------ ------ ------- ------- --------
Gross profit.................................. 2,356 18,057 44,388 109,267 238,150
Operating expenses:
Research and development...................... 906 4,521 9,724 26,963 47,352
In process research and development........... 452 -- 17,280 -- --
Sales and marketing........................... 4,748 19,318 35,250 79,325 148,768
General and administrative.................... 1,692 2,856 5,883 17,528 31,781
Amortization of intangible assets............. 360 540 7,614 52,428 134,063
------ ------ ------- ------- --------
Total operating expenses.............. 8,158 27,235 75,751 176,244 361,964
------ ------ ------- ------- --------
Operating loss.................................. (5,802) (9,178) (31,363) (66,977) (123,814)
Interest income................................. 714 2,129 3,050 6,274 23,398
Minority interest and other, net................ -- -- -- -- (2,263)
Equity share of income (loss) affiliates, net... -- -- -- (1,361) (32,407)
Gain on sale of investment...................... -- -- -- 10,120 270,237
------ ------ ------- ------- --------
Net income (loss) before income taxes........... (5,088) (7,049) (28,313) (51,944) 135,151
Provision for income taxes...................... -- -- -- 138 114,146
------ ------ ------- ------- --------
Net income (loss)............................... (5,088) (7,049) (28,313) (52,082) 21,005
====== ====== ======= ======= ========
Basic net income (loss) per share............... (0.11) (0.12) (0.44) (0.59) 0.20
====== ====== ======= ======= ========
Diluted net income (loss) per share............. (0.11) (0.12) (0.44) (0.59) 0.19
====== ====== ======= ======= ========
Weighted average shares used in computing basic
net income (loss) per share (thousands)....... 47,970 57,457 64,144 88,960 105,211
====== ====== ======= ======= ========
Weighted average shares used in computing
diluted net income (loss) per share
(thousands)................................... 47,970 57,457 64,144 88,960 111,695
====== ====== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------- ------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... 44,142 40,766 153,980 166,506 640,064
Working capital............................... 39,974 38,129 146,889 181,305 579,691
Total assets.................................. 53,661 65,419 317,784 889,799 1,752,444
Long-term portion of deferred revenues, net of
current portion............................. -- 5,100 26,160 55,934 34,216
Long-term portion of notes payable............ -- -- 161 2,600 2,011
Total stockholders' equity.................... 44,106 37,495 237,138 739,470 1,477,714
</TABLE>
I-11
<PAGE> 23
SUMMARY COMPARATIVE PER SHARE DATA
Set forth below are net income, cash dividends and book value per common
share data under Spanish and U.S. GAAP.
The pro forma combined per Lycos equivalent share information shows the
effect of this combination from the perspective of an owner of Lycos shares.
You should read the information below together with our historical
financial statements and related notes included in this proxy
statement/prospectus and the information in "Part Four -- The Combination -- Pro
Forma Financial Data." The unaudited pro forma condensed combined data below is
for illustrative purposes only. Terra Networks and Lycos may have performed
differently had they always been combined. You should not rely on this
information as being indicative of the historical results that would have been
achieved had Terra Networks and Lycos always been combined or the future results
that the companies will experience after this combination.
TERRA NETWORKS PER SHARE DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------- -----------
(IN EURO)
<S> <C> <C>
SPANISH GAAP
------------------------------------------------------------
HISTORICAL
Net loss.................................................. (0.399) (0.589)
Cash dividends............................................ -- --
Book value................................................ 6.054 3.826
U.S. GAAP
------------------------------------------------------------
HISTORICAL
Net loss.................................................. (0.684) (0.955)
Cash dividends............................................ -- --
Book value................................................ 5.543 2.984
PRO FORMA
Net loss.................................................. (6.210) (2.688)
Cash dividends............................................ -- --
Book value................................................ 31.968 29.017
</TABLE>
LYCOS PER SHARE DATA
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED
JANUARY 31, JULY 31,
2000 2000
------------- -----------
<S> <C> <C>
U.S. GAAP
------------------------------------------------------------
HISTORICAL
Net loss.................................................. (1.050) 0.792
Cash dividends............................................ -- --
Book value................................................ 12.980 14.456
PRO FORMA EQUIVALENT(A)
Net loss.................................................. (6.210) (2.688)
Cash dividends............................................ -- --
Book value................................................ 16.602 13.067
</TABLE>
---------------
(a) Represents pro forma equivalent Lycos amounts calculated by multiplying the
Terra Networks pro forma per share data by the ratio of common shares
issued to acquire Lycos (based on an assumed Terra Networks closing stock
price at the lower collar limit) to the total pro forma common shares
outstanding.
I-12
<PAGE> 24
PART TWO
RISK FACTORS
The combination involves high risk. You should consider carefully the risks
described below before you decide to approve the agreement and plan of
reorganization.
RISKS RELATED TO THIS COMBINATION
OUR ABILITY TO SUCCESSFULLY INTEGRATE THE TWO COMPANIES MAY BE ADVERSELY
AFFECTED BY GEOGRAPHIC AND CULTURAL DIFFERENCES AND LANGUAGE BARRIERS.
Terra Networks and Lycos are two large companies with operations currently
conducted in different countries and languages and whose management and
employees come from different cultural backgrounds. These factors may adversely
affect the ability of the companies to successfully integrate and, as a result,
the implementation of our business combination strategy may be more difficult
than expected and might not result in:
- expected synergies;
- operating efficiencies;
- enhancement of competitive position; or
- increased revenues and earnings growth or other benefits to our
shareholders.
TERRA LYCOS MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE COMBINATION.
The success of the combination will depend, in part, on the ability of
Terra Lycos to realize the anticipated growth opportunities and synergies from
combining the businesses of Terra Networks with the businesses of Lycos. To
realize the anticipated benefits of this combination, members of the management
team of Terra Lycos must develop strategies and implement a business plan that
will:
- effectively combine the benefits of the convergence of internet
services, new media content and next-generation communication
technologies with the broadest, most comprehensive array of popular
products and services;
- successfully increase the number of users of Terra Lycos by leveraging
Terra Lycos' network of well-recognized global and regional brand names,
provide enhanced content and services to Terra Lycos' users and expand
Terra Lycos' partnerships and alliances;
- effectively and efficiently integrate the policies, procedures and
operations of Terra Networks and Lycos; and
- successfully retain and attract key employees of the combined company,
including operating management and key technical personnel, during a
period of transition and in light of the competitive employment market.
If members of the management team of Terra Lycos are not able to develop
strategies and implement a business plan that achieves these objectives, among
others, the anticipated benefits of the combination may not be realized. In
particular, anticipated growth in revenue, earnings before interest, taxes,
depreciation and amortization, or "EBITDA," and cash flow may not be realized,
which would have an adverse impact on Terra Lycos and the market price of shares
and ADSs of Terra Networks.
YOU ARE BEING OFFERED A CERTAIN NUMBER OF TERRA NETWORKS SHARES OR ADSS WHICH
INVOLVE THE RISK OF MARKET FLUCTUATIONS.
You are being offered a certain number of Terra Networks shares or ADSs in
this share exchange. The value of the shares or ADSs of Terra Networks being
offered is protected to the
II-1
<PAGE> 25
extent that changes in the average closing price of Terra Networks shares are
within a range of 20% above or below $56.72, but it is not protected to the
extent that the average closing price is less than $45.37. On September 19,
2000, the last reported closing price of the Terra Networks shares on the New
Market segment of the Spanish stock exchanges was equivalent to $43.00.
YOUR OWNERSHIP AND VOTING PERCENTAGES IN LYCOS WILL BE DILUTED AS A RESULT OF
THIS COMBINATION.
You should be aware that your ownership percentages and voting percentages
in Lycos will be diluted. Subject to the adjustment of the exchange ratio and
based on the capitalization of Terra Networks and Lycos immediately following
this combination, Lycos' former stockholders will own securities representing
37.5% to 51.6% of the outstanding shares and voting rights of Terra Networks.
However, Lycos has agreed in the agreement and plan of reorganization not to
take any action, including issuing new Lycos shares, that could reasonably be
expected to result in its shareholders owning or having voting power in excess
of 50% of Terra Lycos upon completion of the combination.
THE COMBINATION OF TERRA NETWORKS AND LYCOS TO FORM A TRULY GLOBAL INTERNET
COMPANY CREATES A NEW BUSINESS MODEL THAT THE MARKETPLACE MAY HAVE DIFFICULTY
VALUING.
Terra Lycos will be a truly global internet company and expects to
capitalize on the convergence of internet services, new media, branded content,
e-commerce and next-generation communications technologies. Financial analysts
may have difficulty identifying and applying measures of financial performance
that reflect the value of the combined company. As a result, shares and ADSs of
Terra Lycos may not achieve a valuation in the public trading market that fully
reflects the true value of the combined company, including its synergies and
benefits.
FORWARD-LOOKING STATEMENTS REGARDING BUSINESS AND OPERATIONS OF THE COMBINED
COMPANY MAY PROVE INACCURATE.
Terra Networks and Lycos have made forward-looking statements in this proxy
statement/prospectus concerning future performance, costs, revenues and growth
of Terra Networks, Lycos and/or Terra Lycos, industry and customer growth,
internet penetration rates, statements regarding operational efficiencies from
and benefits of the merger and estimated company earnings. These statements may
generally, but not always, be identified by the use of words such as
"anticipates", "should", "expects" or "believes." By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. Many factors
could cause actual results and developments to differ materially from those
expressed or implied by these forward-looking statements.
Potential risks and uncertainties which may cause our actual results to
differ materially from those implied by the forward-looking statements include,
but are not limited to:
- difficulties in developing and introducing new access methods and
devices;
- difficulties in having the internet accepted as a medium for
advertising;
- the growth of free internet access in many core markets that may
increase competition;
- the need to establish and maintain strategic relationships with content
providers, e-commerce merchants and technology providers;
- declining prices for our services;
- difficulties in integrating our acquired businesses;
- the effect of future acquisitions on our financial condition and results
of operations;
- the effect of adverse economic trends on our principal markets;
II-2
<PAGE> 26
- the effect of foreign exchange fluctuations on our results of
operations;
- the potential lack of attractive investment targets;
- reliance on third-party content providers;
and other risks discussed in this "Part Two -- Risk Factors" and elsewhere in
this proxy-statement/prospectus.
RISKS RELATED TO TERRA NETWORKS
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
We have operated for a short time only, and our historical financial
statements do not reflect the current scope of our activities.
Although some of the operations that constitute our business have been part
of the Telefonica group since December 1995, we were incorporated and have
operated as a separate company only since December 1998. In addition, we have
acquired many companies since our incorporation, most of which are young
companies. Accordingly, we have only a limited operating history for you to
evaluate our business. Only our historical results of operations are reflected
in the consolidated financial statements appearing elsewhere in this proxy
statement/prospectus. As a result, our consolidated financial statements do not
provide a complete view of the current scope of our activities.
We have never made money and expect our losses to continue for the
foreseeable future.
We have never been profitable. During the six months ended June 30, 2000 we
recorded a net loss of E165.1 million and during the year ended December 31,
1999 we recorded a net loss of E81.4 million. On a pro forma basis, giving
effect to the Lycos transaction, our net loss would have been E1,543.0 million
for the six months ended June 30, 2000 and E3,090.8 million for the year ended
December 31, 1999 under U.S. GAAP. We expect to continue to incur significant
losses. Based on our strategic plan and the experience of other internet portal
companies and ISPs, we expect that our expenses will continue to exceed our
revenues for at least the next three years on a stand-alone basis, and the next
two years giving effect to the Lycos transaction. After that, depending upon
competitive conditions and the dynamics of the industry, we may continue to
pursue a strategy that emphasizes strength of market share and market presence
at the expense of profitability.
You should not rely on our annual operating results as an indication of our
future results because they are subject to significant fluctuations.
Our future revenues and results of operations may fluctuate significantly
due to a combination of factors, including:
- the start-up nature of our business, which means we have not begun to
achieve consistency in revenue and expense growth;
- our acquisition and growth strategy, which means that we expect to
frequently add new activities to our business, leading to increased
revenues and expenses;
- promotional activities by us or our competitors, which could cause
heavier internet usage in some quarters compared to others and lead to
fluctuating access revenues and traffic-inducement fees;
- currency fluctuations that affect reported revenues and expenses from
our Latin American and U.S. operations; and
- heavier retail purchasing activity in some quarters compared to others,
which would contribute to fluctuating e-commerce revenues.
II-3
<PAGE> 27
Accordingly, you should not rely on year-to-year comparisons of our results
of operations as an indication of our future performance. It is possible that in
future periods our results of operations may be below the expectations of public
market analysts and investors. This could cause the trading price of our
ordinary shares and ADSs to decline.
We may not be able to recover the substantial amounts of goodwill generated
by our acquisitions.
Goodwill represents the purchase price of an acquisition less the fair
value of the assets acquired. We generated substantial amounts of goodwill from
our acquisitions, most importantly our acquisitions of Ole, ZAZ, our Chilean
business and Infosel. Part of our strategy involves making significant
acquisitions. Because internet businesses of the type we target often do not
have substantial tangible assets, we expect that our acquisition of these
businesses will continue to generate significant amounts of goodwill.
At June 30, 2000, on an historical basis we had goodwill of E510.4 million,
equal to 37.9% of our total assets at that date. However, on a pro forma basis
at that date, we had E13,127.6 million in goodwill, equal to 76.3% of our total
assets and 78.8% of our shareholders' equity at that date.
We cannot be certain that we will be able to recover all of the goodwill
that we now carry as an asset. Although we now write off goodwill over a
five-year period, we could be forced to write off goodwill faster because of
rapid technological change, intense competition and other factors that in the
future indicate that the fair value of our acquisitions is not worth their
carrying value.
Goodwill generated by our acquisitions results in substantially higher
levels of amortization than we have recorded historically.
We amortize goodwill over a period of five years. The substantial increase
in goodwill described above also leads to a substantial increase in amortization
expense, from E57.3 million for the six months ended June 30, 2000 on an
historical basis, to E1,345.7 million for the six months ended June 30, 2000 on
a pro forma basis. As we acquire more businesses and generate more goodwill in
the future, we expect that our amortization expense will also grow.
RISKS RELATING TO BEING PART OF THE TELEFONICA GROUP
We lack experience operating as an independent entity and rely on the
global presence and marketing capabilities of the Telefonica group.
Until December 1998, our ISP business was operated by various members of
the Telefonica group. We rely in part on the leading presence of the Telefonica
group in Spain and Latin America to build our customer base and attract
strategic partners. Competition among telecommunications companies in these
countries has grown as telecommunications systems have been privatized and
deregulated. If competition adversely affects Telefonica group companies in some
telecommunications markets, this could have a material adverse effect on our
business, financial condition and results of operations.
Other companies in the Telefonica group could compete with us.
Companies in the Telefonica group could compete with us, and they may
pursue their own internet-related business or operational strategies, including:
- providing our competitors with internet-based technology infrastructure;
and
- offering internet-based services from new media platforms operated by
them.
For example, regulatory constraints require some Telefonica group companies
to make their services available to our competitors.
II-4
<PAGE> 28
Because most Telefonica group companies operate in the telecommunications
or media industries, there could be situations in which we and these other
companies find ourselves with related, or even competing activities. Telefonica
is able to exercise significant influence over all matters requiring approval by
our shareholders, including approvals of mergers and other business combinations
it can also exercise influence over our operations and business strategies.
Although Telefonica will attempt to balance the interests of all Telefonica
group members in a fair manner, it is possible that we may disagree with the
outcome of a particular decision.
Some of our initiatives may affect the financial results of other
internet-related businesses of the Telefonica group.
Telefonica owns our controlling equity interest. In addition, Telefonica
owns controlling or otherwise significant equity interests in many companies
engaged in the telecommunications industry. As the telecommunications industry
continues to converge, these companies could begin to compete in the same
markets. As a result, strategic initiatives that we may wish to pursue could
affect other members of the Telefonica group, and vice versa. Such initiatives
may include:
- extending our services beyond the residential and SOHO internet markets;
- significant increases in marketing expenditures or technological
investments;
- acquisitions of other internet-based service providers;
- further expansion throughout Latin America and Europe; and
- changes to our pricing structure.
These actions could affect the operations and activities undertaken by
other Telefonica group companies. As a result, Telefonica will have to determine
how the various members of the Telefonica group will proceed, balancing all
interest involved.
Contracts between us and members of the Telefonica group were negotiated
between parties under common control.
We have entered into a number of contracts with members of the Telefonica
group. These contracts were negotiated between parties under common control.
Although we believe that these contracts are fair to us in all material
respects, it is possible that we could have obtained better terms from third
parties. The most important of these contracts is our agreement with Telefonica
Data Espana, S.A. relating to traffic-inducement fees. Telefonica Data Espana
will pay traffic-inducement fees to other Spanish ISPs according to the same
schedule applicable to us.
Regulations may affect our relationship with the Telefonica group.
Our relationship with the Telefonica group is a competitive strength that
may attract the attention of Spanish, European Union or Latin America
competition authorities. These regulatory bodies may limit the extent to which
we can cooperate with members of the Telefonica group in providing internet
services. The Spanish, European Union or Latin American competition authorities
or private parties could initiate action against us in the future in connection
with our relationship with the Telefonica group.
RISKS RELATED TO OUR MARKETS AND STRATEGY
If internet usage does not continue to grow at a strong pace, our business
may not be successful.
The internet markets in both Spain and Latin America are in an early stage
of development. Our business, financial condition and results of operations will
be materially and adversely affected if internet usage in Spain and Latin
America does not continue to grow or grows more slowly than we
II-5
<PAGE> 29
anticipate. We develop our expectations for internet-industry growth on the
basis of publicly available projections such as those cited in this proxy
statement/prospectus. Any of these projections may turn out to be overly
optimistic.
Growth in the number of people online and the number of hours spent online
may be inhibited for a number of reasons, including:
- the cost of internet access;
- the price and availability of internet access devices;
- concerns about security and privacy;
- the lack of widespread acceptance of electronic payment methods;
- low levels of credit card use;
- ease of use;
- quality of service;
- economic events; and
- availability of telephone lines.
High cost of internet use may limit the growth of the internet and slow our
growth.
Unlike telecommunications companies in the United States,
telecommunications companies in Spain and Latin America generally do not provide
customers with unlimited local telephone service for a fixed fee. For example,
although internet access is free in Spain, internet users have historically been
charged fees by telecommunications companies based on the length of time they
use telephone lines to access the internet. Unfavorable rate developments in
either Spain or Latin America could decrease our visitor traffic and our ability
to derive revenues from transactions over the internet. This could have a
material adverse effect on our business, financial condition and results of
operations.
Introduction of flat rate internet access could negatively affect us.
We could be adversely affected by our introduction of flat rates for
telephone calls to connect to the internet. Unmetered flat rates allow a user to
pay a pre-set amount for telephone calls to connect to the internet, instead of
paying for each call at the local rate. The Spanish government announced in June
2000 plans to introduce limited flat rate access in Spain in November 2000. We
began offering limited flat rate access in Spain in July 2000. Under our
arrangements with Telefonica Data Espana, we pay it a fee for the calls made
under our limited flat rate access plan based on the total minutes of traffic
consumed. Because our flat rate users pay us a fixed rate for telephone calls to
connect to the internet, whereas we pay Telefonica Data Espana a variable rate
based on the total minutes of traffic consumed, the fees we pay to Telefonica
Data Espana could, depending on the total minutes of traffic consumed, exceed
the amounts paid to us by such users. We also began offering flat rate access in
Chile in September 2000. The introduction of flat rate access in our markets
could have a material adverse effect on our business, financial condition and
results of operations.
The market for internet advertising in Spain and Latin America is uncertain
and, if it is not widely accepted as a medium for advertising, our
advertising revenue may decrease.
We expect to derive a substantial portion of our revenue for the
foreseeable future from internet advertising. The internet advertising market is
new and rapidly evolving, particularly in Spain and in Latin America. No
standards have been widely accepted for the measurement of the effectiveness of
II-6
<PAGE> 30
internet advertising, and if these standards do not develop, advertisers may
choose not to advertise on the internet in general or, specifically, on our
portals.
Furthermore, potential advertisers that have relied on traditional
advertising media may be reluctant to advertise on the internet or may pay less
for advertising if they do not perceive our ability to track and measure the
delivery of advertisements to be reliable. Companies may choose not to advertise
on our network if they do not perceive our audience demographics to be desirable
or advertising on our portals to be effective.
We may lose money providing free internet access in Spain and other
countries.
We were among the first free full service providers of internet access in
Spain and began offering free internet access in Brazil in February 2000 and in
Chile and Mexico in March 2000. We may decide to provide free ISP services in
other Latin American countries. When we do not charge subscription fees for
access services, we have to rely on revenue received from advertising and
e-commerce and from traffic-inducement fees paid by data communications network
providers, where possible. We began earning traffic-inducement fees in Spain in
October 1999, in Guatemala in May 2000 and in El Salvador in July 2000, and we
are currently negotiating traffic-inducement contracts in most of the countries
in which we currently offer free internet access. Although various companies
providing competing services use this same strategy, we cannot assure you that
this business strategy will be profitable or that it will generate sufficient
revenues to cover its costs.
The growth of free internet access in many of our core markets may increase
competition among ISPs. For this reason, Terra Networks has to offer free
access in order to avoid a decrease in the number of customers and
advertisers we are able to attract.
Free internet access has become increasingly available in Spain and Latin
America and has caused competition for internet access services to increase in
our core markets. Because our customers have a greater variety of alternatives
to our services, they may have more than one internet account or may switch to
another free internet access provider if they are unable to gain free access to
our service. As a result, usage of our services by customers may decrease. This
would reduce our advertising and e-commerce fees and make it more difficult for
us to attract and retain advertisers.
Our ability to generate revenues would be adversely affected if e-commerce
fails to gain acceptance as a viable means for transacting business in
Latin America.
Numerous factors could delay or prevent the emergence of e-commerce in
Latin America, which would impair our ability to generate e-commerce revenues
and adversely impact our business. Reasons why e-commerce in Latin America may
not gain acceptance among consumers and merchants include:
- the small percentage of consumers holding credit cards, which are the
primary method of payment for e-commerce transactions in the United
States;
- concerns about security of commercial data, such as credit card numbers;
- concerns over privacy of consumers' personal data; and
- lack of adequate distribution and fulfillment operations for goods
purchased.
Moreover, unlike in the United States, consumers and merchants in Latin
America can be held fully liable for credit card and other losses due to
third-party fraud. The incidence of credit card fraud is higher in Latin America
than in the United States. Because secure methods of payment for e-commerce
transactions have not been widely adopted in Latin America, both consumers and
merchants have a relatively low confidence level in the integrity of e-commerce
transactions. Also, many banks and other financial institutions have generally
been reluctant to give merchants the right
II-7
<PAGE> 31
to process online transactions due to concerns about credit card fraud. If
concerns about credit card fraud persist, our ability to generate revenues from
e-commerce may be limited, which could have an adverse effect on our business.
Additionally, customs duties and taxes are imposed on deliveries of
international parcels in many countries in Latin America, making international
e-commerce transactions more costly. Many countries also do not have systems in
place to ensure speedy and reliable delivery of parcels once they have cleared
customs. These problems may deter merchants and consumers from engaging in
e-commerce transactions.
Social, political and economic conditions in our Latin American markets may
cause volatility in our operations and adversely affect our business.
We derive and expect to continue to derive a substantial portion of our
revenues from the Latin American markets. Social and political conditions in
Latin America are volatile and may cause our operations to fluctuate. This
volatility could make it difficult for us to sustain our expected growth in
revenues, which could have an adverse effect on our stock price. Historically,
volatility in Latin American countries has been caused by:
- significant governmental influence over many aspects of local economies;
- political and economic instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative growth;
- imposition of trade barriers; and
- wage and price controls.
Most or all of these factors have occurred at various times in the last two
decades in our most important Latin American markets, Brazil, Mexico, Argentina,
Peru, Venezuela and Chile.
We have no control over these matters. Poor social, political and economic
conditions inhibit internet usage, create uncertainty regarding our operating
climate and cause advertisers to reduce their advertising spending, all of which
may adversely impact our business.
Latin American currencies have in the past been volatile, and volatility in
the future will impact the revenues and expenses we report from our Latin
American operations.
Although our reporting currency is the euro, revenues earned and expenses
relating to our Latin American operations are denominated in local currencies.
The currencies of many Latin American countries, including Brazil and Mexico,
have experienced substantial depreciation and volatility in the past and our
revenues from customers will decline in value if the local currencies depreciate
relative to the euro. We currently do not engage in hedging transactions. Even
if we did so, our hedging strategies may not prove effective. In addition, our
currency exchange losses may be magnified if we become subject to exchange
control regulations restricting our ability to convert local currencies into
euro.
We may not be able to develop our TERRA brand and attract users to our
network.
Maintaining and developing our TERRA brand is critical to our ability to
expand our user base and our revenues. We believe that the importance of brand
recognition will increase as the number of internet-related businesses in Spain
and Latin America grows. In order to attract and retain internet users,
advertisers and e-commerce partners, we intend to increase substantially our
expenditures for creating and maintaining brand loyalty.
II-8
<PAGE> 32
Our success in promoting and enhancing our brand will also depend on our
success in providing high quality content, features and functionality on our
portals. If we fail to promote our brand successfully or if visitors to our
portals or advertisers do not perceive our services to be of high quality, the
value of our brand could be diminished. This could have a material and adverse
effect on our business, financial condition and results of operations.
We may not be able to effectively manage our expanding operations.
We are currently experiencing a period of rapid growth. This is placing a
significant strain on our managerial and operational resources. We have recently
hired employees for important management positions, including our chief
executive officer. We have also used consultants to help us identify and
structure our significant acquisitions, so that we can free managerial resources
for running our business. To accommodate this growth, we must implement new or
upgraded operating and financial systems, procedures and controls throughout
many different locations. We may not succeed with these efforts. Our failure to
expand and integrate these areas in an efficient manner could cause our expenses
to grow and our revenues to decline or grow more slowly than expected, and could
otherwise have a material adverse effect on our business, financial condition
and results of operations.
We may not be able to successfully integrate our acquired businesses.
Our operations have grown largely due to our acquisition of local
internet-based businesses. We are now in the process of integrating the
operations, personnel and products of these businesses. We also expect to
acquire or form joint ventures with other internet companies in Latin America
and the U.S. and will therefore need to integrate their operations, personnel
and products with ours. If we are not able to successfully integrate all of
these businesses, the quality of our service may suffer and customers may be
less likely to use our services. This could have a material adverse effect on
our business, financial condition and results of operations.
We may not be able to interconnect our networks, which would hurt our
ability to improve the level of service we provide.
We are in the process of interconnecting our network infrastructures in the
different countries in which we operate. With an interconnected network, we
expect to be able to improve the level of service we can provide to our access
customers. For example, we believe that an interconnected network would enable
us to diagnose and correct problems remotely, and therefore more quickly. In the
event we fail to successfully interconnect our networks, our ability to improve
the level of service we provide to our customers will be limited. This could
lead to decreased usage of our network, which in turn could have a material
adverse effect on our business, financial condition and results of operations.
We depend substantially on highly qualified managerial, sales and technical
personnel who have many other opportunities available to them.
Our success is largely dependent on our ability to hire highly qualified
managerial, sales and technical personnel. The execution of our
multi-local/global content approach requires us to find and employ personnel who
excel at anticipating consumer tastes and interests. The loss of the services of
any of our key management, sales or technical personnel could have a material
adverse effect on our business, financial condition and results of operations.
These individuals are in high demand and we may not be able to attract the staff
we need. The difficulties and costs in connection with our personnel growth are
compounded by the fact that many of our operations are internationally based.
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We may not be able to identify or finance acquisitions or joint ventures in
the future which would limit our growth prospects.
As part of our business strategy, we continually review acquisition
prospects, joint ventures and strategic alliances that we expect to complement
our existing business, increase our traffic, enhance our content offerings or
increase our advertising and e-commerce revenues. In June 1999, we acquired ZAZ,
a Brazilian ISP and portal operator. In July 1999 we acquired 95% of Infovia
S.A. in Guatemala. In September 1999 we acquired GauchoNet and Donde
Latinoamerica S.A., two Argentine portals. Additionally we acquired 100% of the
assets of Telefonica Servicios Internet, S.A.C. related to the provision of
internet access in Peru. In October 1999, we acquired Infosel, a Mexican ISP and
portal operator and we acquired 95% of Terra Networks Chile S.A. In March 2000
we acquired Chevere, a Venezuelan portal, and in July 2000 we acquired 65% of La
Ciudad, a Colombian portal. We do not know if we will be able to identify any
future joint ventures, acquisitions or alliances or that we will be able to
successfully finance these transactions. A failure to identify or finance future
transactions may impair our growth.
Our acquisitions and joint ventures involve risks and uncertainties that
may harm our business or cause it not to perform as expected.
Our acquisitions and joint ventures could result in numerous risks and
uncertainties, including:
- the need to raise additional funds through public or private financings,
which may result in dilution to existing shareholders and substantially
increase our debt;
- difficulties in assimilating the operations, personnel, technologies,
and products of the acquired companies;
- the risks of entering geographic or business markets in which we have no
or limited prior experience;
- the diversion of management's attention from other business concerns;
and
- the risk that an acquired business will not perform as expected or that
it will carry unforeseen liabilities.
We may not be able to compete effectively, which would harm our business.
There are many companies that provide internet-related services designed
for the Spanish, Latin American and U.S. Hispanic populations. In addition to
strong local ISPs and portal and e-commerce service providers, large established
U.S. internet companies like Yahoo! and America Online have begun to provide
services for these markets. In addition, StarMedia, Yupi and El Sitio have
launched pan-regional portals in the Latin American market and Telmex and
Microsoft have launched a portal in Mexico. Moreover, recently, T-Online, the
internet subsidiary of Deutsche Telekom and the leading internet provider in
Germany, acquired Ya.com, one of our principal competitors in Spain. Competition
is intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in any of our markets.
Increased competition could result in:
- loss of ISP subscription fees in countries where subscription fees are
charged;
- lower advertising revenues;
- price reductions and lower revenues;
- loss of customers;
- loss of brand recognition;
- change in brand perception;
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- reduced page views;
- loss of market share; or
- loss of e-commerce revenues.
Any one of these could materially and adversely affect our business,
financial condition and results of operations.
In addition, our competitors may develop services that are better than
ours, that are more appealing to users, or that achieve greater market
acceptance. It is also possible that new competitors may emerge and acquire
significant market share. A loss of users to our competitors may have a material
and adverse effect on our business, financial condition and results of
operations.
We will not be able to attract users or advertisers if we do not
continually enhance and develop the content and features of our internet
services.
To remain competitive, we must enhance and improve our content. In
addition, we must:
- continually improve the responsiveness, functionality and features of
our portals;
- develop products and services that are attractive to visitors,
advertisers and subscribers;
- establish a strong relationship with our users; and
- increase the download speed of our content.
We may not succeed in developing or introducing in a timely manner
features, functions, products and services that users and advertisers find
attractive. This would likely reduce our user traffic and materially and
adversely affect our business, financial condition and results of operations.
We rely on third-party content providers who may make their content
available to our competitors.
We constantly attempt to determine what content, features and functionality
our target audience wants. We obtain some of our content on a non-exclusive
basis from third parties, including Reuters and Bloomberg. Similar content is
also easily available from other sources. If competing portals present similar
or better content or services, it would adversely affect our user traffic, which
would materially and adversely affect our business, financial condition and
results of operations.
We may fail to develop and introduce new access methods and devices.
We believe that the use of new internet access methods, such as wireless,
broadband and satellite, and new access devices, such as internet television and
personal digital assistants, will become increasingly widespread in coming
years. If we are not able to develop and introduce new access methods and
content for these devices, with partners or on our own, our business, financial
condition and results of operation could suffer.
If we fail to establish and maintain strategic relationships with content
providers, e-commerce merchants and technology providers, we may not be
able to attract and retain users and customers.
We have focused on establishing relationships with leading content
providers, e-commerce merchants, and technology and infrastructure providers
such as Grupo Estado, Banco Bilbao Vizcaya Argentaria, Logista, Agencia EFE,
Grupo Reforma, Reuters, Motor Press, TravelNet and Telefonica Data. Our business
depends extensively on these relationships. Because most of our agreements with
these third parties are not exclusive, our competitors may seek to use the same
partners as we do and attempt to adversely impact our relationships with our
partners. We might not
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be able to maintain these relationships or replace them on financially
attractive terms. If the parties with which we have these relationships do not
adequately perform their obligations, reduce their activities with us, choose to
compete with us or provide their services to a competitor, we may have more
difficulty attracting and maintaining users and our business, financial
condition and results of operations could be materially and adversely affected.
Also, we intend to actively seek additional relationships in the future. Our
efforts in this regard may not be successful.
We provide a service in Mexico that could expose us to liability for failed
financial instrument trades.
In Mexico we provide a service that enables Mexican banks and brokerages to
trade fixed-income instruments. Although we do not engage in trading for our own
account and are not involved in the settlement process, and our subscriber
contracts make clear that we are not responsible for broken trades or trading
losses, we could be sued if one of our subscribers defaults on a trade, or if
our system malfunctions. Although our subscriber contracts include
limitation-of-damages provisions, a subscriber could attempt to sue us for a
substantial amount of money in the event it sustains a loss using our system.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE
Unexpected network interruptions caused by local or global system failures
may result in reduced user traffic, reduced revenue and harm to our
reputation.
A key element of our strategy is to generate a high volume of user traffic.
Our ability to attract advertisers and users as well as our reputation depend
significantly upon the performance of our network infrastructure, including our
servers, hardware and software. Any system failure, including network, hardware
or software failure, that causes an interruption in our service or a decrease in
responsiveness of our web site could result in reduced traffic and reduced
revenue, and could impair our reputation. In addition, computer viruses or other
factors could result in a catastrophic failure of the internet, which would have
a material adverse effect on our business, financial condition and results of
operations.
Accordingly, we face risks related to our ability to accommodate our
expected user traffic levels while maintaining superior performance. In
addition, slower response time may result in fewer users accessing our site or
users spending less time at our site. Accordingly, any system failures would
have a material adverse effect on our business, financial condition and results
of operations.
Concerns about security of e-commerce transactions and confidentiality of
information on the internet may reduce the use of our network and impede
our growth.
A significant barrier to e-commerce and confidential communications over
the internet has been the need for security. Internet usage could decline if any
well-publicized breach of security occurred. We may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. Unauthorized persons could attempt to penetrate our network
security. If successful, they could misappropriate proprietary information or
cause interruptions in our services. As a result, we may be required to expend
capital and resources to protect against or to alleviate these problems.
Security breaches could have a material adverse effect on our business,
financial condition and results of operations.
Computer viruses may cause our systems to incur delays or interruptions and
may adversely affect our business.
Computer viruses may cause our systems to incur delays, or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our user traffic may decrease.
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RISKS RELATED TO LEGAL AND REGULATORY MATTERS
We may become subject to burdensome government regulations affecting the
internet which could adversely affect our business.
To date, governmental regulations have not materially restricted use of the
internet in our markets. However, the legal and regulatory environment that
pertains to the internet may change along with the development of the internet.
Changes in regulation could increase our costs of doing business and prevent us
from delivering our products and services over the internet. The growth of the
internet may also be significantly slowed. This could delay growth in demand for
our services and limit the growth of our revenues.
In addition to the adoption of new laws and regulations, existing laws may
be applied to the internet. New and existing laws may cover issues that include:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- pornography;
- other claims based on the nature and content of internet materials; and
- antitrust and competition law.
Depending on the nature of new laws and regulations, and depending upon the
way existing laws are applied to the internet, our growth could be constrained
and our ability to generate revenues diminished.
Our brand names are difficult to protect and may infringe on the
intellectual property rights of third parties.
We have applied to register the TERRA trademark in all countries in which
we have an interest, as well as in many others. The registration of the
trademark has been obtained in different classes in almost all priority
countries and it is in the process of being obtained in the remaining countries.
We are aware of other companies using the trademark TERRA or variations of
that trademark. None of these uses is within our specific business or commercial
area. Therefore it is unlikely that we will be required to discontinue the use
of this trademark with respect to our current activities. If we are required to
discontinue the use of this trademark with respect to our current activities, we
could lose the goodwill that we have established and may be held liable for
damages.
In addition, we are aware of other companies using the trademark OLE and
variations of that mark. These companies have expressed a belief that we should
not use this mark. The users of these or similar terms may have senior trademark
rights if they were to assert a claim against us for trademark infringement. If
an infringement suit were instituted against us, even if groundless, it could
result in substantial litigation expenses in defending the suit. Also, one of
our applications to register the trademark ZAZ has been opposed by a third party
and another application has been rejected by the Brazilian authorities, which
decision we have appealed. However, because we are consolidating our local
brands into a single global brand, TERRA, we do not believe that any failure to
register our local trademarks OLE and ZAZ will materially affect our business.
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We may be subject to claims based on the content we provide over our
network.
The law in Spain, Latin America and the United States relating to the
liability of online service providers, like us, for activities of their users is
currently unsettled. Claims have been made against online service providers and
networks in the past for defamation, negligence, copyright or trademark
infringement, obscenity, illegal gambling, personal injury or other theories
based on the nature and content of information that was posted online by their
visitors. We could be subject to similar claims and incur significant costs in
their defense. In addition, we could be exposed to liability for the selection
of listings that may be accessible through our network or through content and
materials that our users may post in classifieds, message boards, chat rooms or
other interactive services. It is also possible that if any information provided
through our services contains errors, third parties could make claims against us
for losses incurred in reliance on the information. We offer web-based e-mail
services, which expose us to potential liabilities or claims resulting from:
- unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
Investigating and defending these claims is expensive, even if they do not
result in liability.
We may be subject to claims based on products sold on our network.
We have entered into arrangements to offer third-party products and
services on our network under which we may be entitled to receive a share of
revenues generated from these transactions. These arrangements may subject us to
additional claims including product liability or personal injury from the
products and services, even though we do not ourselves provide the products or
services. These claims may require us to incur significant expenses in their
defense or satisfaction. While our agreements with these parties often provide
that we will be indemnified against such liabilities, such indemnification may
not be adequate.
Although we carry insurance, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the increased attention focused on liability issues as a result of
these lawsuits and legislative proposals could impact the overall growth of
internet use.
Our ability to collect personal data on our users may be restricted and may
limit our ability to generate advertising and e-commerce revenue.
We must comply with applicable data protection legislation, including a
European Union directive that limits our ability to collect and use personal
information relating to our users. Spain has adopted legislation implementing
the standards required by this directive. Increased awareness on the part of the
public of privacy issues and changes to legislation with which we may have to
comply could impact our ability to use such personal information to attract
advertisers and e-commerce partners, which could affect our business, financial
condition and results of operations.
Our acquisition of our Chilean business could be challenged in Chile and we
cannot be sure that this acquisition will not be adversely affected.
Telefonica CTC Chile, which is a member of the Telefonica group, has
received communications from certain shareholders questioning certain aspects of
our acquisition of our Chilean business, including the purchase price paid by
Terra Networks, the structure of the acquisition and the actions of Telefonica
CTC Chile's board of directors and controlling shareholder in connection with
the
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transaction. On June 5, 2000, shareholders of Telefonica CTC Chile filed a legal
claim against the directors of Telefonica CTC Chile and Telefonica Mundo 188 who
approved the acquisition, as well as against the chief executive officers of
both companies, alleging damages in the amount of approximately $28.7 million.
Telefonica CTC Chile is not a party to this legal action.
Telefonica CTC Chile cannot ensure that a shareholder action will not be
brought against Telefonica CTC Chile or that, if brought, such action would not
result in an adverse decision which would materially adversely affect the
business, the consolidated financial position or results of operations of
Telefonica CTC Chile and its subsidiaries, considered as a whole. In addition,
we cannot guarantee that any action would not materially adversely affect our
business, financial condition or results of operations.
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PART THREE
THE LYCOS SPECIAL MEETING
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is being furnished to you in connection
with the solicitation of proxies by the Lycos Board of Directors in connection
with the proposed combination.
This proxy statement/prospectus is first being furnished to stockholders of
Lycos on or about September 28, 2000.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Lycos special meeting is scheduled to be held at Home Suites Inn, 455
Totten Pond Road, Waltham, Massachusetts, on October 27, 2000, at 8:00 a.m.,
local time.
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that Lycos stockholders may consider
and vote upon a proposal to adopt the agreement and plan of reorganization and
to transact any other business that properly comes before the special meeting or
any adjournment or postponement of the special meeting. Adoption of the
agreement and plan of reorganization will also constitute approval of the
actions taken or to be taken by Lycos pursuant to the agreement and plan or
reorganization, including the approval by Lycos, as sole shareholder of Lycos
Virginia, of the share exchange by Lycos Virginia and Terra Networks.
If the stockholders of Lycos adopt the agreement and plan of
reorganization, upon completion of the combination, each outstanding share of
Lycos common stock will be exchanged for one share of Lycos Virginia common
stock. Immediately thereafter each share of Lycos Virginia common stock will be
converted into the right to receive a number of Terra Networks ordinary shares,
which will (unless you elect to retain your Terra Networks ordinary shares)
automatically be deposited on your behalf with Citibank, as ADS depositary, in
exchange for Terra Networks ADSs representing such number of Terra Networks
ordinary shares, based on an exchange ratio which is calculated by dividing
$97.55 by the average of the closing prices of Terra Networks ordinary shares
for the ten trading days ending with the tenth trading day prior to the
completion of the combination. If, however, the average price is equal to or
greater than $68.06, the exchange ratio will be 1.433, or if the average price
is equal to or less than $45.37, the exchange ratio will be 2.150. Each average
closing price of Terra Networks shares will be expressed in U.S. dollars using
the noon buying rate of euro for U.S. dollars as published by the Federal
Reserve Bank of New York as of each day on which the average closing price is
measured. On September 19, 2000, the last reported closing price of the Terra
Networks shares on the New Market segment of the Spanish stock exchanges was
equivalent to $43.00.
RECORD DATE FOR THE SPECIAL MEETING
The Lycos Board of Directors has fixed the close of business on September
5, 2000 as the record date for determination of the Lycos stockholders entitled
to notice of and to vote at the special meeting. On the record date, there were
110,738,573 shares of Lycos common stock outstanding, held by 1,249 holders of
record.
VOTE REQUIRED FOR ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION
A majority of the outstanding shares of Lycos common stock must be
represented, either in person or by proxy, to constitute a quorum at the Lycos
special meeting. The affirmative vote of the holders of a majority of the
outstanding shares of Lycos common stock outstanding as of the record date is
required to adopt the agreement and plan of reorganization. At the Lycos special
meeting,
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each share of Lycos common stock is entitled to one vote on all matters properly
submitted to the Lycos stockholders.
As of the record date, Lycos directors and executive officers and their
affiliates owned approximately 3.19% of the outstanding shares of Lycos common
stock.
PROXIES
All shares of Lycos common stock represented by properly executed proxies
received before or at the Lycos special meeting will, unless the proxies are
revoked, be voted in accordance with the instructions indicated on those
proxies. If no instructions are indicated on a properly executed proxy card, the
shares will be voted FOR adoption of the agreement and plan of reorganization.
You are urged to mark the box on the proxy card to indicate how to vote your
shares.
If a properly executed proxy card is returned and the stockholder has
abstained from voting on adoption of the agreement and plan of reorganization,
the Lycos common stock represented by the proxy will be considered present at
the special meeting for purposes of determining a quorum, but will not be
considered to have been voted in favor of adoption of the agreement and plan of
reorganization. If your shares are held in an account at a brokerage firm or
bank, you must instruct them on how to vote your shares. If an executed proxy
card is returned by a broker or bank holding shares which indicates that the
broker or bank does not have discretionary authority to vote on adoption of the
agreement and plan of reorganization, the shares will be considered present at
the meeting for purposes of determining the presence of a quorum, but will not
be considered to have been voted in favor of adoption of the agreement and plan
of reorganization (a "broker non-vote"). Your broker or bank will vote your
shares only if you provide instructions on how to vote by following the
information provided to you by your broker.
Because adoption of the agreement and plan of reorganization requires the
affirmative vote of at least a majority of the shares of Lycos common stock
outstanding on the record date, abstentions, failures to vote and broker
non-votes will have the same effect as a vote against adoption of the agreement
and plan of reorganization.
The Lycos special meeting may be adjourned or postponed in order to permit
further solicitation of proxies. No proxy voted against the proposal to adopt
the agreement and plan of reorganization will be voted on any proposal to
adjourn or postpone the special meeting that is submitted to the stockholders
for a vote.
Lycos does not expect that any matter other than adoption of the agreement
and plan of reorganization will be brought before its special meeting, If,
however, other matters are properly presented, the persons named as proxies will
vote in accordance with their judgment with respect to those matters, unless
authority to do so is withheld on the proxy card.
A Lycos stockholder may revoke his or her proxy at any time before it is
voted by:
- notifying in writing Georgeson Shareholder Communications, Inc., at 17
State Street, New York, NY, 10004, (212) 440-9800;
- granting a subsequently dated proxy; or
- appearing in person and voting at the special meeting if you are a
holder of record.
Attendance at the Lycos special meeting will not in and of itself
constitute revocation of a proxy.
ELECTRONIC OR TELEPHONIC PROXIES
Because Delaware, the state in which Lycos is incorporated, permits
electronic submission of proxies through the internet or by telephone, instead
of submitting proxies by mail on the enclosed proxy card, many stockholders will
have the option to submit their proxies electronically through the internet or
by telephone. Please note that there are separate arrangements for using the
internet and
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telephone depending on whether your shares are registered in Lycos' stock
records in your name or in the name of a brokerage firm or bank. Lycos
stockholders should check their proxy card forwarded by their broker, bank or
other holder of record to see which options are available.
The internet and telephone procedures described below for submitting your
proxy are designed to authenticate stockholders' identities, to allow
stockholders to have their shares voted and to confirm that their instructions
have been properly recorded. We have been advised by counsel that the procedures
that have been put in place are consistent with the requirements of Delaware
law. Lycos stockholders submitting proxies via the internet should understand
that there may be costs associated with electronic access, such as usage charges
from internet access providers and telephone companies, that would be borne by
the stockholder.
Lycos holders of record may submit their proxies:
- through the internet by visiting a website established for the purpose
at http://www.eproxyvote.com/Icos and following the instructions; or
- by telephone by calling the toll-free number 1-877-PRX-VOTE
(1-877-779-8683) and following the recorded instructions. Stockholders
residing outside the United States and Canada can call 1-201-536-8073 at
no charge using a touch-tone phone and follow the recorded instructions.
Lycos holders of record who submit their proxy by telephone or internet may
change their vote by submitting a proxy at a later date using the same method.
SOLICITATION OF PROXIES
Lycos and Terra Networks will equally share the expenses incurred in
connection with the printing and mailing of this proxy statement/prospectus.
Lycos has retained Georgeson Shareholder Communications, for a fee of $8,000
plus reimbursement of expenses, to assist in the solicitation of proxies. Lycos
and its proxy solicitor will also request banks, brokers and other
intermediaries holding shares of Lycos common stock beneficially owned by others
to send this proxy statement/prospectus to, and obtain proxies from, the
beneficial owners and will reimburse the holders for their reasonable expenses
in so doing. Solicitation of proxies by mail may be supplemented by telephone,
telegram and other electronic means, advertisements and personal solicitation by
the directors, officers or employees of Lycos. No additional compensation will
be paid to directors, officers or employees for such solicitation.
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. A
TRANSMITTAL LETTER WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK CERTIFICATES
WILL BE MAILED TO YOU AS SOON AS PRACTICABLE AFTER COMPLETION OF THE
COMBINATION.
ABSENCE OF APPRAISAL RIGHTS AND DISSENTERS' RIGHTS
UNDER DELAWARE LAW AND VIRGINIA LAW, YOU WILL NOT HAVE APPRAISAL RIGHTS OR
DISSENTER'S RIGHTS IN CONNECTION WITH THE COMBINATION.
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PART FOUR
THE COMBINATION
This summary of the material terms and provisions of the agreement and plan
of reorganization set forth below is qualified in its entirety by reference to
the agreement and plan of reorganization. The agreement and plan of
reorganization is attached as Annex A to this proxy statement/prospectus, and
that document is incorporated into this summary by reference.
The boards of directors of Terra Networks and Lycos have each unanimously
approved the agreement and plan of reorganization, which provides for combining
our companies through the combination.
Subject to the limitations described below, each share of Lycos common
stock issued and outstanding at the effective time will be converted into the
right to receive a number of Terra Networks shares, or their equivalent in ADSs,
determined by multiplying such share by the exchange ratio.
This section describes the material aspects of the combination, including
the principal provisions of the agreement and plan of reorganization.
BACKGROUND OF THE COMBINATION
Beginning at the end of February 2000, representatives of Lazard Freres &
Co., financial advisor to Terra Networks, contacted Robert J. Davis, Chief
Executive Officer of Lycos, a number of times to express Terra Networks'
interest in exploring various opportunities for a possible transaction with
Lycos, including its interest in a possible business combination with Lycos. Mr.
Davis expressed a lack of interest in a business combination, but did state an
interest in pursuing various other opportunities for cooperation.
On March 9, Mr. Davis and other representatives of Lycos met with Mr. Abel
Linares, Chief Executive Officer of Terra Networks, and other representatives of
Terra Networks and Lazard Freres to discuss the possibility of a joint venture.
At this meeting, representatives of Terra Networks raised the possibility of a
business combination with Lycos, but no offer was made and no possible terms
were discussed. Lazard Freres continued to make contact with the management of
Lycos to arrange another meeting.
On March 21, representatives of Lycos, its financial advisor, Credit Suisse
First Boston Corporation, Terra Networks and Lazard Freres met in Waltham,
Massachusetts to discuss various options for cooperation between the companies,
but terms for a possible transaction were not discussed.
On March 24, Mr. Davis and representatives of Lycos and Credit Suisse First
Boston met with Mr. Juan Villalonga, the former Executive Chairman of Terra
Networks, and other representatives of Terra Networks and Lazard Freres in
Miami, Florida. At this meeting, Mr. Villalonga presented various possibilities
for the framework for a possible business combination involving Terra Networks
and Lycos.
On March 27, representatives of Lycos and Credit Suisse First Boston
attended a presentation in Miami, Florida, by representatives of Terra Networks
and Telefonica, Terra Networks' majority shareholder, relating to the parameters
of a possible transaction. Mr. Villalonga suggested that representatives of both
companies meet again in order to further discuss the terms of a possible
transaction, but the management of Lycos declined.
On April 14, Mr. Davis received a telephone call from Mr. Thomas Middelhof,
Chief Executive Officer of Bertelsmann, AG, who offered to arrange a telephone
call between Mr. Villalonga and Mr. Davis in order to facilitate a possible
transaction. The call took place later that day and
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Mr. Villalonga and Mr. Davis discussed various possibilities for a transaction
and Mr. Villalonga proposed meeting again in Miami.
At a regularly scheduled meeting of the Board of Directors of Lycos on
April 27, Mr. Davis informed the Lycos board of the discussions with Terra
Networks. The Board of Directors of Lycos authorized Mr. Davis to continue
discussions.
On April 28, Mr. Davis, Mr. Middelhof, Mr. Villalonga and Mr. Linares met
in Miami, Florida and further discussed a potential transaction, although no
agreement on structure or specific terms was reached.
On May 2, representatives of Lycos, Terra Networks, Telefonica and
Bertelsmann met again in New York to discuss the terms of a potential
transaction involving Lycos and Terra Networks, including the exchange ratio in
the event of a stock for stock transaction. The parties determined that while
there was no agreement on a transaction, sufficient progress had been made
regarding a potential transaction to warrant commencing a due diligence process.
During the following week, the parties had numerous discussions relating to
the structure and terms of a potential transaction, including with respect to
the exchange ratio in the event of a stock-for-stock transaction and management
and governance matters.
Beginning on May 8, representatives of the companies and their financial
advisors began to perform business and financial due diligence, and the
companies' legal advisors had a series of discussions to evaluate alternative
structures for various proposed transactions. At the same time, the companies
continued to negotiate the basic terms of the transactions.
On Friday, May 12, Mr. Linares contacted Mr. Davis and proposed a
stock-for-stock transaction in which Lycos shares would be exchanged for a fixed
value of Terra Networks shares. The parties also discussed various governance
matters related to the transaction, including board composition and management
positions, additional means of enhancing the value of the transaction to the
Lycos shareholders and setting minimum and maximum exchange ratios in the event
that the price of Terra Networks shares were to increase or decrease beyond
specified levels.
During the weekend of May 13 and 14, representatives of the companies and
their advisors continued business and financial due diligence. In addition, the
parties and their legal advisors began negotiating an agreement and plan of
reorganization and employment agreements for senior officers of Lycos and
discussed various other legal matters. Also during that weekend, representatives
of the companies continued negotiating the terms of the potential transactions,
including the exchange ratio and the collars. The representatives also discussed
the possibility of Telefonica committing to participation in a sizeable rights
offering by Terra Networks in connection with the proposed transactions,
eventually agreeing that Telefonica would commit to participation in a E2.2
billion rights offering by Terra Networks prior to the completion of the
proposed business combination. The parties then began drafting and negotiating
the specific terms of such an agreement.
In the evening on Sunday, May 14, the Lycos Board of Directors held a
telephonic meeting. At this meeting, Mr. Davis and other members of management
reviewed the background, terms and status of the proposed transactions.
Representatives of Credit Suisse First Boston and Lycos' legal advisors,
Cravath, Swaine & Moore, also participated in the meeting and answered
directors' questions. At the conclusion of the meeting, the Lycos Board of
Directors authorized management to continue to work towards a potential
transaction.
During May 15, the parties and their advisors completed their due diligence
and held meetings to negotiate further the terms of the agreement and plan of
reorganization, rights offering agreement and other related agreements.
In the evening of Monday, May 15, the Lycos Board of Directors held a
telephonic meeting at which Mr. Davis and other members of management updated
the board as to terms and status of
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the proposed transaction. Representatives of Credit Suisse First Boston and
Cravath, Swaine & Moore also participated in the meeting and answered directors'
questions. At the conclusion of the meeting, the Lycos Board of Directors again
authorized management to continue discussions with Terra Networks.
The companies and their advisors continued negotiations through the evening
and into the morning of May 16 regarding the terms of the transactions and the
agreement and plan of reorganization, the rights offering agreement and other
related documents.
On May 10, the Delegated Committee of Telefonica met to consider the
proposed transactions. At this meeting, Mr. Villalonga informed the Delegated
Committee of the status of the negotiations with Lycos, and Mr. Linares gave a
detailed explanation of the merger, its strategic reasons, Lycos' valuation and
the possible impact on Telefonica. Mr. Linares also explained the rights
offering. Upon completion of its deliberations, the Delegated Committee approved
the proposed transaction and authorized Mr. Villalonga to close the negotiations
in the best interest of the Telefonica group. Mr. Villalonga announced that if
the negotiations concluded successfully, he would call Terra Networks' Board of
Directors to obtain approval for the definitive transactions.
On May 16, the Board of Directors of Terra Networks met to consider the
proposed transactions. At this meeting, Mr. Villalonga and the other directors
analyzed, based upon a presentation by the Board Delegate, Mr. Linares, the
background of, the strategic reasons for and the principal terms of the proposed
transactions and their financial impact. They also reviewed generally Lycos'
business and financial condition. In addition, the Terra Networks Board of
Directors was presented a Fairness Opinion, analyzing the value of Lycos, issued
by the investment bank, Lazard Freres & Co., LLC. The Terra Networks Board of
Directors decided unanimously to approve the agreement and plan of
reorganization and the rights offering agreement and agreed to call for a
general shareholders' meeting of Terra Networks to approve, among other
proposals, the rights offering and the capital increase required to implement
the share exchange. The Terra Networks shareholders' meeting was held on June 8,
2000 and approved the rights offering and capital increase.
On May 16, the Board of Directors of Lycos met to consider the proposed
transactions. At this meeting, Mr. Davis and other members of management
reviewed the transactions with the board, including the background of the
proposed transactions, the strategic reasons for the proposed transactions, the
principal terms of the proposed transactions, a financial review of the proposed
transactions, a review of Terra Networks' financial condition and business
operations and the results of the due diligence review by Lycos. Representatives
of Credit Suisse First Boston made a presentation to the Lycos Board of
Directors regarding the financial terms of the proposed transactions. In
addition, Credit Suisse First Boston delivered its opinion to the effect that,
as of that date and based on and subject to the matters described in its
opinion, the exchange ratio provided for in the combination was fair, from a
financial point of view, to holders of Lycos common stock. Representatives of
Cravath, Swaine & Moore discussed the fiduciary duties of the Board of Directors
of Lycos in considering the combination with Terra Networks and the terms of the
agreement and plan of reorganization and related documents. Upon completing its
deliberations, the Lycos Board of Directors unanimously approved the agreement
and plan of reorganization, the rights offering agreement and new employment
agreements for various senior officers of Lycos, declared the agreement and plan
of reorganization to be advisable and resolved to recommend that Lycos
stockholders adopt the agreement and plan of reorganization.
After finalizing the agreement and plan of reorganization, the rights
offering agreement and related agreements, during the afternoon of May 16,
representatives of Lycos and Terra Networks executed the agreement and plan of
reorganization and the new employment agreements for Lycos senior officers. In
addition, Lycos, Terra Networks and Telefonica entered into the rights offering
agreement, and Terra Networks, Lycos, Bertelsmann and Telefonica entered into
various agreements relating to Bertelsmann's and Telefonica's commitments to
Terra Lycos.
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At 4:00 p.m., New York City time, May 16, 2000, Lycos and Terra Networks
issued a joint press release announcing the proposed combination of Lycos and
Terra Networks.
REASONS FOR THE COMBINATION
Terra Networks and Lycos believe the combination will create a preeminent
global company and a leader in the internet, new media and communications. The
following are key specific reasons for Terra Networks and Lycos entering into
the combination:
Formation of a Truly Global Internet Company. Terra Lycos will be a truly
global internet company with an extensive footprint and leadership positions in
the fastest-growing markets in the world. Terra Lycos will be among the leaders
in markets around the world, including in the United States, Europe, Latin
America, Canada, Japan and South Korea. In addition, Terra Lycos will have
operations in 37 countries, an estimated approximately 45 million unique users
and over 175 million daily page views.
Complementary Businesses. Terra Networks and Lycos are culturally
compatible and have complementary strengths. For example, Terra Networks has
strong content offerings, particularly entertainment offerings, while Lycos has
particularly strong services and functionality. Terra Lycos will have a
diversified revenue base derived from advertising, providing internet services
and e-commerce. Both Terra Networks and Lycos have aggressive management styles
and strategies focused on building brand names in fast-growing markets. In
addition, there is little content or geographic overlap between Terra Networks
and Lycos.
Taking Advantage of Convergence. We believe that Terra Lycos will be in
the best position to take advantage of the accelerating convergence of internet
services, new media, branded content and broadband and wireless distribution
capabilities. Terra Networks expects to leverage Lycos' technology to monetize
its customer base, while Lycos will benefit from Terra Networks' relationship
with Telefonica and access to Telefonica's customers. In addition, Terra Lycos
will have preferred access to Bertelsmann's content.
Access to Telefonica's Network. We expect that Terra Lycos will have
unparalleled access to platforms and technologies through Telefonica's extensive
cable, fixed line, broadband, satellite and wireless networks, which currently
serve approximately 60 million customers globally.
Bertelsmann Relationship. Terra Lycos will have a broad strategic
relationship with Bertelsmann, a leading global media company. Our relationship
with Bertelsmann includes Bertelsmann's commitment to purchase advertising,
placement and integration services from Terra Lycos. In particular, Bertelsmann
is obliged to pay $325 million for services to be performed during the first and
second years from the date of completion of the combination. Bertelsmann will
purchase up to $675 million of services in the third, fourth and fifth years
after the combination. Telefonica has agreed to purchase, if necessary, any
portion of those services in the third, fourth and fifth years that Bertelsmann
does not purchase, up to $675 million. In addition, Terra Lycos will have the
ability to gain preferred access to Bertelsmann's content.
Wireless Joint Venture. Terra Networks owns 49% and Telefonica Moviles
owns 51% of a new wireless joint venture, Terra Mobile, S.A., that was formed in
July 2000 and will distribute content and services. We expect that the joint
venture will have access to over 20 million customers and provide real-time
e-commerce services through a wireless platform. The formation of this joint
venture is a condition to closing of the combination.
Financial Strength. Terra Lycos will be well-capitalized with
approximately E3 billion in cash and a diversified revenue stream.
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TERRA LYCOS STRATEGY
Terra Lycos' objective is to become the world's leading internet company by
providing its users with a unique platform that combines the benefits of the
convergence of internet services, new media content and next-generation
communication technologies with the broadest, most comprehensive array of
popular products and services delivered in a highly targeted, localized manner.
Key elements to the strategy include:
- AGGRESSIVELY EXPAND TERRA LYCOS' GLOBAL REACH: We intend to continue to
increase the number of users of Terra Lycos by leveraging Terra Lycos'
network of well-recognized global and regional brand names, providing
enhanced content and services to Terra Lycos' users and expanding its
partnerships and alliances. We seek to broaden the recognition of Terra
Lycos' brands through online and offline advertising and promotional
campaigns. We plan to invest in developing the umbrella Terra Lycos
brand on a global basis, as well as strengthening the various Terra and
Lycos brands worldwide. We will also continue to enhance and expand the
breadth and scope of Terra Lycos' content and services to attract and
retain users by leveraging Terra Lycos' strategic partnerships and
alliances, such as its relationships with Bertelsmann and Telefonica, to
gain preferred access to leading global content and technology
platforms. In addition, Terra Lycos will continue to provide direct
access to its products and services through its internet access
services, as well as through agreements with computer and software
companies, ISP's and providers of wireless and broadband internet
access.
- EXPAND ACCESS TO OUR NETWORK THROUGH MULTIPLE ENTRY POINTS: Terra Lycos
intends to increase its user base by expanding access to its network
through multiple entry points. Terra Lycos plans to take advantage of
its existing ISP business to develop new generation access platforms
such as wireless and broadband, and enhance user loyalty to our network
of portals while maximizing traffic and brand recognition.
- INTERNET SERVICE PROVIDER: Terra Networks and Lycos currently provide
internet access to over 2.6 million customers worldwide, offering both
paid and free subscription services. We believe Terra Networks is
currently the leading ISP in Spain, Chile, Peru and Guatemala and the
second-ranking ISP in Brazil and Mexico. Terra Lycos plans to expand
its paid subscription services throughout Europe and Latin America and
free subscription services in selected markets where local telephony
revenue sharing arrangements combined with revenues from our portal
business creates an attractive market.
- WIRELESS: Through a joint venture between Telefonica Moviles and Terra
Lycos, Terra Lycos will become one of the world's leading wireless web
services providers with access to an expected subscriber base of
approximately 20 million users. Terra Lycos plans to develop unique
content and e-commerce products designed specifically for distribution
over wireless networks. Terra Lycos plans to expand its market share
through its joint venture partner as well as other strategic wireless
alliances throughout the world.
- BROADBAND: Terra Lycos intends to continue to market its products and
services to high-speed access users worldwide. Terra Lycos intends to
target other high speed access providers in global markets. In
addition, Telefonica's approximately 35 million fixed telephony
subscribers provide a strong base of installed customers to target
expanded service offerings such as DSL, voice and fax over IP and
video streaming.
- MAXIMIZE THE FREQUENCY AND DURATION OF USER VISITS TO THE TERRA LYCOS
NETWORK: Terra Lycos will seek to make its internet network the first
choice and most frequently used destination for internet users
worldwide. We believe that we can increase the frequency and duration of
Terra Lycos' users' visits to Terra Lycos by expanding and enhancing the
content, features and functionality of its product offerings, thus
maximizing user affinity to its network.
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Throughout its network we plan to integrate common features and
functionality across all our sites, making it easier for users to
globally navigate the network. Products and services such as search,
free personal homepages, personalized e-mail, topic-based chat services
and online clubs will be customized from a single platform in order to
create a sense of worldwide online communities. We also plan to continue
to invest in developing or acquiring new technologies that incorporate
leading edge features to Terra Lycos' offering and enhance our users
experience. We believe that we can further enhance the length and
frequency of Terra Lycos' users' visits by providing a highly relevant
experience. For example, Terra Networks and Lycos currently provide
localized versions of services in an aggregate of 37 countries worldwide
which combine both global and local content and applications. We
currently have strong local alliances that facilitate Terra Lycos'
access to premier and differentiated content. Terra Lycos plans to
further expand its global footprint by offering tailored,
country-specific proprietary and third-party content, including
preferred access to Bertelsmann's world-class media content, such as
Random House, Gruner + Jahr and BMG Entertainment. Furthermore, Terra
Lycos will continue to customize Terra Lycos' product offerings to
create a personalized version of its service for each user.
- PROVIDE COMPREHENSIVE ADVERTISING SOLUTIONS: We believe that Terra Lycos
will be the first internet company to provide advertisers access to a
truly global internet user base through Terra Lycos' leading network of
websites and a global sales force with sales representatives placed in
every country where Terra Lycos operates (supported by a tele-sales
representative). Terra Lycos will provide advertisers with the ability
to:
- target its global and diverse user base through network-wide
advertising;
- purchase user-specific or site-specific advertising on its individual
network sites;
- access an attractive platform for measurable, targeted, cost-effective
online advertising;
- develop innovative, flexible and customized ways to reach their
targeted audiences online with various types of advertising formats
(we design and offer customized packages that include the ability to
change advertisements and campaigns quickly and frequently; to link an
advertisement to a specific search term or topic; to target
advertisements based on demographics, geographic location and topical
categories; and to track daily usage and other information); and
- access its target audience through multiple platforms such as
computers, personal digital assistants and web-enabled phones.
- OFFER COMPELLING E-COMMERCE OPPORTUNITIES: We believe that Terra Lycos
will be well-positioned to take advantage of the expected growth in
internet-based commerce based on its experience and the reach of the
Terra Lycos network. Terra Lycos will continue to focus on web-based
electronic commerce opportunities, as an increasing number of businesses
and consumers embrace the internet as a viable method for buying and
selling goods and services. Terra Lycos plans to play a leading role in
the development of an e-commerce platform that integrates buyers and
sellers around the world by:
- enhancing its network of partners to capture value in every part of
the e-commerce transaction process, including everything from store
hosting to product comparisons;
- facilitating Terra Lycos customers' purchases and sales in a secure
and reliable environment; and
- developing a complete solution that covers a broad spectrum of
e-commerce businesses, including retail, auctions and classified
platforms.
Terra Lycos will continue to integrate products and service offerings in a
broad range of product categories mainly in the Business-to-Consumer
("B2C") market (including travel,
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computer hardware and software, books, music and financial products and
services) from merchant partners integrated directly into its search,
directory and community offerings on a topical basis. In doing so Terra
Lycos will draw upon its experience in developed internet markets to
create a seamless e-commerce platform throughout its global network.
- EXPAND TERRA LYCOS' GLOBAL PRESENCE: The number of internet users
worldwide is projected to grow rapidly over the next several years. In
order to take advantage of this growth we plan to extend Terra Lycos'
extensive global footprint into new markets and within existing markets
by growing organically, acquiring leading internet companies and/or
creating joint ventures with local media and technology companies. These
acquisitions and joint ventures should allow it to reduce the cost and
launch time associated with global expansion as well as leverage its
operational and brand strengths and the promotional marketing and sales
strengths of its partners. Upon consummation of the proposed combination
and the rights offering, Terra Lycos will have enhanced financial
strength, including a cash balance of approximately E3 billion, with
which to further expand its global presence through the type of organic
growth and acquisition strategy that has characterized the companies in
the past.
- BUILD STRATEGIC ALLIANCES: Terra Lycos plans to leverage the strategic
ventures it has entered with business partners who offer unique content,
technology and distribution capabilities, as well as marketing and
cross-promotional opportunities. In particular, Terra Lycos expects to
benefit most from its strategic relationships with:
- TELEFONICA. We expect that Telefonica will provide Terra Lycos with a
broad array of state-of-the-art telecommunication access and
distribution. Telefonica is the leading telecommunications company in
Spain and Latin America, a leading wireless service provider
worldwide, is a leading television broadcaster in Spain and Argentina
and has approximately 60 million customers worldwide. Additionally,
Telefonica is one of the few European telecommunications companies to
have a thoroughly diversified investment base, in terms of
communications products and geographies.
- BERTELSMANN. Bertelsmann will provide high quality content to Terra
Lycos. Bertelsmann's operations consist of literary, scientific and
non-fiction publishers, book and music clubs, daily newspapers,
general- and special-interest magazines, music and film companies,
radio and television activities, print shops, service corporations and
online service providers. Bertelsmann is a leading publishing house,
TV producer, music company, clubs operator, media e-commerce player
and distribution/service company worldwide, as well as a leading TV
distributor, magazine publisher and printing house in Europe.
Bertelsmann is focused on leveraging its leading position in media
onto the internet. In addition to providing content to Terra Lycos,
Bertelsmann has agreed to purchase $325 million of services in the
first two years following the consummation of the proposed combination
and up to $675 million of services in years three, four and five
following the consummation of the combination. Telefonica has agreed
to purchase, if necessary, any portion of those services in the third,
fourth and fifth years that Bertelsmann does not buy, up to $675
million.
RECOMMENDATION OF THE LYCOS BOARD OF DIRECTORS
At its meeting on May 16, 2000, the Lycos Board of Directors unanimously
approved the agreement and plan of reorganization, declared it advisable and
unanimously resolved to recommend that Lycos stockholders vote to adopt the
agreement and plan of reorganization.
In reaching its decision to approve the combination and to recommend that
Lycos stockholders vote to adopt the agreement and plan of reorganization, the
Lycos Board of Directors consulted with
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senior management and its financial and legal advisors and considered a number
of factors, including the following:
- the reasons listed above under "-- Reasons for the Combination";
- the exchange ratios contemplated by the agreement and plan of
reorganization, which within the collars represent a premium of 58.3% to
the closing price for Lycos common stock on May 15, 2000 and a premium
of 105.8% to the closing price for the Lycos common stock during the 15
trading days prior to May 16, 2000;
- the continuing ownership interest in Terra Lycos by Lycos stockholders;
- that Telefonica agreed to underwrite the E2.2 billion rights offering,
as a result of which Terra Lycos is expected to have approximately E3
billion in cash, making it one of the world's most well-capitalized
internet companies;
- presentations by senior members of Lycos' management regarding the
strategic advantages of combining with Terra Networks, operational
aspects of the combination and the results of management's operational
and legal due diligence review;
- that Mr. Davis will be the Chief Executive Officer and Mr. Philip will
be the Chief Financial Officer of Terra Lycos after the completion of
the combination;
- that the Board of Directors of Terra Lycos will consist of a maximum of
15 members, including Mr. Davis, Mr. Philip and one other member of the
Lycos Board of Directors selected by Lycos and reasonably acceptable to
Terra Networks;
- historical information concerning Lycos' and Terra Networks' businesses,
financial performance and condition, operations, technology, management,
competitive position and stock performance;
- Lycos management's view as to the financial condition, results of
operations and businesses of Lycos and Terra Networks before and after
giving effect to the combination based on management's due diligence and
publicly available analysts' earnings estimates;
- the expected qualification of the combination as a tax-free
reorganization;
- the terms and conditions of the agreement and plan of reorganization,
including the right of the Lycos Board of Directors to consider and
negotiate other acquisition proposals if it determines, in good faith
after consulting with outside counsel, that such action is necessary to
comply with its fiduciary duties under applicable law;
- the Board of Directors' belief, after consultation with Credit Suisse
First Boston, that the termination fees provided for in the agreement
and plan of reorganization would not materially deter an interested
third party from making a proposal for a transaction with Lycos;
- the Board of Directors' belief that the other terms of the agreement and
plan of reorganization, including the parties' representations,
warranties and covenants, and the conditions to their respective
obligations are reasonable;
- the financial presentation and opinion of Credit Suisse First Boston,
dated May 16, 2000, as to the fairness, from a financial point of view,
to the holders of Lycos common stock of the exchange ratio provided for
in the combination;
- that the complementary nature of the businesses of Lycos and Terra
Networks would enable the combined company to maintain important
relationships with customers, suppliers and employees;
- the regulatory approvals required to complete the combination and the
favorable prospects for receiving those approvals;
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<PAGE> 50
- the accounting treatment of the combination as a "purchase", including
the goodwill that will be recorded on the financial statements of Terra
Lycos; and
- the interests of the officers and directors of Lycos in the combination,
including the matters described under "-- Other Interests of Lycos
Officers and Directors in the Combination", and the impact of the
combination on Lycos stockholders, customers and employees.
The Lycos Board of Directors also identified and considered a number of
potentially negative factors in deliberations concerning the combination,
including:
- the fact that Telefonica is expected to own between 33.6% and 43.5%
(between 34.4% and 44.5% including 100% of the shares expected to be
owned by affiliates of Telefonica) of Terra Lycos following the
combination;
- that the principal trading market for Terra Networks ordinary shares is,
and will continue to be after completion of the combination, the New
Market segment of the Spanish stock exchanges, although the Terra
Networks American Depositary Shares are quoted on the Nasdaq National
Market and provide a more accessible trading vehicle than Terra Networks
ordinary shares for most U.S. stockholders;
- the challenges of combining the businesses, assets and workforces of two
major companies and the risks of not achieving the expected operating
efficiencies or growth;
- the risk of diverting management focus and resources from other
strategic opportunities and from operational matters while working to
implement the combination; and
- the risk that the combination will not be completed.
The Lycos Board of Directors believed that some of these risks were
unlikely to occur, while others could be avoided or mitigated by Lycos and that
overall these risks were outweighed by the potential benefits of the
combination.
The discussion of the information and factors considered by the Lycos Board
of Directors in making its decision is not intended to be exhaustive but is
believed to include all material factors considered by the Lycos Board of
Directors. In view of the variety of material factors considered in connection
with its evaluation of the combination, the Lycos Board of Directors did not
find it practicable to, and did not, quantify or otherwise assign relative
weights to, the specific factors considered in reaching its determination. In
addition, individual members of the Lycos Board of Directors may have given
different weight to different factors.
After careful consideration, the Lycos Board of Directors has unanimously
approved the agreement and plan of reorganization and declared it advisable and
unanimously recommends that Lycos stockholders vote "for" the adoption of the
agreement and plan of reorganization.
OPINION OF LYCOS' FINANCIAL ADVISOR
Credit Suisse First Boston has acted as Lycos' financial advisor in
connection with the combination. Lycos selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation, and its
familiarity with Lycos' business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Lycos requested
that Credit Suisse First Boston evaluate the fairness, from a financial point of
view, to the holders of Lycos common stock of the exchange ratio provided for in
the combination. On May 16, 2000, at a meeting of the Lycos Board of Directors
held to evaluate the combination, Credit Suisse First Boston rendered to the
Lycos Board of Directors an oral opinion, which opinion was confirmed by
delivery of a written
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opinion dated May 16, 2000, to the effect that, as of that date and based on and
subject to the matters described in its opinion, the exchange ratio was fair,
from a financial point of view, to the holders of Lycos common stock.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S WRITTEN OPINION DATED MAY 16,
2000 TO THE LYCOS BOARD OF DIRECTORS, WHICH SETS FORTH, AMONG OTHER THINGS, THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS AND
IS INCORPORATED INTO THIS PROXY STATEMENT/ PROSPECTUS BY REFERENCE. HOLDERS OF
LYCOS COMMON STOCK ARE ENCOURAGED TO, AND SHOULD, READ THIS OPINION CAREFULLY
AND IN ITS ENTIRETY. CREDIT SUISSE FIRST BOSTON'S OPINION IS ADDRESSED TO THE
LYCOS BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO
FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE
PROPOSED COMBINATION OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO ANY MATTER RELATING TO THE COMBINATION.
THE SUMMARY OF CREDIT SUISSE FIRST BOSTON'S OPINION IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION.
In arriving at its opinion, Credit Suisse First Boston reviewed the
agreement and plan of reorganization and related documents, as well as publicly
available business and financial information relating to Lycos and Terra
Networks. Credit Suisse First Boston also reviewed other information relating to
Lycos and Terra Networks that Lycos and Terra Networks provided to or discussed
with Credit Suisse First Boston, as well as publicly available financial
forecasts for Lycos and Terra Networks that Lycos and Terra Networks discussed
with Credit Suisse First Boston. Credit Suisse First Boston also met with Lycos'
and Terra Networks' managements to discuss the businesses and prospects of Lycos
and Terra Networks. Credit Suisse First Boston considered financial and stock
market data of Lycos and Terra Networks, and compared those data with similar
data for other publicly held companies in businesses similar to those of Lycos
and Terra Networks. Credit Suisse First Boston considered, to the extent
publicly available, the financial terms of other business combinations and other
transactions which have recently been effected or announced. Credit Suisse First
Boston also considered other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information that
was provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. Credit Suisse First Boston
reviewed and discussed with Lycos' and Terra Networks' managements publicly
available financial forecasts relating to Lycos and Terra Networks and was
advised, and assumed, that the forecasts represented reasonable estimates and
judgments as to the future financial performance of Lycos and Terra Networks. In
addition, Credit Suisse First Boston relied on, without independent
verification, the assessment of Lycos' and Terra Networks' managements as to
Terra Networks' existing technology and products and the validity of, and risks
associated with, Terra Networks' future technology and products. Credit Suisse
First Boston also assumed, with the consent of the Lycos Board of Directors,
that, before the consummation of the combination, Terra Networks will complete,
and receive the proceeds from, a rights offering of Terra Networks ordinary
shares for aggregate value of E2.2 billion, in accordance with the terms of the
rights offering agreement. Credit Suisse First Boston also assumed, with the
consent of the Lycos Board of Directors, that Bertelsmann will purchase products
and services from Terra Networks for $1.0 billion in the aggregate over a
five-year period following the consummation of the combination, in accordance
with the terms that representatives of Lycos described to Credit Suisse First
Boston. For a discussion of the terms of the Bertelsmann arrangements, see "Part
Five -- Information About Terra Networks -- Other Agreements -- Agreements with
Bertelsmann".
Credit Suisse First Boston also assumed that the combination would be
treated as a tax-free reorganization for United States federal income tax
purposes. In addition, Credit Suisse First Boston was not requested to make, and
did not make, an independent evaluation or appraisal of the assets
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or liabilities, contingent or otherwise, of Lycos or Terra Networks, nor was
Credit Suisse First Boston furnished with any evaluations or appraisals.
Credit Suisse First Boston's opinion is necessarily based on information
available to it, and on financial, economic, market and other conditions as they
existed and could be evaluated, on the date of the Credit Suisse First Boston
opinion. Credit Suisse First Boston did not express any opinion as to what the
value of Terra Networks ordinary shares or Terra Networks ADSs actually will be
when issued to Lycos' stockholders pursuant to the combination or the prices at
which Terra Networks ordinary shares and Terra Networks ADSs will trade
following the combination. In connection with its engagement, Credit Suisse
First Boston was not requested to, and did not, solicit third party indications
of interest in the possible acquisition of all or any part of Lycos.
In preparing its opinion to the Lycos Board of Directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below is not a complete description of the analyses
underlying Credit Suisse First Boston's opinion. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to partial analysis or summary description. In
arriving at its opinion, Credit Suisse First Boston made qualitative judgments
as to the significance and relevance of each analysis and factor that it
considered. Accordingly, Credit Suisse First Boston believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
factors or focusing on information presented in tabular format, without
considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Lycos and
Terra Networks. No company, transaction or business used in Credit Suisse First
Boston's analyses as a comparison is identical to Lycos or Terra Networks or the
proposed combination, and an evaluation of the results of those analyses is not
entirely mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies, business segments or transactions being analyzed. The estimates
contained in Credit Suisse First Boston's analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by the analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, Credit Suisse First Boston's analyses and estimates
are inherently subject to substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one
of many factors considered by the Lycos Board of Directors in its evaluation of
the proposed combination and should not be viewed as determinative of the views
of the Lycos Board of Directors or management with respect to the combination or
the exchange ratio.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion and
reviewed with the Lycos Board of Directors at a meeting of the Lycos Board of
Directors held on May 16, 2000. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE
INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND CREDIT
SUISSE FIRST BOSTON'S FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH
THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE
DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH IN THE
TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL
ANALYSES, INCLUDING THE METHODOLOGIES AND
IV-11
<PAGE> 53
ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE
VIEW OF CREDIT SUISSE FIRST BOSTON'S FINANCIAL ANALYSES.
In connection with its analyses, Credit Suisse First Boston noted that the
combination is structured to include a collar provision. Based on the collar
provision, in the event that the average closing stock price for Terra Networks
ordinary shares for purposes of the combination is between $45.37 and $68.06,
the exchange ratio will be between 2.150x and 1.433x, which is referred to in
the summary below as the collar range. Within the collar range, holders of Lycos
common stock would receive in the combination that number of Terra Networks
ordinary shares or ADSs equal to $97.55 per share. Credit Suisse First Boston
also noted that, in the event that the closing stock price for Terra Networks
ordinary shares for purposes of the combination is equal to or less than $45.37,
the exchange ratio will be fixed at 2.150x, and in the event that the closing
stock price for Terra Networks ordinary shares for purposes of the combination
is equal to or greater than $68.06, the exchange ratio will be fixed at 1.433x.
EXCHANGE RATIO ANALYSIS. Credit Suisse First Boston reviewed the average
of the ratios of the closing price of Lycos common stock divided by the closing
price of Terra Networks ADSs over various periods ending May 15, 2000. Credit
Suisse First Boston then computed the premium/(discount) represented by the
exchange ratio in the combination of 2.150x at the low end of the collar range,
1.720x at the midpoint of the collar range and 1.433x at the high end of the
collar range over the average ratios computed for the various periods. This
analysis indicated the following:
<TABLE>
<CAPTION>
EXCHANGE RATIO PREMIUM/(DISCOUNT)
OVER AVERAGE RATIO AT LOW END,
MIDPOINT AND HIGH END OF COLLAR RANGE
AVERAGE RATIO -------------------------------------
PERIOD PRIOR TO MAY 15, 2000 OVER PERIOD 2.150X 1.720X 1.433X
---------------------------- ------------- ------ ------ ------
<S> <C> <C> <C> <C>
Current market.............................. 1.084x 98.4% 58.7% 32.3%
Unaffected market (May 3, 2000)............. 0.775x 177.6% 122.1% 85.0%
10 trading days average..................... 0.866x 148.3% 98.6% 65.5%
30 trading days average..................... 0.770x 179.0% 123.2% 86.0%
60 trading days average..................... 0.711x 202.5% 142.0% 101.7%
90 trading days average..................... 0.748x 187.6% 130.1% 91.7%
Since November 17, 1999..................... 0.997x 115.5% 72.4% 43.7%
</TABLE>
PRECEDENT TRANSACTIONS ANALYSIS. Credit Suisse First Boston analyzed the
publicly available financial terms of the following five publicly announced
stock-for-stock transactions involving companies in the internet portal
industry, as well as 32 stock-for-stock transactions involving companies in the
internet industry, 76 stock-for-stock transactions with a value of $500 million
or more involving companies in the technology industry and 188 stock-for-stock
transactions involving companies in the technology industry:
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
America Online, Inc. Time Warner, Inc.
Yahoo! Inc. Broadcast.com Inc.
Yahoo! Inc. GeoCities
At Home Corp. Excite, Inc.
America Online, Inc. Netscape Communications Corp.
</TABLE>
IV-12
<PAGE> 54
The following table presents the median premium of the exchange ratio in
each transaction or group of transactions to the ratio of the stock prices for
the acquirors and targets in the transactions one trading day prior to the
announcement of the transaction and over various other periods prior to the
announcement of the transaction:
<TABLE>
<CAPTION>
EXCHANGE RATIO PREMIUM/(DISCOUNT) OF PRECEDENT
STOCK-FOR-STOCK TRANSACTIONS
-------------------------------------------------------
90 DAYS 60 DAYS 30 DAYS 10 DAYS 1 DAY AVERAGE
------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
PRECEDENT TRANSACTION
America Online, Inc./Time Warner, Inc. ...... 48.8% 69.2% 82.8% 65.5% 69.1% 60.1%
Yahoo! Inc./Broadcast.com Inc................ 71.7% 51.9% 35.1% 20.5% 10.0% 37.8%
Yahoo! Inc./GeoCities........................ 82.1% 84.0% 96.8% 63.1% 51.5% 75.5%
At Home Corp./Excite, Inc. .................. 30.4% 31.3% 55.3% 69.2% 57.4% 44.5%
America Online, Inc./Netscape Communications
Corp. ..................................... 0.4% 8.4% 14.2% 9.1% (2.5)% (0.1)%
32 Internet Transactions (median)............ 14.4% 34.8% 35.7% 28.4% 24.2% 22.8%
76 Technology Transactions over $500 million
(median)................................... 30.5% 34.8% 35.3% 33.0% 27.9% 30.3%
188 Technology Transactions (median)......... 27.7% 32.7% 34.0% 31.6% 26.9% 22.8%
</TABLE>
PRECEDENT MERGER-OF-EQUALS TRANSACTIONS ANALYSIS. Credit Suisse First
Boston noted that the combination will result in an implied pro forma fully
converted ownership interest in the combined company for Lycos stockholders of
approximately 40.7% to 50.7% prior to the investment by Telefonica. Credit
Suisse First Boston also noted that this range of implied pro forma ownership
interests is consistent with a party's ownership of the pro forma entity in a
typical merger-of-equals transaction, which was characterized by Credit Suisse
First Boston for purposes of this analysis as a transaction in which each
party's stockholders retain at least a 40% fully converted pro forma interest in
the combined entity. Credit Suisse First Boston reviewed 54 precedent
merger-of-equals transactions across a wide range of industries in order to
determine the median and mean premium paid to the stockholders of the effective
target in each transaction one trading day and 30 trading days prior to
announcement of each transaction. Credit Suisse First Boston identified the
acquiror and target in each transaction by considering the party issuing shares
in the transaction, relative ownership of the combined entity and location of
the combined entity's headquarters. Credit Suisse First Boston compared the
results of this review to the premium to be paid to Lycos stockholders in the
combination utilizing closing prices for Terra Networks ordinary shares within
the collar range. The results of this analysis are as follows:
<TABLE>
<CAPTION>
PREMIUM TO UNAFFECTED STOCK PRICE
------------------------------------
30 DAYS PRIOR TO ONE DAY PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT
---------------- ----------------
<S> <C> <C>
54 PRECEDENT MERGER-OF-EQUALS TRANSACTIONS
Median.................................................... 15.0% 11.3%
Mean...................................................... 19.0% 15.0%
THE COMBINATION -- WITHIN COLLAR RANGE...................... 45.1% 58.3%
</TABLE>
No transaction utilized as a comparison in the precedent transactions
analysis or precedent merger-of-equals transactions analysis is identical to the
combination. In evaluating the combination, Credit Suisse First Boston made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Lycos and Terra Networks, such as the impact of
competition on the businesses of Lycos and Terra Networks and the industry
generally, industry growth and the absence of any adverse material change in the
financial condition and prospects of Lycos, Terra Networks or the industry or in
the financial markets in general.
IV-13
<PAGE> 55
PRO FORMA REVENUE IMPACT ANALYSIS. Credit Suisse First Boston analyzed the
potential pro forma effects of the combination on, among other things, the
estimated revenue per share for Terra Networks for calendar year 2001 throughout
the range of exchange ratios defined by the collar. Credit Suisse First Boston
then calculated the multiples of estimated calendar year 2001 revenue of the
combined company necessary to maintain the May 15, 2000 closing stock/ADS prices
for each of Lycos and Terra Networks. The results of this analysis, which Credit
Suisse First Boston compared to the May 15, 2000 Terra Networks stand-alone
aggregate value multiple of estimated calendar year 2001 revenue of 51.2x, are
as follows:
<TABLE>
<CAPTION>
COMBINED COMPANY
AGGREGATE VALUE
MULTIPLE OF
TERRA NETWORKS' ESTIMATED CALENDAR
TERRA NETWORKS MAY 15, 2000 YEAR 2001 REVENUE
REVENUE PER AGGREGATE VALUE NECESSARY TO MAINTAIN
SHARE ACCRETION: MULTIPLE OF MAY 15, 2000
PREMIUM/ IMPLIED ESTIMATED ESTIMATED STOCK/ADS PRICE FOR:
(DISCOUNT) TO EXCHANGE CALENDAR YEAR CALENDAR YEAR ---------------------
MIDPOINT OF COLLAR RATIO 2001 2001 REVENUE LYCOS TERRA
------------------ -------- ---------------- --------------- ----- -----
<S> <C> <C> <C> <C> <C>
(20.0)% 2.150x 68.2% 51.2x 15.7x 32.5x
0.0 % 1.720x 85.0% 51.2x 17.9x 29.1x
20.0 % 1.433x 98.2% 51.2x 20.0x 26.9x
</TABLE>
PRO FORMA EARNINGS IMPACT ANALYSIS. Credit Suisse First Boston calculated
the estimated cost savings and/or additional revenue of the combined company
necessary to result in breakeven (zero) earnings per share in calendar years
2000 and 2001. This analysis was performed based on securities research
analysts' estimates and included incremental revenue of $175.0 million assumed
by Lycos to be provided by Bertelsmann in calendar year 2001. This analysis
indicated that, for calendar year 2000, the combined company would need to
generate approximately $165.1 million in incremental pre-tax earnings to result
in breakeven earnings per share and, for calendar year 2001, the required
breakeven amount would be approximately $41.5 million.
PEER GROUP COMPARISON. Credit Suisse First Boston compared financial,
operating and stock market data of Terra Networks and Lycos to corresponding
data of the following 34 publicly traded companies in the international
information hub/portal, domestic information hub/portal and other technology
industries:
<TABLE>
<CAPTION>
INTERNATIONAL INFORMATION DOMESTIC INFORMATION OTHER TECHNOLOGY
HUB/PORTAL COMPANIES HUB/PORTAL COMPANIES COMPANIES
------------------------- -------------------- ----------------
<S> <C> <C>
- Freeserve Holdings plc - America Online, Inc. - Infospace, Inc.
- Freenet.de AG - America Online, Inc./Time - CNET Networks Inc.
- StarMedia Network, Inc. Warner, Inc. (pro forma) - ZDNet (division of Ziff-Davis Inc.)
- QXL.com plc - Yahoo! Inc. - GoTo.com, Inc.
- Yupi Internet Inc.(1) - Excite/At Home Corp. (pro forma) - About.com Inc.
- Quepasa.com Inc. - Lycos, Inc. - NBC Internet Inc.
- El Sitio, Inc. - Verio Inc. - SportsLine.com, Inc.
- PSINet Inc. - MarketWatch.com Inc.
- Concentric Network Corp. - Juno Online Services, Inc.
- GO Network (a division of - jVillage Inc.
Infoseek Corp.) - TheStreet.com, Inc.
- LookSmart Ltd. - Earthweb Inc.
- Go2Net Inc. - theglobe.com inc.
- Ask Jeeves, Inc. - iTurf Inc.
- Prodigy Communications Corp.
</TABLE>
---------------
(1) Non-public company. Data based on expected pricing ranges.
Credit Suisse First Boston compared aggregate values, calculated as equity
market value plus net debt, as multiples of latest 12 months and estimated
calendar years 2000 and 2001 revenue. All multiples were based on closing stock
prices on May 15, 2000, except that implied multiples for
IV-14
<PAGE> 56
Lycos were also calculated based on the $97.55 per share in Terra Networks
ordinary shares to be exchanged within the collar range for each share of Lycos
common stock. Estimated financial data for the selected companies, Lycos and
Terra Networks were based on securities research analysts' estimates. This
analysis indicated the implied median and mean multiples for the groups of
companies set forth below, as compared to the actual and implied multiples for
Lycos and the implied multiples for Terra Networks set forth below. Credit
Suisse First Boston placed particular emphasis on the comparison between the
median and mean multiples for the international hub/portal companies and the
implied multiples for Terra Networks, and on the comparison between the median
and mean multiples for the domestic hub/portal companies and the actual and
implied multiples for Lycos common stock:
<TABLE>
<CAPTION>
AGGREGATE VALUE EQUITY VALUE
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
LATEST CALENDAR CALENDAR LATEST CALENDAR CALENDAR
12 MONTHS 2000 2001 12 MONTHS 2000 2001
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Terra (May 15, 2000)............. 135.1x 94.1x 51.2x 138.4x 96.4x 52.5x
International Hub/Portal
Companies:
Median......................... 109.6x 25.1x 12.8x 118.4x 30.4x 12.8x
Mean........................... 133.9x 57.4x 28.2x 148.7x 61.1x 30.0x
Lycos:
May 15, 2000................... 32.9x 21.3x 14.9x 37.0x 24.0x 16.8x
Within Collar Range............ 56.2x 36.4x 25.5x 60.3x 39.1x 27.4x
Domestic Hub/Portal Companies:
Median......................... 19.4x 11.7x 7.1x 21.0x 12.2x 7.0x
Mean........................... 26.6x 16.6x 11.2x 27.4x 17.0x 11.5x
Other Technology Companies:
Median......................... 6.1x 3.1x 2.1x 9.6x 4.9x 2.9x
Mean........................... 27.3x 14.6x 7.6x 29.7x 15.8x 8.3x
</TABLE>
ILLUSTRATIVE FUTURE TRADING ANALYSIS. Credit Suisse First Boston reviewed
the potential pro forma effects of the combination on the aggregate value of the
combined company as a multiple of estimated calendar year 2001 revenue using the
closing price of Terra Networks ADSs on May 15, 2000. Credit Suisse First Boston
then compared the results of this analysis with the aggregate value multiples of
estimated calendar year 2001 revenue for each of Terra Networks and Lycos on a
stand-alone basis. Credit Suisse First Boston also noted that the implied
aggregate value of the combined company as a multiple of estimated calendar year
2001 revenue would be 29.4x, a 49.1% discount to the 57.8x multiple for Yahoo!
Inc. based on the closing stock/ADS prices for Terra Networks and Yahoo! Inc. on
May 15, 2000. This analysis was performed based on securities research analysts'
estimates and included incremental revenue of $175.0 million assumed by Lycos to
be provided by Bertelsmann in calendar year 2001.
IV-15
<PAGE> 57
Credit Suisse First Boston also reviewed the premiums to Lycos' May 15,
2000 share price implied by a range of trading multiples of 20.0x to 60.0x
estimated calendar year 2001 revenue for the combined company, including the May
15, 2000 multiples for Lycos common stock and Terra Networks ADSs both on a
stand-alone basis and assuming the combination is completed. This analysis was
performed throughout the range of exchange ratios defined by the collar, was
based on securities research analysts' estimates and included incremental
revenue of $175.0 million assumed by Lycos to be provided by Bertelsmann in
calendar year 2001. The results of this analysis are as follows:
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT) RECEIVED BY LYCOS STOCKHOLDERS BASED
ON VARIOUS TRADING MULTIPLES FOR TERRA NETWORKS ADSS
----------------------------------------------------------
MAY 15, 2000 MAY 15, 2000 MAY 15, 2000
IMPLIED LYCOS BLENDED TERRA
PREMIUM/(DISCOUNT) EXCHANGE MULTIPLE -- MULTIPLE -- MULTIPLE --
MIDPOINT OF COLLAR RATIO 14.9X 20.0X 29.4X 51.2X 60.0X
------------------ -------- ------------ ----- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
(20.0)%.......................... 2.150x 1.6% 29.6% 81.8% 202.2% 250.6%
0.0%............................. 1.720x (10.3)% 14.3% 60.3% 166.6% 209.3%
20.0%............................ 1.433x (19.8)% 2.3% 43.4% 138.4% 176.6%
</TABLE>
HISTORICAL STOCK TRADING ANALYSIS. Credit Suisse First Boston analyzed the
prices at which Lycos common stock traded over the period from April 2, 1996,
the date of Lycos' initial public offering, through May 15, 2000. Credit Suisse
First Boston noted that the high closing price for Lycos common stock in the
period observed was $92.13 on December 21, 1999, and the low closing price for
Lycos common stock in the period observed was $1.45 on August 1, 1996.
Credit Suisse First Boston also analyzed the prices at which Terra Networks
ordinary shares and Terra Networks ADSs traded over the period from November 17,
1999, the date of Terra Networks' initial public offering, through May 15, 2000.
Credit Suisse First Boston noted that the high closing price for Terra Networks
ordinary shares in the period observed was $137.17 on February 18, 2000, and the
low closing price for Terra Networks ordinary shares in the period observed was
$28.84 on November 19, 1999. Credit Suisse First Boston also noted that the high
closing price for Terra Networks ADSs in the period observed was $135.50 on
February 14, 2000, and the low closing price for Terra Networks ADSs in the
period observed was $30.81 on November 23, 1999.
MISCELLANEOUS. Lycos has agreed to pay Credit Suisse First Boston for its
financial advisory services customary fees based on the aggregate value of the
combination. Lycos also has agreed to reimburse Credit Suisse First Boston for
its reasonable out-of-pocket expenses, including fees and expenses of legal
counsel and any other advisor retained by Credit Suisse First Boston, and to
indemnify Credit Suisse First Boston and related parties against liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
Credit Suisse First Boston and its affiliates have in the past provided
financial services to Lycos and Telefonica, and are currently providing
financial services to Lycos, unrelated to the proposed combination, for which
services Credit Suisse First Boston and its affiliates have received and will
receive compensation. In the ordinary course of business, Credit Suisse First
Boston and its affiliates may actively trade the debt and equity securities of
Lycos, Terra Networks, Telefonica and Bertelsmann for their own accounts and for
the accounts of customers and, accordingly, may at any time hold long or short
positions in those securities.
OTHER INTERESTS OF LYCOS OFFICERS AND DIRECTORS IN THE COMBINATION
In considering the recommendation of the Lycos Board of Directors in favor
of the adoption of the agreement and plan of reorganization, Lycos stockholders
should be aware that several Lycos officers and directors will have interests in
addition to the interests of Lycos stockholders generally.
IV-16
<PAGE> 58
MANAGEMENT SHARE OWNERSHIP AND STOCK OPTIONS
As of September 5, 2000, Lycos officers and directors and their affiliates
beneficially owned (as defined in the rules promulgated under the Securities
Exchange Act of 1934) an aggregate of 3,648,824 shares of Lycos common stock, or
approximately 3.19% of the issued and outstanding shares of Lycos common stock.
All of these shares will be treated in the combination in the same manner as
shares of Lycos common stock held by other stockholders of Lycos. As of
September 5, 2000, options to purchase a total of 9,027,608 shares of Lycos
common stock, at exercise prices ranging from $0.0025 to $66.75, were held by
officers of Lycos under the Lycos, Inc. 1995 Stock Option Plan and the Lycos,
Inc. 1996 Stock Option Plan.
As of September 5, 2000, options to purchase a total of 270,000 shares of
Lycos common stock, at exercise prices ranging from $2.875 to $57.50, were held
by directors of Lycos under the Non-employee Directors Stock Option Plan. In
addition, options to purchase a total of 272,000 shares of Lycos common stock,
at exercise prices ranging from $10.34375 to $13.50, were held by a director of
Lycos under the Lycos, Inc. 1996 Stock Option Plan.
CONTINUED EMPLOYMENT AND OTHER RELATIONSHIPS
Following the combination, substantially all employees of Lycos will become
employees of Terra Lycos. Robert J. Davis, Chief Executive Officer and President
of Lycos, and Edward M. Philip, Chief Financial Officer and Chief Operating
Officer of Lycos, have entered into employment agreements with Terra Networks
and Lycos. In addition, the following officers of Lycos have also entered into
employment agreements with Terra Networks and Lycos: Jeffrey S. Bennett, Thomas
E. Guilfoile, John McMahon, David G. Peterson and Ronald Sege (collectively, the
"Senior Executives"). Each of the foregoing Lycos employees will receive options
to purchase Terra Networks ADSs upon completion of the combination, and it is
anticipated that they will participate in Terra Networks' other incentive plans
following the combination.
Mr. Davis and Mr. Philip will become the Chief Executive Officer and Chief
Financial Officer, respectively, of Terra Lycos as of completion of the
combination. The Senior Executives will serve in principally the same positions
with Lycos that they held at Lycos prior to completion of the combination.
Messrs. Davis and Philip and one other director of Lycos reasonably
acceptable to Terra Networks will also become directors of Terra Lycos upon
completion of the combination.
EMPLOYMENT AGREEMENTS
Terra Networks and Lycos have entered into employment agreements with
Messrs. Davis and Philip and each of the Senior Executives. These employment
agreements will become effective upon completion of the combination.
Each employment agreement for Messrs. Davis and Philip and the Senior
Executives provides that all stock options to purchase Lycos common stock
granted to the applicable executive prior to May 16, 2000 will be accelerated
and become fully vested upon completion of the combination to the extent not
then already vested (other than the Lycos stock options recently granted to the
Senior Executives described below under "-- Special Option Grants, Acceleration
of Vesting," the vesting of which will not become accelerated upon completion of
the combination). The executives will be entitled to receive payments to offset
the excise tax liability, including any interest or penalties imposed with
respect to such taxes, that they may incur under Section 4999 of the Internal
Revenue Code as a result of this accelerated vesting, and as a result of any
other payment, vesting or distribution under the employment agreements.
As of September 5, 2000, Mr. Davis had options to acquire 3,831,000 shares
of Lycos common stock, of which 1,843,869 shares are vested and 1,987,131 shares
are unvested, and Mr. Philip had options to acquire 2,236,408 shares of Lycos
common stock, of which 881,116 shares are vested
IV-17
<PAGE> 59
and 1,355,292 shares are unvested. With respect to the Senior Executives, as of
September 5, 2000 (including the options to acquire 200,000 shares of Lycos
common stock granted to each Senior Executive on May 15, 2000, described below
in "-- Special Option Grants, Acceleration of Vesting," which will not become
vested upon completion of the combination): Mr. Bennett had options to acquire
667,200 shares of Lycos common stock, of which 107,824 shares are vested and
559,376 shares are unvested; Mr. Guilfoile had options to acquire 560,000 shares
of Lycos common stock, of which 110,624 shares are vested and 449,376 shares are
unvested; Mr. McMahon had options to acquire 420,000 shares of Lycos common
stock, of which 59,583 are vested and 360,417 shares are unvested; Mr. Peterson
had options to acquire 713,000 shares of Lycos common stock, of which 151,624
shares are vested and 561,376 shares are unvested; and Mr. Sege had options to
acquire 600,000 shares of Lycos common stock, of which 134,166 shares are vested
and 465,834 shares are unvested.
The employment agreements contain standard restrictive covenants pertaining
to confidentiality, nonsolicitation and noncompetition.
The following discussion pertains to specific aspects of the employment
agreements relevant to Mr. Davis and Mr. Philip, and to the Senior Executives,
respectively.
Messrs. Davis and Philip. Under Messrs. Davis' and Philip's respective
employment agreements, Mr. Davis will report to the Executive President and
Chairman of the Terra Lycos Board of Directors, and Mr. Philip will report to
the Chief Executive Officer of Terra Lycos. Each employment agreement is for a
five-year term.
The employment agreements provide a base salary of no less than $250,000
per year for Mr. Davis and no less than $200,000 per year for Mr. Philip, and
provide for a guaranteed annual bonus of $250,000 for Mr. Davis and $200,000 for
Mr. Philip. Under the employment agreements, Terra Networks will grant to Mr.
Davis options to acquire 2,000,000 Terra Networks ordinary shares and to Mr.
Philip options to acquire 1,500,000 Terra Networks ordinary shares
(collectively, the "New Options"), respectively, upon completion of the
combination, vesting ratably over four years (commencing on the date of grant),
at an exercise price equal to the fair market value of the underlying shares
subject to the New Options on the date of grant and pursuant to the terms of
Terra Networks' stock incentive plans.
The employment of Messrs. Davis and Philip may be terminated by either the
executives or Terra Networks in certain circumstances. The agreements provide
for a severance benefit in the event of termination of the executive's
employment by Terra Networks other than for "cause," or termination by Mr. Davis
or Mr. Philip, as the case may be, for "good reason," determined as follows: the
greater of $5,000,000 for Mr. Davis ($3,250,000 for Mr. Philip) or the value of
the New Options on the date of termination (which is defined as the aggregate
fair market value of the Terra Networks shares underlying the New Options on the
date of termination less the aggregate exercise price of the New Options). If
the value of the New Options is greater than the cash severance amount, no cash
severance payment will be made to the executives, and the executives will retain
their New Options. If the cash severance amounts are greater than the value of
the New Options, the executives will receive the cash payments and will forfeit
their New Options. In the event that the executives retain the New Options upon
termination of employment, the unvested portion of the New Options will become
immediately vested on the date of termination. In the event of such termination,
Messrs. Davis and Philip also will be entitled to continuation of certain
benefits generally until the end of the unexpired original term.
Senior Executives. Each employment agreement with the Senior Executives is
for a term of three years.
The employment agreements provide for a base salary for each Senior
Executive as follows: Mr. Bennett, $140,000, Mr. Guilfoile, $140,000, Mr.
McMahon, $150,000, Mr. Peterson, $160,000 and Mr. Sege, $170,000. All bonus
amounts payable under the Senior Executives' agreements are
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discretionary, to be determined by the Chief Executive Officer of Terra Lycos
based upon certain targets. Under the employment agreements, Terra Lycos will
grant to each Senior Executive options to acquire 200,000 Terra Networks
ordinary shares upon completion of the combination, vesting ratably over four
years (commencing on the date of grant), at an exercise price equal to the fair
market value of the underlying shares subject to the new options on the date of
grant.
The employment of the Senior Executives may be terminated by either the
executives or Terra Networks in certain circumstances. The agreements provide
for a lump sum severance benefit in the event of termination of an executive's
employment by Terra Lycos other than for "cause," or termination by the Senior
Executives, as the case may be, for "good reason," in the amount of 12 month's
of such executive's base salary. The terminated Senior Executive will also
receive continuation of certain benefits generally for one year after
termination of employment, and the unvested portion of any options held by the
Senior Executive will become immediately vested on the date of termination.
Special Option Grants, Acceleration of Vesting. On May 15, 2000, the five
Senior Executives were each granted options to purchase 200,000 shares of Lycos
common stock. The exercise price for such grant to each Senior Executive was
$61.63 per share (which was the closing price of Lycos common stock on May 15,
2000). These options will vest over four years commencing on the date of grant,
and will not accelerate upon completion of the combination.
The vesting of all stock options granted to members of the Lycos Board of
Directors under the Lycos Non-employee Directors Stock Option Plan will
accelerate upon completion of the combination. The members of the Lycos Board of
Directors will be entitled to receive a payment for any excise taxes they may
incur under Section 4999 of the Internal Revenue Code as a result of accelerated
vesting. As of September 5, 2000, options to purchase a total of 270,000 shares
of Lycos common stock, at exercise prices ranging from $2.875 to $57.50, were
held by directors of Lycos under the Non-employee Directors Stock Option Plan.
The vesting of all Lycos stock options previously granted to Jeffrey
Snider, general counsel of Lycos, and Richard Sabot, a former employee and
current member of the Lycos Board of Directors, will become accelerated by two
years upon completion of the combination. Messrs. Snider and Sabot will be
entitled to receive a payment for any excise tax liability they may incur under
Section 4999 of the Internal Revenue Code as a result of accelerated vesting.
THE MERGER OF LYCOS INTO LYCOS VIRGINIA
Subject to the terms and conditions of the agreement and plan of
reorganization, and in accordance with the General Corporation Law of Delaware
and the Virginia Stock Corporation Act (VSCA), the first step of the completion
of the combination will be the merger of Lycos with and into Lycos Virginia, a
newly-formed, wholly-owned subsidiary of Lycos incorporated in Virginia, with
Lycos Virginia as the surviving entity. At that time, each share of Lycos common
stock issued and outstanding (other than shares of Lycos common stock held in
the treasury of Lycos) shall convert automatically into one share of Lycos
Virginia common stock, and each certificate previously representing shares of
Lycos common stock shall thereafter represent shares of Lycos Virginia common
stock. In addition, each option granted by Lycos to purchase shares of Lycos
common stock that is outstanding and unexercised at that time shall convert
automatically into an option to purchase the number of shares of Lycos Virginia
common stock subject to such option immediately prior to that time. This merger
will be followed by the share exchange described below. Unless the context
otherwise requires, all references herein to Lycos prior to the merger are to
Lycos, Inc., and all references to Lycos after the merger are to Lycos Virginia.
Under Delaware law, Lycos stockholders are not entitled to appraisal rights
in connection with the merger of Lycos into Lycos Virginia.
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THE SHARE EXCHANGE
Subject to the terms and conditions of the agreement and plan of
reorganization and in accordance with the VSCA and the Spanish Corporation Law
of 1989 (Texto Refundido de la Ley de Sociedades Anonimas), immediately
following the merger described above, Lycos Virginia and Terra Networks will
effect a statutory share exchange whereby each share of Lycos Virginia common
stock will be exchanged for Terra Networks ordinary shares (which, unless the
Lycos stockholder otherwise elects will automatically be deposited with
Citibank, as ADS depositary, in exchange for Terra Networks ADSs) upon
completion of the combination. Upon completion of the share exchange, Lycos
Virginia shall become a wholly-owned subsidiary of Terra Networks. The separate
corporate existence of each of Terra Networks and Lycos will continue following
the share exchange. Under Virginia Law, Lycos Virginia stockholders will not
have dissenters' rights in connection with the share exchange.
CONVERSION OF STOCK; TREATMENT OF OPTIONS
Lycos Common Stock. Upon completion of the combination, each share of
Lycos Virginia common stock outstanding will be exchanged for a number of Terra
Networks ADSs, each representing one Terra Networks ordinary share, or at each
stockholder's election, a number of Terra Networks ordinary shares in account
entry form, equal to the exchange ratio. The exchange ratio shall be determined
by dividing (1) $97.55 by (2) the average closing price of Terra Networks shares
on the New Market segment of the Spanish stock exchanges for the ten full
trading days ending on the tenth trading day prior to the share exchange.
However, if the average closing price of Terra Networks shares is equal to or
greater than $68.06, the exchange ratio shall be 1.433, or if the average
closing price of Terra Networks shares is equal to or less than $45.37, the
exchange ratio shall be 2.150. Each closing price of Terra Networks shares used
to determine the exchange ratio will be expressed in U.S. dollars using the noon
buying rate for euro for U.S. dollars as of each day on which the average
closing price is measured. The closing price of Terra Networks shares on the New
Market segment of the Spanish stock exchanges on September 19, 2000 was
equivalent to $43.00.
Terra Networks ordinary shares to be issued for each share of Lycos
Virginia common stock will be determined as illustrated in the following
examples:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
AMOUNT OF AMOUNT OF
TERRA ACQUISITION NEW TERRA NEW TERRA
AVERAGE PRICE PER EXCHANGE NETWORKS SHARES NETWORKS SHARES
PRICE(1) LYCOS SHARE RATIO(2) TO BE ISSUED(3) TO BE ISSUED(4)
-------- ----------- -------- --------------- ---------------
(IN U.S. DOLLARS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
Above Upper End............ >68.06 >97.55 1.433 191.8 227.3
Upper End.................. 68.06 97.55 1.433 191.8 227.3
Central Reference.......... 56.72 97.55 1.720 230.1 272.7
Lower End.................. 45.37 97.55 2.150 287.7 340.9
Below Lower End............ <45.37 <97.55 2.150 287.7 340.9
</TABLE>
---------------
(1) Average closing price of Terra Networks shares on the Continuous Market
Exchange for the ten days ending on the tenth day prior to the closing date
of the transaction converted to U.S. dollars using the noon buying rate of
euro for U.S. dollars as of each day the average closing price is measured.
(2) Number of Terra Networks shares per each Lycos Virginia share.
(3) Based on 133.8 million Lycos shares outstanding on a fully-diluted basis at
May 16, 2000.
(4) Assumes 158.6 million Lycos shares outstanding on a fully-diluted basis.
This is the maximum number of shares permitted to be outstanding on a
fully-diluted basis at the closing of the transaction under the agreement
and plan of reorganization. However, Lycos has agreed in the
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agreement and plan of reorganization not to take any action, including
issuing new Lycos shares, that could reasonably be expected to result in
its shareholders owning or having voting power in excess of 50% of Terra
Lycos upon completion of the combination.
Lycos Virginia Stock Options. Immediately prior to completion of the
combination, each outstanding option to purchase a share of Lycos Virginia
common stock that is outstanding and unexercised will be transferred to Terra
Networks. Terra Networks will issue as of completion of the combination, in
exchange therefor, an option to purchase that number of Terra Networks ADSs
equal to the number of shares of Lycos Virginia common stock subject to the
original option multiplied by the exchange ratio, at an exercise price per Terra
Networks ADS equal to the exercise price per share of the Lycos Virginia common
stock under the original option divided by the exchange ratio. The Terra
Networks options will otherwise be on terms substantially identical to those of
the existing Lycos options. Any fractional shares resulting from this conversion
may be grouped with fractional shares resulting from the conversion of other
options to purchase Lycos Virginia common stock. Terra will pay the value of any
fractional shares in cash. Upon completion of the combination any outstanding
Lycos options will cease to represent a right to purchase Lycos Virginia common
stock.
Each vesting date after completion of the combination with respect to any
Lycos Virginia option (other than those held by the Lycos officers with
employment agreements with Terra Networks and Lycos, those held by members of
the Lycos Board of Directors and those held by Jeffrey Snider or Richard Sabot
which are discussed in further detail under "-- Other Interests of Lycos
Officers and Directors in the Combination") will be deemed to occur on the date
that is one year prior to the original vesting date.
As of September 12, 2000, options to purchase a total of 23,765,741 shares
of Lycos common stock, at exercise prices ranging from $0.0025 to $85.38, were
held by approximately 900 Lycos employees, directors, officers and consultants.
Of the options so held, options to purchase a total of 9,058,583 shares, at
exercise prices ranging from $0.0025 to $85.38 per share were unvested as of
September 12, 2000, and will become fully vested in connection with completion
of the combination. As of September 12, 2000, options to purchase a total of
9,569,608 shares of Lycos common stock, at exercise prices ranging from $0.0025
to $66.75, were held by executive officers and directors of Lycos. Of the
options held by the executive officers and directors of Lycos, options to
purchase a total of 4,905,134 shares, at exercise prices ranging from $0.0025 to
$66.75 per share were unvested as of September 12, 2000, and will become fully
vested in connection with completion of the combination.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
Exchange Procedures. Promptly following the completion of the combination,
Terra Networks shall provide for the benefit of holders of certificates
representing Lycos Virginia common stock (1) to Citibank, N.A., as depositary,
the Terra Networks shares being issued in the form of Terra Networks ADSs and
cash in lieu of any fractional Terra Networks shares, and the depositary shall
deposit with a bank or trust company appointed by Lycos as exchange agent,
receipts representing the Terra Networks ADSs and cash in lieu of any fractional
Terra Networks ADSs and (2) to the exchange agent appointed by Lycos, the Terra
Networks ordinary shares being issued in account entry form and cash in lieu of
any fractional Terra Networks shares. We refer to the fund into which Terra
Networks deposits the receipts for Terra Networks ADSs, Terra Networks shares in
account entry form and cash, together with any dividends or distributions on the
ADSs and shares, as the "Exchange Fund."
In order for Terra Networks to issue the new shares for the benefit of
Lycos stockholders, Lycos shares will need to be delivered to Terra Networks as
a contribution in-kind. As soon as practicable following such delivery, which
will occur upon completion of the share exchange, Terra Networks will execute
the capital increase, register it with the Commercial Registry, obtain the
acceptance by the
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<PAGE> 63
New Market segment of the Spanish stock exchanges of the new shares for listing
and deliver the new shares for the benefit of Lycos stockholders.
As soon as practicable after and in no event later than five business days
after the completion of the combination, the exchange agent will mail a
transmittal letter to holders of certificates representing Lycos Virginia common
stock. The form of transmittal letter will contain instructions about the
surrender of certificates representing Lycos Virginia common stock for Terra
Networks ADSs or Terra Networks shares in account entry form and any cash in
lieu of fractional ADSs or shares.
The letter of transmittal will permit the holder of certificates
representing Lycos Virginia common stock to elect to receive Terra Networks
ordinary shares in account entry form instead of having the shares deposited
with Citibank, as ADS depositary, in exchange for Terra Networks ADSs following
the exchange of the holder's shares of Lycos common stock for Terra Networks
ordinary shares.
YOU SHOULD NOT RETURN YOUR LYCOS COMMON STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD. YOU ALSO SHOULD NOT FORWARD YOUR LYCOS CERTIFICATES TO THE
EXCHANGE AGENT UNLESS AND UNTIL YOU RECEIVE A TRANSMITTAL LETTER FOLLOWING THE
COMPLETION OF THE COMBINATION.
After the completion of the combination, you will not be paid dividends or
other distributions declared on the Terra Networks shares for which your stock
has been exchanged (or on your Terra Networks ADSs) until you surrender your
certificates representing Lycos Virginia common stock for exchange. When you
surrender your certificates, Terra Networks will pay you any unpaid dividends or
other distributions, without interest, that had become payable with respect to
Terra Networks ADSs or shares. After the completion of the combination, there
will be no transfers on the stock transfer books of Lycos Virginia of shares of
Lycos common stock issued and outstanding immediately prior to the completion of
the combination. If Lycos Virginia common stock certificates are presented for
transfer after the completion of the combination, they will be canceled and
exchanged for certificates representing the applicable number of Terra Networks
ADSs or Terra Networks shares in account entry form. Any stockholder that
requests that Terra Networks ADSs or Terra Networks shares in account entry form
be issued in a name other than that in which the certificate being surrendered
is registered will have to pay any transfer taxes to the exchange agent in
advance.
No Fractional Shares Will Be Issued. The exchange agent will not issue
fractional ADSs or shares of Terra Networks to you in the combination.
Accordingly, you will not receive any dividends or voting rights with respect to
any fractional ADSs or shares. For each fractional ADS or share that would
otherwise be issued, the exchange agent will pay cash in an amount equal to the
fraction of a whole ADS or share that would otherwise have been issued,
multiplied by the average closing price of Terra Networks shares on the New
Market segment of the Spanish stock exchanges for the ten full trading days
ending on the tenth trading day prior to the completion of the combination. No
interest will be paid or accrued on the cash in lieu of fractional ADSs or
shares.
None of Terra Networks, Lycos, the exchange agent or any other person will
be liable to any former Lycos Virginia stockholder for any amount properly
delivered to a public official under applicable abandoned property, escheat or
similar laws.
For a description of the Terra Networks ordinary shares and ADSs and a
description of the differences between the rights of Lycos stockholders and
Terra Networks shareholders and ADS holders, see "Part Seven -- Legal
Information."
COMPLETION OF THE COMBINATION
We anticipate that we will complete the combination during the fourth
quarter of 2000. However, completion could be delayed if there is a delay in
obtaining the necessary regulatory approvals. We cannot assure you whether or
when these approvals will be obtained or whether the combination will be
consummated. If we do not complete the combination by January 31, 2001, either
Terra Networks
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<PAGE> 64
or Lycos may terminate the agreement and plan of reorganization, unless the
failure to complete the combination by this date is due to the failure of the
party seeking to terminate the agreement and plan of reorganization to perform
or observe its covenants and agreements in the agreement and plan of
reorganization. See "-- Conditions to Completion of the Combination."
The effective time of the first step of the combination, the merger of
Lycos with and into Lycos Virginia, will be the time that is specified in the
related certificate of merger issued by the Virginia State Corporation
Commission. The effective time of the second step of the combination, the
statutory share exchange involving Terra Networks and Lycos Virginia, will be
the time that is specified in the related certificate of share exchange issued
by the Virginia State Corporate Commission and that Terra Networks receives the
certificate representing all of the shares of the Lycos Virginia common stock.
We will complete the combination on a date on which each of us agrees, but in
any case no later than five business days after the satisfaction or waiver
(where waiver is legally permissible) of the last remaining condition to the
combination, unless extended by our mutual agreement. See "-- Conditions to
Completion of the Combination."
REPRESENTATIONS AND WARRANTIES
The agreement and plan of reorganization contains representations and
warranties of Lycos, on the one hand, and Terra Networks, on the other, as to,
among other things:
- the corporate organization and existence of each party and its
subsidiaries;
- the capitalization of each party and its subsidiaries;
- the corporate power and authority of each party;
- the compliance of the agreement and plan of reorganization with:
- the certificate of incorporation, by-laws or similar organizational
documents of each party;
- applicable law;
- material agreements, instruments or obligations;
- regulatory consents and approvals;
- each party's financial statements and filings with the SEC;
- each party's broker's fees;
- the absence of material changes and other events in each party's
business since, in the case of Lycos, July 31, 1999 and, in the case of
Terra Networks, December 31, 1999;
- the absence of material legal proceedings and injunctions;
- the filing and accuracy of each party's tax returns;
- each party's employee benefit plans and related matters;
- each party's compliance with applicable law;
- the validity of, and the absence of material defaults under, various
contracts;
- environmental liabilities;
- ownership and non-infringement of intellectual property;
- insurance coverage;
- fairness opinions;
- in the case of Lycos, the inapplicability of state anti-takeover laws to
the combination; and
- in the case of Terra Networks, Telefonica's ownership of Terra Networks
shares.
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<PAGE> 65
CONDUCT OF BUSINESS PENDING THE COMBINATION
Under the agreement and plan of reorganization, prior to the completion of
the combination, each of Lycos and Terra Networks has agreed to, and to cause
their subsidiaries to:
- conduct its business in the ordinary course;
- use reasonable best efforts to maintain and preserve intact its business
organization, employees and advantageous business relationships and
retain the services of its key officers and key employees; and
- take no action that would adversely affect or delay the ability of
either Lycos or Terra Networks to obtain the necessary approvals of any
regulatory agency or other governmental entity or to perform its
covenants and agreements under the agreement and plan of reorganization,
or to consummate the transactions contemplated by the agreement and plan
of reorganization.
In addition, except as expressly contemplated by the agreement and plan of
reorganization or as disclosed prior to signing the agreement and plan of
reorganization, each of Lycos and Terra Networks has agreed that, without the
consent of the other party (which shall not be unreasonably withheld), it will
not and will not permit its subsidiaries to, among other things:
- other than in the ordinary course of business, incur any indebtedness
for borrowed money (other than short-term indebtedness incurred to
refinance short-term indebtedness and indebtedness incurred to finance
investments permitted under the agreement and plan of reorganization) or
assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or
other entity, or make any loan or advance;
- adjust, split, combine or reclassify any of its capital stock;
- make, declare or pay any dividend or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares
of its capital stock or any securities or obligations convertible into
or exchangeable for any shares of its capital stock, except for
dividends paid to it by one of its subsidiaries;
- grant any stock appreciation rights or grant any right to acquire any
shares of its capital stock other than pursuant to existing plans in the
ordinary course of business;
- issue any additional shares of capital stock except:
(i) pursuant to the exercise of stock options outstanding as of the
date of the agreement and plan of reorganization or stock options
issued in compliance with the agreement and plan of reorganization;
(ii) in the ordinary course of business and consistent with past
practice in connection with existing stock option, stock purchase
and similar plans; and
(iii) to finance acquisitions permitted under the agreement and plan of
reorganization;
- sell, transfer, mortgage, encumber or otherwise dispose of any material
properties or assets, including by merger, consolidation or otherwise,
to any individual, corporation or other entity other than a subsidiary,
or cancel, release or assign any indebtedness to any such person or any
claims held by any such person, except in the ordinary course of
business or under contracts or agreements in force at the date of the
agreement and plan for reorganization;
- except for transactions in the ordinary course of business or under
contracts or agreements in force at the date of or permitted by the
agreement and plan for reorganization, make any material investment,
either by purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets, in any other
individual, corporation
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or other entity other than a subsidiary, except that Lycos is permitted
to make investments in an aggregate amount not in excess of $250,000,000
and Terra Networks is permitted to make investments in an aggregate
amount not in excess of $500,000,000;
- in the case of Lycos, except for transactions in the ordinary course of
business, terminate, or waive any material provision of, any of its
material contracts or agreements, or make any change in any instrument
or agreement governing the terms of any of its securities, or material
lease or contract, other than normal renewals of contracts and leases
without material adverse changes of terms;
- in the case of Lycos, except as required by applicable law, increase,
reduce or modify in any manner the compensation or fringe benefits of
any of its employees or pay any pension or retirement allowance not
required by any existing plan or agreement to any of its employees or
become a party to, amend or commit itself to any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee other than in the
ordinary course of business or accelerate the vesting of, or the lapsing
of restrictions with respect to, any stock options or other stock-based
compensation;
- in the case of Lycos, settle any material claim, action or proceeding
involving money damages, except in the ordinary course of business;
- amend its articles of incorporation, by-laws or comparable
organizational documents, or, in the case of Lycos, take any action to
exempt any person or entity (other than Terra Networks or its
subsidiaries) or any action taken by that person or entity from any
takeover statute or similar restrictive provision in Lycos'
organizational documents;
- take any action that is intended or expected to result in any of its
representations and warranties being or becoming untrue in any material
respect at any time prior to the effective time of the combination, or
in any of the conditions to the combination not being satisfied or in a
violation of any provision of the agreement and plan for reorganization,
except as may be required by applicable law;
- implement or adopt any change in its accounting principles, practices or
methods, other than as may be required by regulatory guidelines or, in
the case of Terra Networks, by Spanish GAAP or U.S. GAAP, or, in the
case of Lycos, by U.S. GAAP;
- in the case of Lycos, renew any current contract or agreement containing
any material exclusivity provisions or enter into any contract of
agreement containing any material exclusivity provision;
- agree to take, make any commitment to take, or adopt any resolutions of
its Board of Directors in support of, any of the actions listed above;
and
- take any action which could reasonably be expected to prevent the merger
or the share exchange from qualifying as a reorganization within the
meaning of Section 368(a) of the U.S. tax code or to result in the
shareholders of Lycos Virginia recognizing gain under Section 367(a) of
the U.S. tax code with respect to the share exchange.
OTHER AGREEMENTS
In addition to the agreements about the conduct of business described
above, Lycos and Terra Networks have in the agreement and plan of reorganization
made other customary agreements, including the following:
- Lycos and Terra Networks have agreed to cooperate with each other and to
use their reasonable best efforts to promptly prepare and file all
necessary documentation to obtain as promptly as practicable all
permits, consents, approvals and authorizations of all third parties
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<PAGE> 67
and governmental entities necessary or advisable to complete the
combination, including of the SEC and the CNMV;
- Lycos and Terra Networks have agreed to use their reasonable best
efforts to take all actions necessary, proper or advisable under
applicable laws so as to permit completion of the combination as
promptly as practicable;
- Lycos and Terra Networks have agreed to give the other access to all
properties, books, contracts, commitments and records and to provide
information about their respective businesses, properties and personnel
and to keep the other's information confidential, subject to the
restrictions set forth in the agreement and plan of reorganization; and
- After the completion of the combination, Terra Networks will indemnify
and hold harmless the current and former directors and officers of Lycos
or any of its subsidiaries pursuant to existing Lycos corporate
governance documents, indemnification agreements and otherwise to the
fullest extent permitted by law, from any liability arising from
threatened or actual claims, actions, suits, proceedings or
investigations to which such persons are made a party based on or
arising out of (1) the fact that he or she is or was an officer or
director of Lycos or Lycos Virginia or any of their subsidiaries, or (2)
the agreement and plan of reorganization or any of the transactions
contemplated thereby. Terra Networks has agreed to maintain or cause to
be maintained in effect for six years after the effective date of the
combination policies of directors' and officers' liability insurance
with coverage in amount and scope at least as favorable as Lycos'
existing policies, with annual premiums not to exceed 200% of current
premiums paid by Lycos for such insurance.
Also, Lycos and Terra Networks have agreed on the following points
concerning employee benefit plans:
- Employee benefit plans (other than equity-based programs) in place at
the completion of the combination covering employees of Lycos will
remain in effect for these employees for a period of at least one year
or until the company substitutes the plans providing benefits no less
favorable in the aggregate;
- After the combination is completed, Terra Networks will recognize prior
service with Lycos of each employee of Lycos or any of its subsidiaries
for the purposes of Terra Networks' employee benefit plans in which
Lycos employees are eligible to participate following the completion of
the combination, for purposes of eligibility, vesting and levels of
benefits, but not for purposes of benefit accruals under any defined
benefit pension plan;
- After the combination is completed, Terra Networks will waive any
pre-existing conditions or limitations and eligibility waiting periods
under any group health plans of Terra Networks for Lycos employees and
their eligible dependents; and
- After the combination is completed, Terra Networks will give each Lycos
employee credit for the plan year in which the combination is completed
towards applicable deductibles and annual out-of-pocket limits for
expenses incurred prior to completion of the combination.
NO SOLICITATION
Under the agreement and plan of reorganization, Lycos has agreed that it
will not, and will not permit or cause any of its subsidiaries or any of the
officers and directors of it or its subsidiaries to, and that it will direct and
cause its and its subsidiaries' employees, agents and representatives not to,
directly or indirectly, initiate, solicit, encourage or otherwise facilitate any
inquiries or the making of any acquisition proposal. "Acquisition proposal" is
defined in the agreement and plan of reorganization as any proposal or offer
with respect to a merger, reorganization, share exchange, consolidation or
similar transaction involving, or any purchase of 15% or more of the voting
securities of Lycos or 15% or more of the consolidated assets of Lycos and its
subsidiaries. Lycos has also
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agreed that it will not, and will not permit or cause any of its subsidiaries or
any of the officers and directors of it or its subsidiaries to, and will direct
and cause its and its subsidiaries' employees, agents and representatives not
to, directly or indirectly, engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
third-party relating to an acquisition proposal.
If, however, the Lycos Board of Directors determines, in good faith after
consulting with outside legal counsel, that such action is necessary to comply
with the fiduciary duties of the Lycos Board under applicable law:
- Lycos may, and may authorize and permit its employees, agents and
representatives to, furnish confidential information pursuant to a
customary confidentiality agreement and may participate in such
negotiations and discussions with respect to an acquisition proposal by
a third party;
- the Lycos Board of Directors may withdraw or modify its recommendation
to the Lycos stockholders with respect to the combination and may
recommend an acquisition proposal by a third party to the Lycos
stockholders; and
- the Lycos Board of Directors may terminate the agreement and plan of
reorganization in order to immediately thereafter enter into a
definitive agreement with respect to an acquisition proposal by a third
party.
Lycos has agreed to notify Terra Networks promptly if any inquiries,
proposals or offers with respect to a possible acquisition proposal are received
by, any confidential information relating to an acquisition proposal is
requested from, or any discussions or negotiations relating to an acquisition
proposal are sought to be initiated or continued with, any of its officers,
directors or its representatives.
CONDITIONS TO COMPLETION OF THE COMBINATION
Terra Networks' and Lycos' obligations to complete the combination are
subject to the satisfaction or waiver, where permissible, of the following
conditions:
- the agreement and plan of reorganization will have been duly adopted by
the Lycos stockholders;
- the Terra Networks shareholders shall have approved the delegation in
favor of the Board of Directors of Terra Networks to approve the capital
increase required in connection with the share exchange;
- the ADSs of Terra Networks that are to be issued upon consummation of
the share exchange will have been authorized for quotation on the
Nasdaq, subject to official notice of issuance;
- the waiting period (and any extension thereof) applicable to the
combination under the HSR Act shall have been terminated or shall have
expired and any required approval of the combination of the European
Commission under Counsel Regulation (EEC) No. 4064/89 shall have been
obtained;
- the execution of the deed of execution of capital increase in connection
with the share exchange, the filing of the necessary auditors' report
and the filing of the necessary report of the expert designated by the
commercial registry for the Province of Madrid relating to the fair
value of the assets acquired by Terra Networks in the share exchange
shall have been filed or made;
- all regulatory approvals required to consummate the Lycos
reincorporation and the share exchange will have been obtained and will
remain in full force and effect and any statutory waiting periods
required by law will have expired;
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- the registration statement of which this proxy statement/prospectus
forms a part will have become effective, no stop order suspending the
effectiveness of the registration statement will have been issued by the
SEC and no proceedings for that purpose will have been initiated or
threatened by the SEC;
- the prospectus relating to the share exchange shall have been verified
by, and registered with, the CNMV;
- no order, injunction or decree issued by any court or agency with
jurisdiction, or other legal restraint or prohibition, preventing
completion of the combination will be in effect;
- no statute, rule, regulation, order, injunction or decree will have been
enacted, entered, promulgated or enforced by any governmental entity
that prohibits or makes illegal completion of the combination;
- Terra Networks will have received the opinion of Davis Polk & Wardwell,
and Lycos will have received the opinion of Cravath, Swaine and Moore,
each in form and substance reasonably satisfactory to Terra Networks and
Lycos, respectively, dated as of the closing date, substantially to the
effect that, on the basis of facts, representations and assumptions set
forth in each of these opinions that are consistent with the state of
facts existing at the effective time:
- each of the merger and the share exchange will constitute a
reorganization under Section 368(a) of the U.S. tax code;
- Lycos and Lycos Virginia will each be a party to the reorganization
within the meaning of Section 368(b) at the U.S. tax code with
respect to the merger, and Terra Networks and Lycos Virginia will
each be a party to the reorganization under Section 368(b) of the
U.S. tax code with respect to the share exchange;
- no gain or loss will be recognized by Lycos or Lycos Virginia as a
result of the merger or by Lycos Virginia as a result of the share
exchange; and
- no gain or loss will be recognized by Lycos stockholders who exchange
all of their Lycos common stock solely for shares of Lycos Virginia
common stock pursuant to the merger and no gain or loss will be
recognized by stockholders of Lycos Virginia who exchange all of
their Lycos Virginia common stock solely for Terra Networks ADSs or
ordinary shares in connection with the share exchange (except with
respect to cash received in lieu of a fractional share interest in
Terra Networks common stock);
- the representations and warranties of the other party to the agreement
and plan of reorganization will be true and correct in all material
respects as of the date of the agreement and plan of reorganization and
(except to the extent that the representations and warranties speak as
of an earlier date) as of the closing date as though made on the closing
date, except that for purposes of this condition, these representations
and warranties will be deemed to be true and correct unless the failure
of these representations and warranties to be so true and correct,
individually or in the aggregate, and without giving effect to any
qualification as to materiality set forth in the representations and
warranties, would have a material adverse effect on the representing
party; and
- the other party to the agreement and plan of reorganization will have
performed in all material respects all obligations required to be
performed by it under the agreement and plan of reorganization at or
prior to the completion of the combination.
The agreement and plan of reorganization defines "material adverse effect"
as a material adverse effect on
- the business, results of operations or financial condition of Lycos or
Terra Networks (as the case may be) and its subsidiaries, taken as a
whole; and
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- the ability of Lycos or Terra Networks (as the case may be) to complete
in a timely manner the transactions contemplated by the agreement and
plan of reorganization.
"Material adverse effect" shall not include, however, the impact of any
change, event, occurrence, condition or effect relating to:
- the United States, Spanish or global economy or securities markets in
general;
- the execution and delivery of the agreement and plan of reorganization
or the consummation of the transactions contemplated by the agreement
and plan of reorganization or the announcement thereof; or
- Terra Networks' or Lycos' industry in general and not specifically
relating to Lycos or Terra (as the case may be) or their respective
subsidiaries.
In addition, Lycos' obligations to complete the combination are subject to
Telefonica having performed in all material respects all obligations required to
be performed by it under the rights offering agreement at or prior to the
completion of the combination.
TERMINATION OF THE AGREEMENT AND PLAN OF REORGANIZATION
The agreement and plan of reorganization may be terminated at any time
before the effective time of the combination, whether before or after approval
by Terra Networks shareholders and Lycos stockholders as follows:
- mutual consent -- by mutual consent of Terra Networks and Lycos, if each
of their boards so determines by a vote of a majority of the members of
its entire board;
- legal impediment -- by either of the boards of Terra Networks or Lycos
if (assuming the terminating party has used its reasonable best efforts
to prevent the entry of and to remove such impediment):
- any governmental entity that must grant a requisite regulatory
approval has denied approval of the combination and this denial has
become final and non-appealable; or
- any governmental entity with jurisdiction has issued, enacted or
entered a final non-appealable restraint prohibiting or making
illegal the completion of the transactions contemplated by the
agreement and plan of reorganization;
- lack of shareholder approval -- any shareholder approval required by the
agreement and plan of reorganization is not obtained;
- delay -- by either of their boards if the combination is not completed
on or before January 31, 2001, unless the delay is caused by the failure
of the party seeking to terminate the agreement and plan of
reorganization to perform its obligations in the agreement and plan of
reorganization; or
- breach -- by either of their boards (if the terminating party is not in
material breach of the agreement and plan of reorganization) if there
has been a breach of the agreement and plan of reorganization on the
part of the other party which, individually or in the aggregate, would
constitute, if occurring or continuing on the closing date, the failure
of the conditions described in either of the last two paragraphs under
"-- Conditions to Consummation of the Combination," and that is not
cured within 30 days following written notice to the party committing
the breach or that, by its nature or timing, cannot be cured prior to
the closing date.
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Terra Networks may also terminate the agreement and plan or reorganization
if:
- the Board of Directors of Lycos withdraws, modifies or changes its
recommendation of the agreement and plan of reorganization in a manner
adverse to Terra Networks or resolves to do so;
- after a bona fide acquisition proposal has been made public, the Board
of Directors of Lycos refuses to affirm its recommendation of the
agreement and plan of reorganization as promptly as practicable (but in
any case within 10 business days) after receipt of any written request
from Terra Networks (but only once in respect of each acquisition
proposal);
- the Board of Directors of Lycos recommends to the stockholders of Lycos
an acquisition proposal or resolves to do so; or
- a tender offer or exchange offer for 15% or more of the outstanding
shares of capital stock of Lycos is commenced, and the Board of
Directors of Lycos fails to recommend against acceptance of such tender
offer or exchange offer by its stockholders (including by taking no
position with respect to the acceptance of such tender offer or exchange
offer by its stockholders).
Lycos may also terminate the agreement and plan of reorganization if, prior
to the vote of the stockholders of Lycos on the agreement and plan of
reorganization, after receiving a bona fide acquisition proposal, the Board of
Directors of Lycos determines, in good faith after consulting with outside legal
counsel, that such action is necessary to comply with the fiduciary duties of
the Lycos Board under applicable law. Lycos may not, however, terminate the
agreement and plan of reorganization on this basis until three business days
have elapsed following delivery to Terra Networks of written notice of the
determination of Lycos, and then only after Lycos has paid Terra Networks the
termination payment described below under "Termination Fees".
TERMINATION FEES
Lycos is required to pay Terra Networks a termination fee of $347,556,960
in any of the following circumstances:
- the agreement and plan of reorganization is terminated by Terra Networks
on the basis that (i) after a bona fide acquisition proposal has been
made public, the Board of Directors of Lycos refuses to affirm its
recommendation of the agreement and plan of reorganization as promptly
as practicable (but in any case within 10 business days) after receipt
of any written request from Terra Networks (but only once in respect of
each acquisition proposal), (ii) the Board of Directors of Lycos
recommends to the stockholders of Lycos an acquisition proposal or
resolves to do so, or (iii) a tender offer or exchange offer for 15% or
more of the outstanding shares of capital stock of Lycos is commenced,
and the Board of Directors of Lycos fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders
(including by taking no position with respect to the acceptance of such
tender offer or exchange offer by its stockholders);
- the agreement and plan of reorganization is terminated by Lycos on the
basis that, prior to the vote of the stockholders of Lycos on the
combination, after receiving a bona fide acquisition proposal, the Board
of Directors of Lycos determines, in good faith after consulting with
outside legal counsel, that such action is necessary to comply with the
fiduciary duties of the Lycos Board under applicable law; or
- the agreement and plan of reorganization is terminated by either party
due to the fact that (i) the stockholders of Lycos fail to approve the
combination, (ii) the combination is not completed by January 31, 2001
without the Lycos stockholder meeting having occurred, or (iii) the
Lycos Board of Directors withdraws, modifies or changes its
recommendation of the agreement and plan of reorganization in a manner
adverse to Terra Networks or resolves to
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do so, and in the case of each of clauses (i), (ii) or (iii), at such
time a third-party shall have made a bona fide acquisition proposal
which is made known to Lycos stockholders generally, or shall have
publicly announced an intention to do so, and within 12 months of
termination of the agreement and plan of reorganization, Lycos
consummates, or enters into a definitive agreement with any third party
to consummate, any merger, reorganization, share exchange, consolidation
or similar transaction involving, or any purchase of, 40% or more of the
voting securities or Lycos or 40% or more of the consolidated assets of
Lycos and its subsidiaries.
OTHER FEES AND EXPENSES
Whether or not Terra Networks and Lycos complete the combination, all fees
and expenses incurred in connection with the combination will be paid by the
party incurring the expenses. However, the costs and expenses of printing and
mailing this document, and all filing and other fees paid to the SEC in
connection with the combination, will be shared equally by Terra Networks and
Lycos.
EXTENSION, WAIVER AND AMENDMENT OF THE AGREEMENT AND PLAN OF REORGANIZATION
Extension and Waiver. At any time before the effective time of the
combination, either of Terra Networks and Lycos, by action taken or authorized
by their respective boards, may, to the extent legally allowed:
- extend the time for the other to perform any of its obligations or other
acts;
- waive any inaccuracies in the representations and warranties of the
other contained in the agreement and plan of reorganization or in any
document delivered under the agreement and plan of reorganization; and
- waive compliance by the other with any of the agreements or conditions
contained in the agreement and plan of reorganization.
However, after Terra Networks shareholders or Lycos stockholders approve or
adopt the agreement and plan of reorganization, there may not be, without
further approval of these shareholders, any extension or waiver of the agreement
and plan of reorganization that reduces the amount or changes the form of the
consideration to be delivered to the Lycos stockholders, other than as
contemplated by the agreement and plan of reorganization, or that under
applicable law otherwise requires further approval of stockholders.
Amendment. Subject to compliance with applicable law, we may amend the
agreement and plan of reorganization by action taken or authorized by both Terra
Networks' and Lycos' boards at any time before or after Terra Networks
shareholders or Lycos stockholders approve the agreement and plan of
reorganization, except that after the Terra Networks shareholders or Lycos
stockholders have given their approval, there may not be, without further
approval of these shareholders, any amendment of the agreement and plan of
reorganization that changes the amount or the form of the consideration to be
delivered to the Lycos stockholders, other than as contemplated by the agreement
and plan of reorganization, or that under applicable law otherwise requires
further approval of stockholders.
STOCK EXCHANGE LISTING
Terra Networks has agreed to cause the ADSs to be issued in the share
exchange to be approved for quotation on the Nasdaq National Market. Lycos'
obligation to consummate the combination is conditioned on the Terra Networks
ADSs being authorized for quotation on the Nasdaq National Market, subject to
official notice of issuance.
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RESTRICTIONS ON RESALES BY AFFILIATES
The ADSs and ordinary shares of Terra Networks to be issued to Lycos
stockholders in the share exchange have been registered under the Securities
Act. They may be traded freely and without restriction by you if you are not
deemed to be an affiliate of Lycos under the Securities Act. An "affiliate" of
Lycos, as defined by the rules promulgated under the Securities Act, is a person
who directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, Lycos. Any subsequent transfer
of these shares by any person who is an affiliate of Lycos at the time the
combination is submitted for vote of the Lycos stockholders will, under existing
law, require one of the following:
- the further registration under the Securities Act of the proposed
transfer of these shares of Terra Networks common stock;
- compliance with Rule 145 under the Securities Act (permitting limited
sales in some circumstances); or
- the availability of another exemption from the registration requirements
of the Securities Act.
We expect these restrictions to apply to the directors and executive
officers of Lycos, some of their family members and to entities in which they
may have a substantial ownership interest.
MANAGEMENT AND OPERATIONS AFTER THE COMBINATION
Board of Directors. Following the combination, the Terra Lycos board will
have a maximum of 15 members, including Joaquim Agut, Abel Linares, Robert
Davis, Edward Philip and one other director of Lycos designated by Lycos and
reasonably acceptable to Terra Networks.
Management. Upon completion of the combination, Mr. Agut will serve as
Executive Chairman of Terra Lycos, Mr. Davis will serve as Chief Executive
Officer, Mr. Linares will serve as Chief Operating Officer and Mr. Philip will
serve as Chief Financial Officer.
THE RIGHTS OFFERING AGREEMENT
Pursuant to a rights offering agreement entered into by Telefonica, Terra
Networks and Lycos in connection with the agreement and plan of reorganization,
Terra Networks made a rights offering whereby it issued to its shareholders
rights to purchase Terra Networks ordinary shares for an aggregate of E2.2
billion at a price per share of E62.00, which was the closing price of Terra
Networks ordinary shares on May 16, 2000, the date of the announcement of the
combination. Under the rights offering agreement, Telefonica agreed to subscribe
for all shares not subscribed for by other shareholders in the rights offering.
The receipt by Terra Networks of E2.2 billion in proceeds from the rights
offering, which is a condition to Lycos' obligation to complete the combination,
occurred on September 20, 2000. Telefonica subscribed for substantially all of
the shares offered pursuant to the rights offering.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a discussion of the material U.S. federal income tax
consequences to you of the merger and share exchange and of the ownership and
disposition of Terra Networks ordinary shares or ADSs that you may elect to
receive in the share exchange.
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This discussion applies to you if you are:
- a citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any political subdivision thereof; or
- an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
You should consult your own tax adviser regarding the specific tax
consequences to you of the merger and share exchange and of owning and disposing
of Terra Networks ADSs or ordinary shares acquired as a result of the share
exchange, including your eligibility for the benefits of the treaty between
Spain and the United States for the avoidance of double taxation (the "Treaty"),
the applicability or effect of any special rules to which you may be subject,
and the effect of any state, local, or other tax laws.
The following summary applies to you if you are a Lycos stockholder at the
time of the merger and share exchange and you hold Lycos common stock as a
capital asset. The summary is based on the U.S. tax code, U.S. Treasury
regulations thereunder, administrative rulings and court decisions, in each case
as in effect as of the date of this document, all of which are subject to change
at any time, possibly with retroactive effect. This summary is not a complete
description of all of the tax consequences of the merger and share exchange. In
particular, this summary may not address U.S. federal income tax considerations
applicable to you if you are a Lycos stockholder subject to special treatment
under U.S. federal income tax law, including, for example a:
- foreign person;
- financial institution;
- dealer in securities;
- trader in securities who elects to apply a mark-to-market method of tax
accounting;
- insurance company;
- tax-exempt entity;
- holder who acquired his or her shares of Lycos common stock through
exercise of an employee stock option or right, or otherwise as
compensation; or
- holder who holds his or her shares of Lycos common stock as part of a
hedging transaction, straddle or conversion transaction or who has
entered into a "constructive sale" transaction with respect to the
common stock of Lycos or Terra Networks.
In addition, we do not provide any information in this proxy
statement/prospectus about the tax consequences of the share exchange under
applicable foreign, state or local laws other than Spanish law.
IF YOU ARE A LYCOS STOCKHOLDER, WE URGE YOU TO CONSULT WITH YOUR TAX
ADVISERS ABOUT THE PARTICULAR TAX CONSEQUENCES OF THE SHARE EXCHANGE TO YOU,
INCLUDING THE EFFECTS OF U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
THE MERGER AND THE SHARE EXCHANGE
General. In connection with the filing of the registration statement
containing this proxy statement/prospectus with the SEC, the law firms of
Cravath, Swaine & Moore and Davis Polk & Wardwell will deliver their respective
opinions addressing the U.S. federal income tax consequences of the merger and
share exchange described below. Each of those opinions will be rendered on the
basis of facts, representations and assumptions set forth or referred to
therein. In rendering these opinions, Cravath, Swaine & Moore and Davis Polk &
Wardwell will require and rely upon factual
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representations contained in certificates of officers of Terra Networks, Lycos
and Lycos Virginia. These opinions will assume, among other things, that any
Lycos stockholder that is a U.S. person and is treated under the relevant U.S.
Treasury regulations as owning at least 5% of the stock of Terra Networks (by
vote or value) immediately after the share exchange will enter into a timely and
valid gain recognition agreement in the form provided in the relevant Treasury
regulations. These opinions will be to the effect that, for U.S. federal income
tax purposes:
- Each of the merger and the share exchange will constitute a
reorganization within the meaning of Section 368(a) of the U.S. tax
code;
- Lycos and Lycos Virginia will each be a party to the reorganization
within the meaning of Section 368(b) of the U.S. tax code with respect
to the merger, and Terra Networks and Lycos Virginia will each be a
party to the reorganization within the meaning of Section 368(b) of the
U.S. tax code with respect to the share exchange;
- No gain or loss will be recognized by Lycos or Lycos Virginia as a
result of the merger or by Lycos Virginia as a result of the share
exchange; and
- No gain or loss will be recognized by Lycos stockholders who exchange
all of their Lycos common stock for shares of Lycos Virginia common
stock pursuant to the merger and no gain or loss will be recognized by
stockholders of Lycos Virginia who exchange all of their Lycos Virginia
common stock solely for Terra networks ADSs or ordinary shares in
connection with the share exchange (except with respect to cash received
in lieu of a fractional share interest in Terra Networks stock).
None of the tax opinions to be delivered to the parties in connection with
the merger or share exchange as described in this document are binding on the
Internal Revenue Service or the courts, and we do not intend to request a ruling
from the IRS with respect to the merger or share exchange.
Fractional Shares. Cash that you receive in lieu of a fractional share
interest in Terra Networks ordinary shares will be treated as received in
redemption of the fractional share interest, and you should recognize capital
gain or loss for U.S. federal income tax purposes measured by the difference
between the amount of cash received and the portion of the tax basis of the
share of Lycos common stock allocable to the fractional share interest. This
capital gain or loss will be a long-term capital gain or loss if your holding
period for the share or shares of Lycos common stock is greater than one year at
the effective time.
Holding Period. Your holding period with respect to a Terra Networks
ordinary share or ADS received in the share exchange (including a fractional
share interest deemed received and redeemed as described above) will include
your holding period in the Lycos common stock surrendered in exchange for the
Terra Networks ordinary shares or ADS.
Information Reporting and Backup Withholding. Payments of more than $20 in
lieu of fractional shares may be subject to information reporting to the IRS and
to a 31% backup withholding tax. Backup withholding will not apply, however, to
a payment to you, or another payee, if you or the payee completes and signs the
substitute Form W-9 that we will include as part of the transmittal letter, or
otherwise proves to Terra Networks and the exchange agent that you or the payee
is exempt from backup withholding.
OWNERSHIP AND DISPOSITION OF TERRA NETWORKS ADSS OR ORDINARY SHARES
TAXATION OF DISTRIBUTIONS ON TERRA NETWORKS ADSS OR ORDINARY SHARES
General. This discussion assumes that Terra Networks is not, and will not
become, a passive foreign investment company for U.S. federal income tax
purposes, as described more fully below. This discussion also assumes that each
obligation of the deposit agreement dated as of November 15, 1999, as amended
between us, Citibank, N.A., as depositary, and all holders of Terra Networks
ADSs, and any related agreement will be performed in accordance with its terms
and that the representations made by Citibank as depositary regarding the
pre-release of Terra Networks ADSs are true. The U.S. Treasury has expressed
concerns that parties to whom ADSs are pre-
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released may be taking actions that are inconsistent with the claiming of
foreign tax credits. Accordingly, the analysis of the creditability of Spanish
taxes described below could be affected by actions that may be taken by the U.S.
Treasury.
For federal income tax purposes, your ownership of Terra Networks ADSs (or
Terra Networks ADRs) will be treated as ownership of the underlying Terra
Networks ordinary shares.
Distributions paid on ADSs or ordinary shares out of current or accumulated
earnings and profits, as determined for U.S. federal tax purposes, before
reduction for any Spanish income tax withheld by us, will be taxable to you as
foreign source dividend income and will not be eligible for the
dividends-received deduction allowed to corporations. Distributions in excess of
current and accumulated earnings and profits will be treated first as a tax-free
return of capital to the extent of your basis in the shares and then as capital
gain.
Foreign Currency Dividends. You will be required to include dividends paid
in pesetas or euro as income in a U.S. dollar amount calculated by reference to
the exchange rate in effect on the date the dividends are actually or
constructively received. In the case of ADSs, that date will be the date that
Citibank, as depositary, receives the dividend, regardless of whether the
pesetas or euro are converted into U.S. dollars. Gain or loss realized on a sale
or other disposition of the pesetas or euro will be ordinary income or loss and
will be U.S. source income. If dividends received in pesetas or euro are not
converted into U.S. dollars on the day they are received, you will generally be
required to recognize ordinary income or loss in the amount or any foreign
currency gain or loss realized in respect of the later conversion to U.S.
dollars.
Effect of Spanish Withholding Taxes. As described in the discussion of
Spanish tax consequences below, payments of dividends on the ADSs or ordinary
shares to U.S. persons are generally subject to Spanish withholding taxes. For
U.S. federal income tax purposes, you will be treated as having received the
gross amount of any dividend paid, including Spanish taxes withheld by us, and
then as having paid over the withheld taxes to the Spanish taxing authorities.
As a result of this rule, the amount of dividend income included in gross income
for U.S. federal income tax purposes by you in connection with a payment of
dividends will be greater than the amount of cash actually received or
receivable by you (or in the case of ADSs, by Citibank) from us.
Subject to certain generally applicable limitations and restrictions, you
will be entitled to a credit against your U.S. federal income tax liability, or
a deduction in computing your U.S. federal taxable income, for Spanish income
taxes withheld by us. However, taxes withheld in excess of the rate provided in
the Treaty will not be eligible for credit against your federal income tax
unless you exhaust all remedies to recover such excess withholding, including
the seeking of competent authority assistance from the IRS, without obtaining a
refund. A description of how you can secure the rate provided in the Treaty for
withholding on dividends paid by us is contained in the discussion of Spanish
tax consequences below.
You must satisfy minimum holding period requirements in order to be
eligible to claim a foreign tax credit for foreign taxes withheld on dividends.
A foreign tax credit is not allowed for foreign taxes withheld on dividends in
circumstances where you are under an obligation to make related payments in
connection with positions in "substantially similar or related property". The
limitation on foreign taxes eligible for credit is calculated separately for
specific classes of income. For this purpose, depending on your particular
circumstances, dividends paid by us on our shares will generally constitute
"passive income" or "financial services income", as the case may be.
You may be required to recognize ordinary income or loss attributable to
currency fluctuations upon your receipt of any refund in respect of Spanish
withholding tax to the extent that the U.S. dollar value of the refund differs
from the U.S. dollar equivalent of the refund amount on the date the underlying
dividend was received.
SALE OR EXCHANGE OF THE TERRA NETWORKS ADSS OR ORDINARY SHARES
Upon a sale or exchange of ADSs or ordinary shares, you will recognize a
capital gain or loss for U.S. federal income tax purposes equal to the
difference, if any, between the amount realized on
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the sale or other disposition and your adjusted tax basis in the ADSs or
ordinary shares. This gain or loss will be long-term capital gain or loss if
your holding period in the ADSs or ordinary shares exceeds one year. Any gain or
loss will generally be U.S. source gain or loss.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Terra Networks believes that it is not a passive foreign investment company
for U.S. federal income tax purposes for the current taxable year. However,
since passive foreign investment company status depends upon the composition of
a company's income and the market value of its assets, including, among others,
equity investments in various entities, from time to time, there can be no
assurance that we will not be considered a passive foreign investment company
for any future taxable year. If we were a passive foreign investment company for
any taxable year, certain adverse consequences could apply to you.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of dividends and other proceeds in connection with ADSs or
ordinary shares by a U.S. paying agent or other U.S. intermediary will be
reported to the IRS and to you as may be required under applicable regulations.
Backup withholding at a rate of 31% will apply to these payments if you fail to
provide an accurate taxpayer identification number or fail to report all
interest and dividends required to be shown on your federal income tax returns.
Some persons, such as corporations, are not subject to backup withholding.
Depending on the type of person you are, you may qualify for exemption from
backup withholding provided you comply with the procedure for obtaining the
exemption.
SPANISH TAX CONSEQUENCES
GENERAL
The following is a summary of the material Spanish consequences of the
acquisition, ownership and disposition of ordinary shares or ADSs by a U.S.
resident (as defined below). This summary is not a complete analysis or listing
of all the possible tax consequences of such transactions and does not address
all tax considerations that may be relevant to all categories of potential
purchasers, some of whom may be subject to special rules. Accordingly,
prospective investors should consult their own tax advisors as to the tax
consequences of their purchase, ownership and disposition of ordinary shares or
ADSs, including the effect of tax laws of any other jurisdiction.
As used herein, the following terms have the following meanings:
(1) A U.S. holder means a beneficial owner of ordinary shares or ADSs
who is for U.S. federal income tax purposes.
- an individual who is a citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any political subdivision thereof; or
- an estate or trust the income of which is subject to U.S. federal
income taxation regardless of source.
(2) The treaty means the Convention between the United States and the
Kingdom of Spain for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income together with a related
protocol.
(3) A U.S. resident means a U.S. holder that is a resident of the
United States for purposes of the treaty and entitled to the benefits of
the treaty and whose holding is not effectively connected with a permanent
establishment as defined by the treaty in Spain through which such
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holder carries on or has carried on business or with a fixed base in Spain
from which such holder performs or has performed independent personal
services.
Holders of ordinary shares or ADSs who are not U.S. residents should also
consult their own tax advisors, particularly as to the applicability of any tax
treaty.
The statements regarding Spanish tax laws set out below are based on
interpretations of those laws as in force on the date of this prospectus. Such
statements also assume that each obligation in the deposit agreement and any
related agreement will be performed in full accordance with its terms.
Taxation of Dividends. Under Spanish law, dividends paid by a Spanish
resident company to a non-Spanish resident holder of ordinary shares or ADSs,
are subject to the Spanish Non-Resident Income Tax, withheld at source,
currently at a 25% tax rate. As a means for levying such tax, the company will
apply a 25% withholding tax on the gross amount of dividends. However, under the
treaty, a U.S. resident is subject to the treaty-reduced rate of 15%.
In practice, on any dividend payment date, U.S. residents will be subject
to withholding of 25% of the gross amount of dividends. However, U.S. residents
will be entitled to the refund from the U.S. depositary of the 10% withheld in
excess of the treaty-reduced rate of 15%, according to the procedure set forth
by the Order of April 13, 2000. To benefit from the reduced rate of 15%, a U.S.
resident must provide, through the U.S. depositary, to the Spanish resident
depositary, if any, acting as depositary of the shares underlying the ADSs a
certificate from the U.S. Internal Revenue Service (IRS) stating that, to its
best knowledge, such holder is a U.S. resident within the meaning of the treaty.
The IRS certificate is valid for a period of one year.
The IRS certificate must be provided to the Spanish depositary, through the
U.S. depositary, before the 10th day following the end of the month in which the
dividends were paid. Otherwise, the U.S. resident may afterwards obtain a refund
of the 10% withheld in excess of the 15% rate provided by the treaty, from the
Spanish tax authorities, following the standard refund procedure established by
Spanish regulations (See "Spanish refund procedure" below).
Spanish Refund Procedure. According to Spanish regulations on
Non-Residents Income Tax, approved by Royal Decree 326/1999 of February 26, 1999
as amended, a refund for the amount withheld in excess of the treaty-reduced
rate can be obtained from the relevant Spanish tax authorities. To pursue the
refund claim, the U.S. resident is required to file:
- the corresponding Spanish tax form;
- the IRS certificate of residence referred to above under "-- Taxation of
Dividends"; and
- a certificate from Terra Networks stating that Spanish Non-Residents
Income Tax was withheld with respect to such U.S. resident.
Taxation of Capital Gains. Capital gains obtained by U.S. residents from
the disposition of ordinary shares or ADSs will not be taxed in Spain, provided
that the seller has not maintained a direct or indirect holding of at least 25%
in our capital during the twelve months preceding the disposition of the stock.
A U.S. resident may be required to establish that he or she is entitled to this
exemption by providing to the relevant Spanish tax authorities an IRS
certificate of residence in the United States, together with the corresponding
Spanish tax form.
Additionally, capital gains derived from the transfer of shares in an
official Spanish secondary stock market by any holder who is resident in a
country that has entered into a treaty with Spain containing an exchange of
information clause, will be exempt from taxation in Spain. In the case of U.S.
residents, it may be necessary to provide to the Spanish tax authorities an IRS
certificate of residence in the United States.
Spanish Wealth Tax. U.S. individuals holders of ordinary shares or ADSs
located or exercisable in Spain are subject to the Spanish wealth tax (Spanish
Law 19/1991), which imposes a tax on property located in Spain on the last day
of any year. U.S. holders of ordinary shares or
IV-37
<PAGE> 79
ADSs located outside of Spain are not subject to the Spanish wealth tax.
However, the Spanish tax authorities may argue that all shares of Spanish
corporations and all ADSs representing such shares are located in Spain for
Spanish tax purposes. If such a view were to prevail, non-residents of Spain who
held ordinary shares or ADSs on the last day of any year would be subject to the
Spanish Wealth Tax for such year at marginal rates varying between 0,2% and 2,5%
of the average market value of such ordinary shares or ADSs during the last
quarter of such year, as published by the Spanish Treasury Ministry.
Non-residents of Spain should consult their tax advisors with respect to the
applicability of the Spanish Wealth Tax.
Spanish Inheritance and Gift Taxes. Transfers of ordinary shares of ADSs
on death or by gift are subject to Spanish inheritance and gift taxes,
respectively (Spanish Law 29/1987), if the transferee is a resident of Spain for
tax purposes, or if the ordinary shares or ADSs are located in Spain, regardless
of the residence of the beneficiary. In this regard, the Spanish tax authorities
may argue that all ordinary shares and all ADSs representing such shares are
located in Spain for Spanish tax purposes.
The applicable tax rate to an individual donee or heir, after applying all
relevant reductions in case of inheritance, ranges between 7.65% and 34% for
amounts exceeding Ptas132,702,000 (E797,555). However, the tax payable may be
increased by a factor ranging from 1 to 2.4 depending on the wealth of the
beneficiary prior to giving effect to the inheritance and gift, and the
relationship with the donor or deceased.
Gifts granted to non Spanish resident corporations are subject to
Non-Resident Income Tax at a 35% tax rate on the fair market value of the
shares. However, if the donee is a U.S. resident corporation, according to a
ruling issued by the Spanish Tax Authorities on October 26, 1992, the transferee
will not be subject to the Spanish gift tax pursuant to the treaty.
Spanish Transfer Tax. Transfers of ordinary shares or ADSs will be exempt
from any transfer tax (Impuesto sobre Transmisiones Patrimoniales) or
value-added tax. Additionally, no stamp duty will be levied on such transfers.
COMPARATIVE SHARE AND DIVIDEND INFORMATION
SHARE INFORMATION
TERRA NETWORKS
Our ordinary shares are currently listed on the New Market segment of the
Spanish stock exchanges and are traded on the Automated Quotation System of the
Spanish stock exchanges. ADSs representing Terra Networks' ordinary shares are
quoted on the Nasdaq National Market under the ticker symbol "TRRA". Each Terra
Networks ADS represents one of our ordinary shares. Citibank, N.A. is our
depositary issuing the ADRs evidencing the Terra Networks ADSs.
IV-38
<PAGE> 80
The following table shows, for the periods indicated, the high and low of
the last reported closing prices per Terra Networks share and ADS. Terra
Networks share prices are as reported on the Automated Quotation System and
Terra Networks ADS prices are as reported on the Nasdaq.
<TABLE>
<CAPTION>
TERRA NETWORKS
--------------------------------------
SHARES ADSS
----------------- -----------------
HIGH LOW HIGH LOW
------- ------ ------- ------
(EURO) (U.S. DOLLARS)
<S> <C> <C> <C> <C>
1999
Fourth Quarter(1)................................ 54.50 28.02 54.750 30.813
2000
First Quarter.................................... 139.75 56.10 135.500 52.375
Second Quarter................................... 78.65 38.10 76.500 36.469
Third Quarter (through September 19)............. 56.55 36.37 45.438 31.063
</TABLE>
---------------
Source: Factset.
(1) Terra Networks shares and ADSs commenced trading on the Spanish Stock
Exchanges and the Nasdaq on November 17, 1999.
LYCOS
Lycos shares are traded on the Nasdaq under the ticker symbol "LCOS."
The following table shows, for the calendar quarters indicated, the high
and low of the last reported closing prices per Lycos share. Lycos shares are as
reported on the Nasdaq.
<TABLE>
<CAPTION>
LYCOS SHARES(1)
----------------
HIGH LOW
------ ------
(U.S. DOLLARS)
<S> <C> <C>
1997
First Quarter............................................. 5.625 2.625
Second Quarter............................................ 4.063 2.844
Third Quarter............................................. 9.750 3.000
Fourth Quarter............................................ 10.344 5.344
1998
First Quarter............................................. 11.438 8.281
Second Quarter............................................ 19.609 12.297
Third Quarter............................................. 24.891 10.844
Fourth Quarter............................................ 32.625 12.500
1999
First Quarter............................................. 68.500 26.188
Second Quarter............................................ 58.500 35.031
Third Quarter............................................. 53.719 32.938
Fourth Quarter............................................ 92.125 50.969
2000
First Quarter............................................. 85.234 52.375
Second Quarter............................................ 72.625 35.688
Third Quarter (through September 19)...................... 74.625 41.625
</TABLE>
---------------
Source: Factset.
(1) Adjusted to reflect all stock splits.
IV-39
<PAGE> 81
DIVIDEND INFORMATION
TERRA NETWORKS
Terra Networks has never declared or paid any dividends. Terra Networks
currently intends to retain future earnings, if any, to finance its business. As
a result, Terra Networks does not anticipate paying any cash dividends in the
foreseeable future.
LYCOS
Lycos has not paid any cash dividends on its common stock. Lycos
anticipates that it will reinvest earnings to finance future growth, and
therefore does not intend to pay dividends in the foreseeable future.
MARKET INFORMATION
On May 15, 2000, the last full trading day before the public announcement
of the proposed combination,
- the last reported closing price, as reported on the Spanish Automated
Quotation System was E64.00 for Terra Networks ordinary shares; and
- the last reported closing price on the Nasdaq was:
- U.S.$56.88 for Terra Networks ADSs; and
- U.S.$61.63 for Lycos shares.
On September 19, 2000, the most recent practicable date prior to the
printing of this proxy statement/prospectus,
- the last reported closing price, as reported on the Spanish Automated
Quotation System was E50.50 for Terra Networks ordinary shares; and
- the last closing price on Nasdaq was:
- U.S.$38.00 for Terra Networks ADSs; and
- U.S.$69.44 for Lycos shares.
WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING ANY
DECISION WITH RESPECT TO THIS COMBINATION.
Following the combination, Terra Networks ADSs will continue to be traded
on Nasdaq. Subject to the approval of the Nasdaq, we expect to change our ticker
symbol from "TRRA" to "TRLY" following the combination. Terra Networks ordinary
shares will continue to be traded on the New Market segment of the Spanish stock
exchanges under the ticker symbol "TRR".
Following the combination, shares of Lycos will no longer trade on Nasdaq.
IV-40
<PAGE> 82
PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data have been prepared by applying
adjustments relating to the transactions described below to our historical
consolidated financial statements appearing elsewhere in this proxy
statement/prospectus. The pro forma financial data are provided for illustrative
purposes only and do not purport to represent what our actual financial position
or results of operations would have been had the transactions described below
occurred on the respective dates assumed. The pro forma financial data are not
indicative of our future financial position or results of operations.
The pro forma financial data should be read in conjunction with "-- The
Combination", "Part Five -- Information About Terra Networks -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Part Six -- Information About Lycos -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the respective consolidated
financial statements and the accompanying notes appearing elsewhere in this
proxy statement/prospectus.
The pro forma financial data have been prepared in accordance with United
States generally accepted accounting principles (U.S. GAAP). As our financial
statements are presented under Spanish generally accepted accounting principles
(Spanish GAAP), we have included a column of adjustments to reconcile our
historical consolidated financial statements appearing elsewhere in this proxy
statement/prospectus to U.S. GAAP. While these adjustments are explained in the
accompanying notes to the pro forma financial data, further information can be
found in Note 20 to our consolidated financial statements.
The pro forma financial data give effect to:
1. Our agreement to acquire 100% of the common shares of Lycos for
consideration valued at approximately E13.7 billion. For purposes of the pro
forma financial data, we have assumed that we will issue 2.150 Terra
Networks ordinary shares for each Lycos option and share of Lycos common
stock, which represents the maximum exchange ratio under the agreement and
plan of reorganization. We have further assumed that the value of the Terra
Networks ordinary shares to be issued will be E45.00 per share, which
approximately corresponds to the maximum price in the agreement and plan of
reorganization at which we would be obligated to use the maximum exchange
ratio of 2.150.
At the date we consummate the combination, we have agreed to exchange
outstanding options to purchase shares of Lycos common stock held by Lycos
employees with options to purchase Terra Networks ordinary shares. The Terra
Networks options will have the same terms and conditions as the Lycos stock
options, except that the number of options and their exercise price will be
adjusted based on the exchange ratio used to consummate the combination and
some options will accelerate upon consummation of the combination. For a
description of how we determined the value of these options, see note k
below.
IV-41
<PAGE> 83
For purposes of these pro forma financial data, we have assumed that we will
be required to issue the following amount of ordinary shares and options to
purchase our ordinary shares in order to consummate the combination:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM LYCOS TERRA NETWORKS
SHARES/OPTIONS ORDINARY
PERMITTED TO BE SHARES/OPTIONS
OUTSTANDING AT THE TO BE ISSUED
CONSUMMATION OF USING MAXIMUM
THE COMBINATION EXCHANGE RATIO
------------------ --------------
<S> <C> <C>
Ordinary shares.................................... 120,221,719 258,476,695
Options to purchase ordinary shares................ 38,346,984 82,446,016
----------- -----------
Total ordinary shares/options to be issued.... 158,568,703 340,922,711
=========== ===========
</TABLE>
2. Our acquisition in April 1999 of 100% of Ordenamientos de Links
Especializados S.L., known as Ole, for E12.02 million in cash and 4,928,000
ordinary shares of Terra Networks, which were issued at the time of our
initial public offering and valued at our initial public offering price in
the Spanish retail offering of E11.81 per share. Ole has been reflected in
our historical consolidated financial statements since April 1, 1999.
3. Our acquisition in June 1999 of 100% of Nutec Informatica, S.A., known as
ZAZ, for E225 million in cash and $10 million in ordinary shares of Terra
Networks valued at our initial public offering price. Nutec has been
reflected in our historical consolidated financial statements since July 1,
1999.
4. Our acquisition in November 1999 of 100% of Informacion Selectiva, S.A. de
C.V., known as Infosel, for E58 million in cash and $220 million in ordinary
shares of Terra Networks valued at our initial public offering price.
Infosel has been reflected in our historical consolidated financial
statements since November 1, 1999.
5. Our acquisitions in October 1999 of our Peruvian and Chilean businesses for
an aggregate amount of E68 million in cash. Although these businesses have
been consolidated in our historical consolidated financial statements
because they were under the control of the Telefonica group during all
relevant periods, the goodwill associated with such acquisitions, and the
related amortization of goodwill expense, are included in our historical
consolidated financial statements only since the date of such acquisitions.
6. Lycos' acquisition in June 1999 of 100% of Wired Ventures through the
issuance of 6,192,898 shares of its common stock valued at $291 million. The
historical financial statements of Lycos reflect the results of operations
of this business from June 30, 1999.
7. Pursuant to the rights offering agreement among Telefonica, S.A., Terra
Networks and Lycos in connection with the agreement and plan of
reorganization, Terra Networks made a rights offering whereby it issued to
its shareholders rights to purchase Terra Networks ordinary shares for an
aggregate of E2.2 billion at a price per share of E62.00.
The unaudited pro forma condensed consolidated statements of operations for
the six months ended June 30, 2000 and the year ended December 31, 1999 reflect
the transactions described above as if they had occurred on January 1, 1999. The
unaudited pro forma condensed consolidated balance sheet as of June 30, 2000
reflects the transactions described above as if they had occurred on June 30,
2000. Our fiscal year ends on December 31. As Lycos' fiscal year ends on July
31, we have made certain adjustments to the Lycos historical financial data for
purposes of preparing the pro forma financial data. These adjustments are
discussed in note j below.
IV-42
<PAGE> 84
The unaudited pro forma financial data do not give effect to:
- acquisitions other than those described above made by us or Lycos during
the past eighteen months that would not have a material effect on our
pro forma financial position or results of operations; and
- probable acquisitions other than those described above, including our
planned acquisitions of the minority interests in Terra Networks
Interactive Services USA, LLC and Terra Networks Access Services USA,
LLC, among others, that would not have a material effect on our pro
forma financial position or results of operations.
IV-43
<PAGE> 85
TERRA NETWORKS, S.A.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(THOUSANDS OF EURO)
UNAUDITED
<TABLE>
<CAPTION>
SUBTOTAL TOTAL TERRA
TERRA NETWORKS
TERRA NETWORKS U.S. GAAP NETWORKS ACQUISITION RIGHTS PRO FORMA
(SPANISH GAAP) ADJUSTMENTS (U.S. GAAP) LYCOS(J) ADJUSTMENTS OFFERING(M) (U.S. GAAP)
-------------- ----------- ------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Start-up costs............. 83,931 (54,230)(a) -- -- -- -- --
(29,701)(b)
Property, plant and
equipment................ 67,942 -- 67,942 11,562 -- -- 79,504
Financial assets........... 170,237 (141,975)(c) 28,262 492,178 -- -- 520,440
Intangible assets and
goodwill................. 626,783 (27,268)(d) 563,190 589,323 12,086,038(k) -- 13,238,551
(156)(e)
24,912(f)
(34,035)(g)
(27,046)(h)
Current assets:
Cash....................... 28,188 -- 28,188 692,357 -- 2,171,990 2,892,535
Short-term financial
investments.............. 213,310 -- 213,310 -- -- -- 213,310
Accounts receivable........ 49,921 -- 49,921 31,582 -- -- 81,503
Other current assets....... 104,801 104,801 78,615 -- -- 183,416
--------- -------- --------- --------- ---------- --------- ----------
Total current assets..... 396,220 -- 396,220 802,554 -- 2,171,990 3,370,764
--------- -------- --------- --------- ---------- --------- ----------
Total assets............. 1,345,113 (289,499) 1,055,614 1,895,617 12,086,038 2,171,990 17,209,259
========= ======== ========= ========= ========== ========= ==========
Liabilities and shareholders'
equity:
Shareholders' equity......... 1,071,173 (235,612)(i) 835,561 1,598,443 12,048,536(k) 2,171,990 16,654,530
Minority interest............ 463 -- 463 -- -- -- 463
Long term liabilities........ 41,597 (23,590)(c) 18,007 121,671 -- -- 139,678
Current liabilities:
Accounts payable to trade
creditors................ 133,209 -- 133,209 11,737 -- -- 144,946
Accounts payable to
non-trade creditors...... 53,260 (30,297)(d) 22,963 62,188 -- -- 85,151
Accounts payable to related
companies................ 29,794 -- 29,794 -- -- -- 29,794
Other current
liabilities.............. 15,617 -- 15,617 101,578 37,502(l) -- 154,697
--------- -------- --------- --------- ---------- --------- ----------
Total current
liabilities............ 231,880 (30,297) 201,583 175,503 37,502 -- 414,588
--------- -------- --------- --------- ---------- --------- ----------
Total liabilities and
shareholders' equity... 1,345,113 (289,499) 1,055,614 1,895,617 12,086,038 2,171,990 17,209,259
========= ======== ========= ========= ========== ========= ==========
</TABLE>
The accompanying notes to the pro forma condensed consolidated financial
statements are an integral part of this pro forma condensed consolidated balance
sheet.
IV-44
<PAGE> 86
TERRA NETWORKS, S.A.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(THOUSANDS OF EURO, EXCEPT SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
TOTAL
SUBTOTAL TERRA
TERRA TERRA NETWORKS
NETWORKS U.S. GAAP NETWORKS ACQUISITION PRO FORMA
(SPANISH GAAP) ADJUSTMENTS (U.S. GAAP) LYCOS(J) ADJUSTMENTS (U.S. GAAP)
-------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Advertising................ 17,093 -- 17,093 117,350 -- 134,443
e-commerce................. 2,332 -- 2,332 62,771 -- 65,103
Access revenues............ 45,395 -- 45,395 -- -- 45,395
Other...................... 17,679 -- 17,679 -- -- 17,679
----------- -------- -------- -------- ---------- -----------
Total revenues............... 82,499 -- 82,499 180,121 -- 262,620
Operating expenses:
Goods purchased............ (57,811) -- (57,811) (36,856) -- (94,667)
Personnel expenses......... (36,521) -- (36,521) (47,173) (156,795)(k) (240,489)
Depreciation and
amortization of
goodwill................. (26,884) 607(s) (110,176) (83,737) (1,208,604)(k) (1,402,517)
6,126(s)
(57,288)(t)
8,318(u)
(41,055)(v)
Other operating expenses... (142,039) (544)(w) (142,583) (75,477) -- (218,060)
----------- -------- -------- -------- ---------- -----------
Total operating expenses
before financial
expenses................... (263,255) (83,836) (347,091) (243,243) (1,365,399) (1,955,733)
----------- -------- -------- -------- ---------- -----------
Operating loss............... (180,756) (83,836) (264,592) (63,122) (1,365,399) (1,693,113)
Amortization of goodwill..... (57,288) 57,288(t) -- -- -- --
Financial income (expense)... 321 -- 321 20,863 -- 21,184
----------- -------- -------- -------- ---------- -----------
Loss from ordinary
activities................. (237,723) (26,548) (264,271) (42,259) (1,365,399) (1,671,929)
Extraordinary income
(loss)..................... (486) 544(w) 58 -- -- 58
----------- -------- -------- -------- ---------- -----------
Loss before tax and minority
interest................... (238,209) (26,004) (264,213) (42,259) (1,365,399) (1,671,871)
Corporate income tax benefit
(provision)................ 76,158 (76,136)(x) 22 (120,818) -- (120,796)
Equity income from
affiliates................. (4,789) -- (4,789) 255,220 -- 250,431
Minority interest............ 1,718 -- 1,718 (2,448) -- (730)
----------- -------- -------- -------- ---------- -----------
Net loss..................... (165,122) (102,140) (267,262) 89,695 (1,365,399) (1,542,966)
=========== ======== ======== ======== ========== ===========
Basic and diluted loss per
share(y)................... (0.59) (2.69)
=========== ===========
Weighted average number of
shares used in the
computation of basic and
diluted earnings (loss) per
share(y)................... 280,000,000 573,960,567
=========== ===========
</TABLE>
IV-45
<PAGE> 87
TERRA NETWORKS, S.A.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(THOUSANDS OF EURO, EXCEPT SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
SUBTOTAL
TERRA TERRA SUBTOTAL
NETWORKS NETWORKS TERRA
(SPANISH ACQUISITION (SPANISH U.S. GAAP NETWORKS
GAAP) OLE(N) NUTEC(O) INFOSEL(P) ADJUSTMENTS GAAP) ADJUSTMENTS (U.S. GAAP)
----------- ------ -------- ---------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Advertising................... 5,123 156 1,303 319 -- 6,901 -- 6,901
e-commerce.................... -- -- -- -- -- -- -- --
Access........................ 24,817 -- 4,614 6,318 -- 35,749 -- 35,749
Other......................... 20,291 24 2,696 11,240 -- 34,251 -- 34,251
----------- ---- ------ ------- ------- -------- -------- --------
Total revenues................. 50,231 180 8,613 17,877 -- 76,901 -- 76,901
Operating expenses:
Goods purchased............... (31,044) -- (3,389) (5,333) -- (39,766) -- (39,766)
Personnel expenses............ (19,942) (120) (2,797) (6,559) -- (29,418) -- (29,418)
Depreciation and amortization
of goodwill................. (6,272) -- (292) (739) (4,888)(r) (12,191) 1,213(s) (130,728)
(101,403)(t)
1,016(u)
(19,363)(v)
Other operating expenses...... (83,904) (379) (1,884) (8,676) -- (94,843) (1,270)(w) (96,113)
----------- ---- ------ ------- ------- -------- -------- --------
Total operating expenses before
financial expenses............ (141,162) (499) (8,362) (21,307) (4,888) (176,218) (119,807) (296,025)
----------- ---- ------ ------- ------- -------- -------- --------
Operating loss................. (90,931) (319) 251 (3,430) (4,888) (99,317) (119,807) (219,124)
Amortization of goodwill....... (28,654) -- -- -- (72,749)(r) (101,403) 101,403(t) --
Financial income (expense)..... 1,839 -- (2,040) (337) -- (538) -- (538)
----------- ---- ------ ------- ------- -------- -------- --------
Loss from ordinary
activities.................... (117,746) (319) (1,789) (3,767) (77,637) (201,258) (18,404) (219,662)
Extraordinary income (loss).... (1,485) (12) 227 -- -- (1,270) 1,270(w) --
----------- ---- ------ ------- ------- -------- -------- --------
Loss before tax and minority
interest...................... (119,231) (331) (1,562) (3,767) (77,637) (202,528) (17,134) (219,662)
Corporate income tax benefit
(provision)................... 35,899 108 -- -- -- 36,007 (36,007)(x) --
Minority interest.............. 1,928 -- -- -- -- 1,928 -- 1,928
----------- ---- ------ ------- ------- -------- -------- --------
Net loss....................... (81,404) (223) (1,562) (3,767) (77,637) (164,593) (53,141) (217,734)
=========== ==== ====== ======= ======= ======== ======== ========
Basic and diluted loss per
share(y)...................... (0.40)
===========
Weighted-average number of
shares used in computation of
basic and diluted earnings
(loss) per share(y)........... 203,763,953
===========
<CAPTION>
TOTAL
TERRA
NETWORKS
WIRED ACQUISITION PRO FORMA
LYCOS(J) VENTURES(Q) ADJUSTMENTS (U.S. GAAP)
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Advertising................... 144,093 9,449 -- 160,443
e-commerce.................... 67,823 2,500 -- 70,323
Access........................ -- -- -- 35,749
Other......................... -- -- -- 34,251
-------- ------- ---------- -----------
Total revenues................. 211,916 11,949 -- 300,766
Operating expenses:
Goods purchased............... (50,251) (5,683) -- (95,700)
Personnel expenses............ (68,251) (9,596) (313,589)(k) (420,854)
Depreciation and amortization
of goodwill................. (95,539) (1,010) (2,440,067)(k) (2,667,344)
Other operating expenses...... (99,424) (16,712) -- (212,249)
-------- ------- ---------- -----------
Total operating expenses before
financial expenses............ (313,465) (33,001) (2,753,656) (3,396,147)
-------- ------- ---------- -----------
Operating loss................. (101,549) (21,052) (2,753,656) (3,095,381)
Amortization of goodwill....... -- -- -- --
Financial income (expense)..... 7,061 647 -- 7,170
-------- ------- ---------- -----------
Loss from ordinary
activities.................... (94,488) (20,405) (2,753,656) (3,088,211)
Extraordinary income (loss).... (2,665) -- -- (2,665)
-------- ------- ---------- -----------
Loss before tax and minority
interest...................... (97,153) (20,405) (2,753,656) (3,090,876)
Corporate income tax benefit
(provision)................... (2,656) -- -- (2,656)
Minority interest.............. 847 -- -- 2,775
-------- ------- ---------- -----------
Net loss....................... (98,962) (20,405) (2,753,656) (3,090,757)
======== ======= ========== ===========
Basic and diluted loss per
share(y)...................... (6.21)
===========
Weighted-average number of
shares used in computation of
basic and diluted earnings
(loss) per share(y)........... 497,724,520
===========
</TABLE>
The accompanying notes to the pro forma condensed consolidated financial
statements are an integral part of this pro forma condensed consolidated
statement of operations.
IV-46
<PAGE> 88
a) In accordance with Spanish GAAP, period expenses incurred during the
start-up of a business that are likely to contribute to the generation of
future revenues may be deferred and amortized over five years. These
expenses consist mainly of advertising costs. Under U.S. GAAP, start-up
costs must be expensed as incurred.
b) In accordance with Spanish GAAP, expenses associated with the issuance of
equity securities may be deferred and amortized over five years. Under U.S.
GAAP, expenses associated with capital increases must be netted against the
gross proceeds of the new capital and recorded as a direct reduction to
shareholders' equity.
c) Spanish GAAP permits the recognition of deferred tax assets, including those
arising from net operating loss carryforwards, if it can be demonstrated
that the deferred tax assets can be realized within a ten-year period from
the date on which the assets were generated. Based on the business plan
prepared by our management, we believe that these assets will be realized
within a ten-year period.
Under U.S. GAAP, deferred tax assets should be recognized if it is "more
likely than not" that these assets will be realized. In making a
determination of whether it is more likely than not that a deferred tax
asset is realizable, all available evidence, both positive and negative,
should be considered. Due to our limited operating history and losses
sustained since our formation, we believe that under U.S. GAAP a valuation
allowance would need to be recorded in full against the deferred tax assets
related to our net operating losses. The adjustment reflected in the pro
forma condensed consolidated balance sheet consists of the establishment of
a valuation allowance of E141,975 thousand for the deferred tax assets
recorded under Spanish GAAP and the elimination of deferred tax liabilities
of E23,590 thousand that would not be required to be recorded under U.S.
GAAP.
d) On October 5, 1999, we formed a joint venture with International Discount
Telecommunication Corporation (IDT) called Terra Networks Access Services
USA, LLC. Upon formation of this venture, IDT contributed a customer list
containing approximately 46,000 users to the joint venture, while Terra
Networks agreed to contribute up to $30 million in cash during a two-year
period following the formation of the joint venture. The timing and extent
of the contributions would be determined based on mutual arrangements
between Terra Networks and the joint venture. In exchange for these
contributions, IDT received a 49% interest in the joint venture and Terra
Networks received a 51% interest in the joint venture.
Under Spanish GAAP, Terra Networks has reflected an intangible asset for
the customer list of E28.6 million, with an offsetting obligation for the
same amount to the joint venture. Under U.S. GAAP, the customer list
contributed to the joint venture would be recorded at IDT's carrying basis
for such list. This amount was zero as of the date that the list was
transferred to the joint venture. Moreover, the joint venture would not
reflect an obligation for funding from Terra Networks until such time that
Terra Networks incurs a binding obligation to make such funding.
e) In accordance with Spanish GAAP, research and development costs are
capitalized and amortized over a period not exceeding five years. Under U.S.
GAAP, research and development costs are expensed when incurred. This
adjustment eliminates research and developments costs capitalized under
Spanish GAAP.
f) In April 1999, Terra Networks acquired 100% of Ole from Infosearch
Holdings, S.A. for E12.02 million in cash and agreed to sell to Infosearch
Holdings, S.A. 4,928,000 Terra Networks ordinary shares for E20.8 million.
The estimated fair value of the ordinary shares sold was E54.0 million
based on our initial public offering price in the Spanish retail public
offering of E11.81 per share. For U.S. GAAP purposes, the difference of
E33.2 million between the fair value of the ordinary shares and the amount
received from the sale would be considered additional purchase price. This
additional consideration of E33.2 million would result in the same amount
of goodwill. The adjustment consists of the establishment of the goodwill
on the balance sheet. Under
IV-47
<PAGE> 89
Spanish GAAP, the ordinary shares sold would be recorded based on the
amount of cash received and would not be considered to be additional
purchase price.
g) On October 4, 1999, our subsidiary Terra Networks Chile Holding Limitada
(formerly Telefonica Interactiva Chile Limitada) acquired from CTC Mundo all
shares that CTC Mundo owned of Proveedora de Servicios de Conectividad, S.A.
(i.e., 95% of the total number of shares issued by this entity). The price
paid by Terra Networks Chile Holding Limitada was $40 million, generating
goodwill of E39,282 thousand, which is amortized over a period of 60 months
(5 years) under Spanish GAAP. As both CTC Mundo and we were under the common
control of Telefonica, S.A. at the time of this transaction, our acquisition
of Proveedora de Servicios de Conectividad, S.A. would be considered a
reorganization of entities under common control in accordance with U.S.
GAAP. Therefore, under U.S. GAAP, we would record the acquisition of
Proveedora de Servicios de Conectividad, S.A. at its historical cost basis
and would not recognize any goodwill associated with the transaction. The
adjustment reflected on the pro forma condensed consolidated balance sheet
reflects the elimination of the goodwill recorded under Spanish GAAP.
h) On October 20, 1999, our subsidiary Terra Networks Peru, S.A.C. entered into
contracts with Telefonica del Peru, S.A. and Telefonica Servicios Internet
del Peru, S.A.C. that enabled it to commence operations in the residential
internet segment. According to the main terms of the agreements, Telefonica
del Peru, S.A. agrees not to provide internet services for residential users
directly or through subsidiaries. The consideration paid by Terra Networks
for the foregoing covenant not to compete amounted to $25 million, and this
amount was recorded as an intangible asset and is being amortized on a
straight-line basis over five years. Additionally, Telefonica Servicios
Internet del Peru, S.A.C. transferred to Terra Networks Peru, S.A.C. all of
its contracts with customers and the customer database of the internet
provider centers and made available to the latter the assets assigned to or
obtained for the provision of internet services to residential customers.
Terra Networks Peru, S.A. paid $5 million in this connection, and this
amount was recorded as an intangible asset and is being amortized on a
straight-line basis over five years.
As Telefonica del Peru, S.A., Telefonica Servicios Internet del Peru,
S.A.C. and Terra Networks were under common control of Telefonica, S.A. at
the time of this transaction, in accordance with U.S. GAAP, the $30 million
in payments would not be capitalized as intangible assets but would instead
be treated similar to dividends. The adjustment reflected on the pro forma
condensed consolidated balance sheet reflects the elimination of the
intangible assets recorded under Spanish GAAP.
IV-48
<PAGE> 90
i) Represents the following adjustments:
<TABLE>
<CAPTION>
AT JUNE 30, 2000
------------------------------------------
EFFECTS ON
------------------------------------------
PAID-IN
CAPITAL/ TOTAL
ACCUMULATED LOSS FOR STOCKHOLDERS'
DEFICIT THE PERIOD EQUITY
----------- ---------- -------------
(THOUSANDS OF EURO)
<S> <C> <C> <C>
Start-up costs -- advertising (see note a)... (18,102) (36,128) (54,230)
Start-up costs -- capital increase (see note
b)......................................... (33,001) 3,300 (29,701)
Valuation allowances on deferred tax assets
(see note c)............................... (42,249) (76,136) (118,385)
Research and development costs (see note
e)......................................... (247) 91 (156)
Goodwill recognized from Ole acquisition, net
(see note f)............................... 28,236 (3,324) 24,912
Goodwill reversed from Chile acquisition, net
(see note g)............................... (37,966) 3,931 (34,035)
Goodwill reversed from Peru acquisition, net
(see note h)............................... (30,165) 3,119 (27,046)
Elimination of fair-value step-up on net
assets contributed to joint venture with
IDT (see note d)........................... 22 3,007 3,029
-------- -------- --------
Total.............................. (133,472) (102,140) (235,612)
======== ======== ========
</TABLE>
j) Lycos' fiscal year ends on July 31, which differs from our fiscal year end.
Consequently, we have adjusted the financial data presented for Lycos to
reflect its results of operations for the six month period ended July 31,
2000 and for the twelve month period ended January 31, 2000 for purposes of
presenting the pro forma condensed consolidated statement of operations for
the six month period ended June 30, 2000 and for the year ended December
31, 1999, respectively. Additionally, for purposes of presenting the pro
forma condensed consolidated balance sheet as of June 30, 2000, we have
used the Lycos consolidated balance sheet as of July 31, 2000 and restated
the amounts from U.S. dollars into euro using the exchange rate in effect
at July 31, 2000.
The following table shows the calculation of the results of operations
of Lycos for the six month period from February 1, 2000 to July 31, 2000:
<TABLE>
<CAPTION>
TWELVE
MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
JULY 31, 2000 JANUARY 31, 2000 JULY 31, 2000
-------------- ---------------- --------------
(THOUSANDS OF EURO)
<S> <C> <C> <C>
Revenues:
Advertising revenues.................. 202,586 85,236 117,350
E-commerce............................ 105,066 42,295 62,771
Access revenues....................... -- -- --
Other................................. -- -- --
-------- -------- --------
Total revenues.......................... 307,652 127,531 180,121
Operating expenses:
Goods purchased (Cost of Sales)....... (65,489) (28,633) (36,856)
Personnel expenses.................... (88,751) (41,578) (47,173)
Depreciation and amortization of
goodwill........................... (147,615) (63,878) (83,737)
Other operating expenses.............. (136,043) (60,566) (75,477)
-------- -------- --------
</TABLE>
IV-49
<PAGE> 91
<TABLE>
<CAPTION>
TWELVE
MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
JULY 31, 2000 JANUARY 31, 2000 JULY 31, 2000
-------------- ---------------- --------------
(THOUSANDS OF EURO)
<S> <C> <C> <C>
Total operating expenses before
financial expenses.................... (437,898) (194,655) (243,243)
-------- -------- --------
Operating loss.......................... (130,246) (67,124) (63,122)
Financial income (expense).............. 25,110 4,247 20,863
-------- -------- --------
Loss from ordinary activities........... (105,136) (62,877) (42,259)
Extraordinary income (loss)............. -- -- --
-------- -------- --------
Loss before tax and minority interest... (105,136) (62,877) (42,259)
Corporate income tax benefit
(provision)........................... (123,333) (2,515) (120,818)
Equity income from affiliates........... 257,154 1,934 255,220
Minority interest....................... (2,448) -- (2,448)
-------- -------- --------
Net income (loss)....................... 26,237 (63,458) 89,695
======== ======== ========
</TABLE>
The following table shows the calculation of the results of operations of
Lycos for the twelve month period from February 1, 1999 to January 31, 2000:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED TWELVE MONTHS
YEAR ENDED AUGUST 1, 1998 TO AUGUST 1, 1999 TO ENDED
JULY 31, 1999 JANUARY 31, 1999 JANUARY 31, 2000 JANUARY 31, 2000
------------- ----------------- ----------------- ----------------
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C>
Revenues:
Advertising............. 98,862 40,005 85,236 144,093
E-commerce.............. 43,129 17,601 42,295 67,823
Access revenues......... -- -- -- --
Other................... -- -- -- --
-------- ------- -------- --------
Total revenues............ 141,991 57,606 127,531 211,916
Operating expenses:
Goods purchased......... (36,258) (14,640) (28,633) (50,251)
Personnel expenses...... (45,791) (19,118) (41,578) (68,251)
Depreciation and
amortization of
goodwill............. (57,501) (25,840) (63,878) (95,539)
Other operating
expenses............. (68,419) (29,561) (60,566) (99,424)
-------- ------- -------- --------
Total operating expenses
before financial
expenses................ (207,969) (89,159) (194,655) (313,465)
-------- ------- -------- --------
Operating loss............ (65,978) (31,553) (67,124) (101,549)
Financial income
(expense)............... 6,430 3,616 4,247 7,061
-------- ------- -------- --------
Loss from ordinary
activities.............. (59,548) (27,937) (62,877) (94,488)
Extraordinary income
(loss).................. (2,665) -- -- (2,665)
-------- ------- -------- --------
Loss before tax and
minority interest....... (62,213) (27,937) (62,877) (97,153)
</TABLE>
IV-50
<PAGE> 92
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED TWELVE MONTHS
YEAR ENDED AUGUST 1, 1998 TO AUGUST 1, 1999 TO ENDED
JULY 31, 1999 JANUARY 31, 1999 JANUARY 31, 2000 JANUARY 31, 2000
------------- ----------------- ----------------- ----------------
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C>
Corporate income tax
benefit (provision)..... (141) -- (2,515) (2,656)
Minority interest......... 8,978 10,064 1,933 847
-------- ------- -------- --------
Net loss.................. (53,376) (17,873) (63,459) (98,962)
======== ======= ======== ========
</TABLE>
The information shown above also reflects the historical results of
operations of Gamesville.com, which was acquired by Lycos on November 22,
1999 and was accounted for by Lycos under the pooling of interests method.
Accordingly, the historical financial statements of Lycos have been
retroactively restated to include the results of operations of
Gamesville.com since its inception.
k) These amounts represent adjustments related to our acquisition of Lycos and
the elimination of Lycos' equity accounts.
For purposes of these pro forma financial statements, we have assumed that
the value of the total purchase consideration to be issued by us to
consummate the acquisition of Lycos would be approximately E13.7 billion.
This amount was determined as follows:
- We have assumed that we will issue 2.150 Terra Networks ordinary shares
for each share of Lycos common stock, which represents the maximum
exchange ratio under the agreement and plan of reorganization. Assuming
the maximum exchange ratio and assuming 120,221,719 shares of Lycos
common stock outstanding on the date of consummation of the combination,
we would be required to issue 258,476,695 ordinary shares to consummate
the combination. The 120,221,719 shares represents the maximum number of
Lycos shares permitted to be outstanding on the date of consummation of
the combination. Had we assumed an exchange ratio of 1.433 Terra
Networks ordinary shares per each Lycos share, the minimum exchange
ratio contained in the agreement and plan of reorganization, we would be
required to issue 172,277,723 ordinary shares to consummate the
combination, assuming the maximum number of Lycos shares outstanding.
- We have assumed that the value of the Terra Networks ordinary shares to
be issued will be E45.00 per share, which corresponds approximately to
the price in the agreement and plan of reorganization at which we would
be obligated to use the maximum exchange ratio of 2.150.
- We have agreed to replace outstanding options to purchase shares of
Lycos common stock held by Lycos employees with options to purchase
Terra Networks ordinary shares. The Terra Networks options will have the
same terms and conditions as the Lycos stock options, except that the
number of options and their exercise price will be adjusted based on the
exchange ratio used to consummate the combination. We have made the
following assumptions regarding the Terra Networks options that we plan
to issue:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE OF
TERRA NETWORKS TERRA NETWORKS
ORIGINAL AMOUNT OPTIONS TO OPTIONS TO
OF LYCOS OPTIONS BE ISSUED BE ISSUED
---------------- -------------- -----------------
<S> <C> <C> <C>
Vested(1).................. 14,840,892 31,907,918 E11.35
Unvested(1)................ 23,506,092 50,538,098 E20.18
---------- ----------
Total...................... 38,346,984 82,446,016
========== ==========
</TABLE>
---------------
(1) As of the date of the consummation of the combination.
IV-51
<PAGE> 93
- We have assumed that the value of the fully vested options is E1,122.5
million. This value was determined using a Black-Scholes pricing model
and is based on the following weighted-average assumptions:
- risk free interest rate of 5.5%;
- volatility of 63.5%;
- expected term of two years; and
- expected dividend yield of 0%.
This value has been recorded in its entirety as purchase price.
- We have assumed that the value of the unvested options is E1,520.2
million. This value was determined using a Black-Scholes pricing model
and is based on the following weighted-average assumptions:
- risk free interest rate of 5.55%;
- volatility of 57%;
- expected term of three years; and
- expected dividend yield of 0%.
We have further assumed that:
- On the date that we grant these unvested replacement options, the
intrinsic value of the unvested replacement options is E24.82 per
share. This amount is calculated by subtracting the weighted-average
exercise price of the replacement options of E20.18 from the assumed
fair market value of Terra Networks ordinary shares on the date of
grant of E45.00. Thus, the aggregate intrinsic value of all of the
unvested replacement options is E1,254.4 million as of the date of
grant.
- The weighted-average remaining service period on the unvested
options is two years. The weighted-average aggregate service period
under the terms of the initial options awarded by Lycos is assumed
to be four years. Thus, the portion of fair value of the unvested
stock options to be classified as deferred compensation expense is
2/4 of the aggregate intrinsic value shown above, or E627.2 million.
- Accordingly, we have recorded the difference of E893.0 million
between the fair value of the unvested stock options and the amount
classified as deferred compensation as additional purchase price.
- We have assumed direct acquisition costs of E37,502 thousand. See
note l.
The following is a summary of the calculation of the purchase price, as
described above, as well as the allocation of this purchase price to the fair
value of net assets acquired:
<TABLE>
<CAPTION>
(THOUSANDS OF EURO,
EXCEPT SHARE AMOUNTS)
---------------------
<S> <C>
Total number of Terra Networks ordinary shares issued to
consummate acquisition................................ 258,476,695
Assumed value per ordinary share........................ 45
-----------
Value of Terra Networks ordinary shares issued.......... 11,631,451
Fair value of vested stock options issued............... 1,122,520
Fair value of unvested stock options issued............. 893,008
Assumed direct acquisition costs (see note l)........... 37,502
-----------
Total purchase price.................................... 13,684,481
Fair value of current assets acquired................... 802,554
Fair value of property and equipment acquired........... 11,562
</TABLE>
IV-52
<PAGE> 94
<TABLE>
<CAPTION>
(THOUSANDS OF EURO,
EXCEPT SHARE AMOUNTS)
---------------------
<S> <C>
Fair value of other tangible assets acquired............ 492,178
Fair value of liabilities assumed....................... (297,174)
Intangible assets and goodwill recorded by Lycos........ 589,323
-----------
Intangible assets and goodwill acquired................. 12,086,038
===========
</TABLE>
For purposes of this pro forma financial data we have preliminarily
estimated the fair value of the net assets acquired from Lycos based on the
historical financial statements of Lycos as of July 31, 2000. The excess of the
purchase price over a preliminary estimate of the fair value of the net assets
acquired has been allocated to acquired intangible assets and goodwill. This
amount is assumed to be amortized over an estimated useful life of 5 years,
yielding approximately E2,417.3 million in amortization expense on a yearly
basis.
Under Spanish GAAP, the value of the Terra Networks ordinary shares to be
issued will be set at E11.00 per share, yielding acquired goodwill and
intangible assets of approximately E1,282.3 million based on the assumptions
described above. Such amount will also be amortized over a five-year period
under Spanish GAAP, yielding annual amortization expense of E256.5 million based
on the previously described assumptions.
The above allocation of purchase price as it relates to the acquisition of
Lycos has been prepared on a preliminary basis and is subject to revision based
upon a formal study to be performed by us. Based on this study both the
allocation of purchase price and the useful lives assigned to identifiable
intangible assets may differ from the assumptions shown above. The effects of
this revised allocation may have a material effect on the pro forma results of
operations.
The adjustments reflected on the pro forma condensed consolidated statement
of operations are determined as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(THOUSANDS OF EURO)
<S> <C> <C>
Amortization of goodwill/intangible assets
from:
Acquisition of Lycos...................... 1,208,604 2,417,208
Acquisition of Wired Ventures (see note
q)..................................... -- 22,859
--------- ---------
1,208,604 2,440,067
========= =========
Amortization of deferred compensation....... 156,795 313,589
========= =========
</TABLE>
l) This amount represents taxes, legal fees and other direct costs in
connection with the acquisition of Lycos.
m) Pursuant to the rights offering agreement among Telefonica, S.A., Terra
Networks and Lycos, Terra Networks made a rights offering whereby it issued
to its existing shareholders rights to purchase 35,483,872 Terra Networks
ordinary shares for an aggregate of E2.2 billion at a price per share of
E62.00.
Under the rights offering agreement, Telefonica, S.A. agreed to subscribe
for all ordinary shares not subscribed for by other shareholders in the
rights offering. This offering has been included in the pro forma condensed
consolidated balance sheet as if it had been completed as of June 30, 2000.
The estimated expenses that will be incurred in connection with the rights
offering, primarily related to taxes and fees, amount to E28 million and
have been deducted from shareholders' equity in accordance with U.S. GAAP.
n) Amounts represent the historical results of operations for the period from
January 1, 1999 to March 31, 1999.
o) Amounts represent the historical results of operations for the period from
January 1, 1999 to June 30, 1999.
IV-53
<PAGE> 95
p) Amounts represent the historical results of operations for the period from
January 1, 1999 to October 31, 1999.
q) Amounts represent the historical results of operations for the period from
February 1, 1999 to June 30, 1999, the date of acquisition by Lycos.
r) Represents amortization of goodwill and intangible assets that is reflected
in Terra Networks' statement of operations for the six months ended June
30, 2000 and the year ended December 31, 1999 relating to the following
acquisitions consummated by Terra Networks in 1999:
<TABLE>
<CAPTION>
PORTION OF
ANNUAL AMOUNT
NOT REFLECTED IN U.S. GAAP
TOTAL GOODWILL HISTORICAL FINANCIALS ADJUSTMENT(S)
RESULTING FROM ----------------------- -----------------------
ACQUISITION ANNUAL JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, USEFUL LIFE
(SPANISH GAAP) AMORTIZATION 2000 1999 2000 1999 (YEARS)
-------------- ------------ -------- ------------ -------- ------------ -----------
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C> <C> <C> <C>
Ole.................. 12,242 2,448 -- 613 3,324 6,643 5
Nutec................ 181,897 36,379 -- 18,187 -- -- 5
Infosel.............. 264,392 52,878 -- 47,402 -- -- 5
Terra Networks
Chile.............. 39,282 7,856 -- 6,547 (3,931) (7,856) 5
------- ------ -- ------ ------ ------
Total....... 497,813 99,561 -- 72,749 (607) (1,213)
======= ====== == ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PORTION OF
ANNUAL AMOUNT
TOTAL NOT REFLECTED IN U.S. GAAP
INTANGIBLE ASSETS HISTORICAL FINANCIALS ADJUSTMENT(S)
RESULTING FROM ----------------------- -----------------------
ACQUISITION ANNUAL JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, USEFUL LIFE
(SPANISH GAAP) AMORTIZATION 2000 1999 2000 1999 (YEARS)
----------------- ------------ -------- ------------ -------- ------------ -----------
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C> <C> <C> <C>
Terra Networks Peru.. 31,209 6,242 -- 4,888 (3,119) -- 5
Terra Networks Access
Services........... 30,297 6,059 -- -- (3,007) -- 5
------ ------ -- ----- ------
Total....... 61,506 12,301 -- 4,888 (6,126) --
====== ====== == ===== ====== ==
</TABLE>
s) Represents:
- for Ole, amortization of the incremental goodwill recognized under U.S.
GAAP (see note f).
- for the Chilean acquisition, the amortization of goodwill, as the
acquisition of this entity would be considered a reorganization of
entities under common control under U.S. GAAP (see note g).
- for Peru, the elimination of amortization on the intangible assets
acquired, since these payments would be akin to dividends under U.S.
GAAP (see note h).
- for Terra Networks Access Services, the elimination of amortization of
an acquired customer list, since U.S. GAAP would require this list to
be accounted for at its carry over basis (see note d).
t) Under Spanish GAAP, amortization of goodwill is shown separately in the
consolidated statement of operations below operating loss. For U.S. GAAP
reporting purposes, amortization of goodwill is shown as a deduction before
operating income.
u) Represents the reversal of amortization expense recorded on deferred
start-up costs and research and development costs, which are capitalized
under Spanish GAAP, during the six months ended June 30, 2000 and the year
ended December 31, 1999:
IV-54
<PAGE> 96
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
---------- -------------
(THOUSANDS OF EURO)
<S> <C> <C>
Reversal of amortization of start-up costs (see
note a)......................................... (8,060) (920)
Reversal of amortization on research and
development costs (see note e).................. (258) (96)
------ ------
Total................................... (8,318) (1,016)
====== ======
</TABLE>
v) Represents the immediate recognition of start-up costs and research and
development costs, which are capitalized under Spanish GAAP, during the six
months ended June 30, 2000 and the year ended December 31, 1999:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
2000 1999
---------- -------------
(THOUSANDS OF EURO)
<S> <C> <C>
Start-up costs (see note a)....................... 40,887 19,020
Research and development costs (see note e)....... 168 343
------ ------
Total................................... 41,055 19,363
====== ======
</TABLE>
w) Under Spanish GAAP, certain income and expenses, such as those arising from
the disposition of fixed assets can be classified as extraordinary items.
Under U.S. GAAP, these amounts would be classified as a component of
operating income (loss).
x) Represents the elimination of deferred tax benefit recognized under Spanish
GAAP for net operating losses incurred during the year (see note c).
y) Pro forma basic and diluted loss per share is calculated by dividing pro
forma net loss available to ordinary shareholders by the pro forma
weighted-average number of common shares outstanding. The weighted-average
pro forma number of shares outstanding is equal to the comparable historical
amount, adjusted to reflect the ordinary shares to be issued in connection
with our acquisition of Lycos and the rights offering. The pro forma
weighted-average number of shares is calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
Historical weighted-average number of
shares outstanding..................... 280,000,000 203,763,953
Total number of ordinary shares assumed
to be issued in connection with the
Lycos acquisition...................... 340,922,711 340,922,711
Less: Portion to be issued in the form of
stock options.......................... (82,446,016) (82,446,016)
----------- -----------
Ordinary shares to be issued in
connection with the acquisition of
Lycos.................................. 258,476,695 258,476,695
Ordinary shares to be issued in the
rights offering........................ 35,483,872 35,483,872
----------- -----------
Total.......................... 573,960,567 497,724,520
=========== ===========
</TABLE>
For the period presented, no potentially dilutive securities have been
included in the calculation of historical and pro forma diluted loss per
share as such amounts would be antidilutive in periods in which a loss has
been reported. The aggregate number of potential common share equivalents,
including the stock options that will be issued in connection with the
Lycos acquisition, that have been excluded from the pro forma diluted loss
per share calculation was 82,446,016 shares for the six months ended June
30, 2000 and the year ended December 31, 1999.
IV-55
<PAGE> 97
PART FIVE
INFORMATION ABOUT TERRA NETWORKS
OVERVIEW
Terra Networks provides internet access and local-language interactive
content and services to Spanish- and Portuguese-speaking residential and small
office/home office, or SOHO, customers. We currently provide internet access
services in Spain, Brazil, Mexico, Peru, Chile, Guatemala, El Salvador and the
United States. We operate internet portals serving these countries and
Venezuela, Argentina, Costa Rica, Honduras, Nicaragua, Panama, Uruguay and
Colombia. We also recently launched an English-language portal in the United
States. We plan to launch or acquire portals in one or more additional Latin
American countries by the end of 2000. We also plan to launch internet access
services in Colombia and Argentina. In all of our markets, we are developing
online interactive solutions for advertising and marketing, as well as for
electronic commerce and related activities.
Telefonica, S.A., the parent company of the Telefonica group, currently
owns our majority equity interest. As a member of the Telefonica group, we
benefit from our relationship with the largest and strongest telecommunications
group in Spain and Latin America, with approximately 60 million customers and
significant media assets. The Telefonica group controls full-service
telecommunications subsidiaries in Spain, Brazil, Argentina, Peru, Chile and
Guatemala and has additional telecommunications properties in several other
Latin American countries, Europe and Africa. In Spain and Latin America, the
Telefonica group also controls media properties, including Spanish soccer
broadcast rights and radio stations, and has significant media investments,
including interests in television, cable and film production companies.
We are the principal company through which the Telefonica group develops:
- internet access services for residential and SOHO customers through a
dial-up service and broadband;
- internet portals and the full range of services that can be provided
through internet portals such as news, shopping and online communities
and chat;
- online and wireless, among others, advertising and marketing solutions
tailored to our clients' needs; and
- e-commerce activities.
We plan to build upon our relationship with the Telefonica group:
- to continue to enhance our market presence, distribution channels and
product offerings;
- to receive the best innovation in technology;
- to exploit the media content controlled by other members of the
Telefonica group; and
- to exploit Telefonica's customer base of approximately 60 million.
We have achieved a leading position in the Spanish and Portuguese-speaking
world internet services business. We plan to consolidate our position in the
longer term through improving and supplementing our internet products and
services, both independently and through strategic alliances, partnerships and
acquisitions, and by building upon our relationships with:
- strong communications, technology and media businesses throughout Spain
and Latin America in the Telefonica group; and
- the network of partners we are building through strategic investments
and alliances.
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<PAGE> 98
We are a Spanish corporation (sociedad anonima) with principal executive
offices located at Via de las Dos Castillas, 33, Complejo Atica, Edificio 1,
Pozuelo de Alarcon, 28223 Madrid, Spain and our telephone number is (34)
91-452-3000. Our internet address is www.terranetworks.com. We were incorporated
on December 4, 1998. Our agent for service of process in the United States is
Terra Networks USA, which is located at 1001 Brickell Bay Drive, Suite 2300,
Miami, Florida 33131.
HISTORY
The following timeline describes the significant milestones in the
development of our internet business:
April 1999 Telefonica, S.A. transferred its Spanish
residential and SOHO internet access business to
us. With this transfer, we took control of
Telefonica's 72,000 residential and SOHO ISP
customers.
April 1999 We acquired 100% of Ordenamientos de Links
Especializados S.L., known as Ole, from
InfoSearch Holdings, S.A. Ole operated a portal
in Spain. In return, we paid Ptas2,000 million in
cash to InfoSearch and sold InfoSearch 4,928,000
newly-issued ordinary shares for US$21.5 million.
June 1999 Through a series of transactions, we acquired 96%
of Nutec Informatica, S.A., known as ZAZ, from
RBS Administracao e Cobranca Ltda.,
MLSP -- Comercio e Participacoes Ltda. and other
minority shareholders for US$232 million. Of this
amount, US$192 million was used to redeem the
interests of minority shareholders and US$40
million was left as cash at ZAZ. We subsequently
agreed to acquire the remaining 4% of ZAZ from
its minority shareholders in exchange for US$10
million in ordinary shares at our initial public
offering price of E13.00 per share. We gave these
shareholders the right to put these shares to us
at market value through June 2001. They notified
us in May 2000 of their intention to exercise
this put.
ZAZ's former shareholders have agreed to refrain
from competing against us for two years with
respect to activities ZAZ engaged in as of June
15, 1999. The remaining minority shareholders
similarly have agreed to refrain from competing
against us while they are shareholders of ZAZ and
for one year after they sell their interests in
ZAZ.
With this acquisition, we acquired our Brazilian
ISP and portal, including ZAZ's 200,000
residential and SOHO ISP customers.
July 1999 We acquired 25% of Corporacion Real Time Team,
S.L., known as Teknoland Corp., for a net payment
of Ptas2,340 million. We have agreed to purchase
an additional 26% of Teknoland Corp. from its
founding shareholders after 36 months, although
we have the option to purchase this 26% earlier
if Teknoland Corp. fails to meet specified
revenue targets. The founding shareholders have
the right to sell to us at any time from 26% to
75% of Teknoland Corp. The per-share price of
these options is equal to the per-share value of
Teknoland Corp. reflected in the price we have
agreed to pay for our 25% interest plus 50% of
the difference between that value and the value
of Teknoland
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<PAGE> 99
Corp. on the date when the options are exercised,
as determined by an independent party.
In addition, the founding shareholders have an
option to repurchase our 25% interest in
Teknoland Corp. until they cease to be majority
shareholders. This option may only be exercised
if we cease to be part of the Telefonica group or
the Telefonica group no longer provides internet
services, or in a small number of other
extraordinary circumstances.
With this acquisition, we are positioned to
compete in designing online products like web
sites, intranets and extranets, creating virtual
communities, and offering other innovative
web-based services.
July 1999 We acquired 95% of Infovia, S.A., known as
Infovia, from Infovia International Inc. In
return, we paid US$4 million to Infovia
International Inc. Infovia International Inc.
agreed to refrain from competing against us in
Guatemala for a period of four years from July
1999.
With this acquisition, we acquired Infovia's
approximately 6,000 ISP customers in Guatemala.
We purchased the remaining 5% of Infovia in March
2000.
September 1999 We acquired 100% of Netgocios S.A. from
individual shareholders. Netgocios operates
GauchoNet, an Argentine portal. In return, we
agreed to pay US$5.5 million to such
shareholders. These shareholders have agreed to
refrain from competing against us for a period of
two years from September 1999.
We acquired 100% of Donde Latinoamerica S.A.,
another Argentine portal, from individual
shareholders. In return, we agreed to pay US$4.5
million to these shareholders. The sellers have
agreed to refrain from competing against us for a
period of two years from September 1999.
With the acquisition of Netgocios, S.A. and Donde
Latinoamerica S.A., we acquired Argentine portals
with 1.5 million and 1.0 million page views per
month, respectively.
October 1999 We agreed to form a joint venture with
International Discount Telecommunications Corp.,
known as IDT, to operate our residential and SOHO
ISP business in the United States. Under the
joint venture agreement, we agreed to hold 51% of
the joint venture and IDT agreed to hold 49%. In
addition, we agreed with IDT to form a second
joint venture, to be owned 10% by IDT and 90% by
us, to operate our portal business in the United
States.
IDT contributed approximately 46,000 internet
access customers to the ISP joint venture. A
significant majority of such ISP customers are
not of Hispanic origin. The joint venture,
however, has focused its marketing efforts on
Hispanic customers.
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<PAGE> 100
We agreed to fund the first US$30 million of
expenses for the ISP joint venture, subject to
the completion of performance milestones to be
agreed upon.
IDT purchased US$15.5 million of our ordinary
shares at our initial public offering price.
October 1999 We agreed to acquire 100% of the assets of
Telefonica Servicios Internet, S.A.C., a
subsidiary of Telefonica del Peru, S.A., related
to the provision of internet access serving the
residential and SOHO markets in Peru. Telefonica
del Peru has agreed that it will not provide
internet services to residential customers in
Peru for 10 years without our prior consent.
Telefonica del Peru has agreed to provide us with
telecommunications services. In return, we agreed
to pay US$30 million.
We granted Telefonica del Peru an option to
purchase up to US$30 million of our ordinary
shares at our initial public offering price.
Telefonica del Peru exercised this option.
Telefonica del Peru has agreed not to sell,
transfer or otherwise dispose of these shares
before October 2000. Telefonica del Peru has
granted us a right of first refusal if it decides
to sell any of these shares.
With this acquisition, we acquired our Peruvian
ISP and portal. This business has been included
in our consolidated financial statements since
1996 because it was under the control of a
Telefonica group member. However, the results of
this business were not significant during periods
ending on or before June 30, 1999.
October 1999 We agreed to acquire 100% of Informacion
Selectiva, S.A. de C.V., known as Infosel,
through a series of transactions in which the
sellers received US$60 million in cash and US$220
million of our ordinary shares at our initial
public offering price.
As part of these transactions, Grupo Reforma has
agreed to refrain from competing against us in
the Mexican market for a period of four years and
in the U.S. market for a period of three years
from October 1999.
With this acquisition, we acquired our Mexican
ISP and portal, Infosel, including 49,000
residential and SOHO ISP customers.
October 1999 We acquired 95% of the shares of Proveedora de
Servicios de Conectividad, S.A., known as CTC
Internet, the internet subsidiary of Compania de
Telefonos de Chile -- Transmisiones Regionales
S.A., known as CTC Mundo. In return, we agreed to
pay US$40 million. As previously agreed, CTC
Mundo delivered to us, at no additional cost, the
remaining 5% of CTC Internet in December 1999.
We granted CTC Mundo, and CTC Mundo exercised, an
option to purchase up to US$40 million of our
ordinary shares at the initial public offering
price. CTC Mundo has agreed not to sell, transfer
or otherwise dispose of these shares for one year
after
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<PAGE> 101
our initial public offering. CTC Mundo has
granted us a right of first refusal if it decides
to sell any of these shares.
Compania de Telecomunicaciones de Chile S.A.,
known as CTC, the parent of CTC Mundo, and CTC
Mundo agreed that they will provide CTC Internet
with all necessary telecommunications services
relating to CTC Internet's business and CTC
Internet will be designated the preferred
provider for internet services to CTC's
residential customers. We have agreed to use
CTC's telecommunications services with preference
over any other provider in Chile.
With this acquisition, we acquired our Chilean
ISP and portal, including 74,000 residential and
SOHO ISP customers. This business has been
included in our consolidated financial statements
since 1996 because it was under the control of a
Telefonica group member.
March 2000 We acquired the Venezuelan portal Chevere and
rights relating to two domain names from Dotcom
Publicidad C.A. for US$4 million. Chevere is one
of the leading portals in Venezuela with over
3,000,000 page views in February 2000.
April 2000 We agreed with IDT to acquire its interests in
our U.S. ISP and portal joint ventures in
exchange for 3,750,000 of our ordinary shares. In
addition, we and IDT agreed to terminate certain
arrangements involving our respective interests
in the ISP and portal joint venture. In
reconciling amounts owed under these
arrangements, we agreed to release each other
from obligations thereunder upon IDT paying us
US$3,000,000. With respect to the termination of
the ISP joint venture, 25,000 of its customer
accounts, chosen by us, were transferred to us
and the remaining accounts were transferred to
IDT.
IDT has agreed not to compete against our ISP
targeted at the Hispanic residential and Hispanic
SOHO markets in the United States through April
2001, and against our portal targeted at the
Hispanic population of the United States through
July 2001.
In connection with this transaction, we
terminated the lock-up restrictions on the Terra
Networks shares acquired by IDT in connection
with our initial public offering. The
underwriters of our initial public offering also
waived IDT's lock-up limitations. The waiver
provides that IDT cannot dispose of their initial
public offering shares in an amount in excess of
75,000 shares in any one business day or in
excess of 500,000 shares in the aggregate in any
calendar month.
May 2000 We agreed to acquire Lycos, Inc. Please see "Part
Four -- The Combination" for a description of
this transaction.
July 2000 We acquired, through Terra Networks Colombia
Holding, S.A., 65% of the shares of La
Ciudad.com, S.A., which operates a portal in
Colombia. We will pay a total of US$35 million
for such shares and content to be provided by our
local partners over a five-year term.
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<PAGE> 102
As of June 30, 2000 we operated ISPs in the following countries:
<TABLE>
<CAPTION>
COUNTRY URL
------- ----------------
<S> <C>
Spain.................................................... www.terra.es
Brazil................................................... www.terra.com.br
Mexico................................................... www.terra.com.mx
Peru..................................................... www.terra.com.pe
Chile.................................................... www.terra.cl
Guatemala................................................ www.terra.com.gt
United States............................................ www.terra.com
</TABLE>
As of June 30, 2000, we operated portals serving the following countries:
<TABLE>
<CAPTION>
COUNTRY URL
------- ----------------
<S> <C>
Spain.................................................... www.terra.es
Brazil................................................... www.terra.com.br
Mexico................................................... www.terra.com.mx
Argentina................................................ www.terra.com.ar
Peru..................................................... www.terra.com.pe
Chile.................................................... www.terra.cl
Guatemala................................................ www.terra.com.gt
Venezuela................................................ www.terra.com.ve
United States............................................ www.terra.com
Costa Rica............................................... www.terra.com.cr
Honduras................................................. www.terra.com.hn
El Salvador.............................................. www.terra.com.sv
Nicaragua................................................ www.terra.com.ni
Panama................................................... www.terra.com.pa
Uruguay.................................................. www.terra.com.uy
</TABLE>
LINES OF BUSINESS
We offer a suite of internet services in Spanish and Portuguese that
provides our users throughout our core markets in Spain and North, Central and
South America with:
- access to the internet;
- portal services that incorporate a wide variety of content built on our
multi-local/global model;
- a range of online advertising, marketing and e-commerce opportunities;
and
- multiple solutions for our customers' internet needs, such as web design
and hosting and communication.
Our services complement each other, as customer growth in our access
business will benefit our portal business, which in turn will benefit our online
advertising and e-commerce businesses, which in turn will benefit our internet
solutions businesses. For example, important synergies between our access and
portal businesses arise from default mechanisms that direct access customers to
our portal home pages. We are successfully capturing these synergies across our
markets, where we combine our areas of expertise and operate as an online
service provider. We have substantial experience combining these businesses,
while many of our competitors have substantial experience operating only as an
ISP or as a portal operator. We are prepared to adapt our businesses in all of
our core markets in order to better serve our customers and to gain a
competitive advantage.
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<PAGE> 103
Our multi-local/global approach to content distinguishes our services from
most of the competing portal services in the market, and we believe this
approach will be key to our success. For example, by accessing our Mexican
portal, a user will easily find:
- content that is Mexico-specific and presented in Mexican vocabulary,
such as local chat features and politics presented by Grupo Reforma, a
leading Mexican news organization;
- content that is regional in character, such as Copa America soccer
coverage; and
- content that is international in character, such as world business news
provided by Reuters.
Similarly, a user accessing our Brazilian site would find content presented
by strong national and global content providers, such as Grupo Estado, one of
the oldest media groups of Brazil and a leader in the Brazilian media market,
with newspaper, radio, television and cable interests, and Carta Capital, a news
magazine in Brazil, as well as information and content relating to specific
cities.
Our content is presented in our users' local idioms, which differ
throughout Spain and North, Central and South America. We are able to execute
our multi-local/global approach through our in-depth understanding of local
markets and customer needs. We gain this understanding through our locally-based
employees collaborating with our local content providers and through the direct
operational experience of the Telefonica group in most of our core markets. In
markets where the Telefonica group does not have substantial historical
experience, such as Mexico and the U.S. Hispanic market, we work closely with
established local partners and integrate their knowledge and experience in the
local market. For example, Grupo Reforma, a leader in the Mexican media market,
contributes content to our portals from its newspaper, magazine and radio and
television sources. Because more than 63% of the U.S. Hispanic population is of
Mexican origin, Grupo Reforma's knowledge of the Mexican market also helps us
provide content and services that are attractive to the U.S. Hispanic market. In
addition, we have partnered with the Miami Herald, which is one of the most
popular U.S. newspapers targeted at the U.S. Hispanic population, to provide
content for our portal designed for the U.S. Hispanic market.
We have been and will continue to be supported by the Telefonica group in
providing internet access services, portal services and advertising and
e-commerce solutions. We are supported by:
- Telefonica's telecommunications and infrastructure assets in Spain and
Latin America, including fixed and mobile telephony, data transmission
and highspeed internet access;
- Telefonica's global and local media assets and investments including
conventional television, satellite and cable television, radio,
directories and other media;
- Telefonica's customer relationships throughout Spain and Latin America
across a variety of access media;
- Telefonica's research and development capabilities for the development
of new communication technologies and value added services;
- Telefonica's access to leading content providers and e-commerce
companies; and
- Telefonica's strong presence and reputation in the capital markets.
We also plan to continue to actively pursue strategic investments. This
allows us to capture value in other internet-related businesses, including those
that exist today and those that will develop in the future.
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<PAGE> 104
Our multi-local/global approach, the support we receive from the Telefonica
group and our strategic investments will allow us to take advantage of
significant growth opportunities stemming from:
- our large and growing core markets of Spain and Latin America, and our
targeted market in the U.S. Hispanic community, which are united by
common cultural values and languages but which also exhibit varying
local interests and preferences;
- the current low internet penetration in our core markets; and
- our access to the approximately 60 million customers currently served by
the Telefonica group.
We believe that Spanish- and Portuguese-speaking internet users and future
internet users in Spain, Latin America and the United States are demanding and
will continue to demand online services in their own language, as opposed to
services that offer primarily English language content. According to
International Data Corporation, approximately two-thirds of Latin American
internet users would prefer to visit web sites in their native languages.
Currently, however, eStats estimates that only approximately 2% of web pages are
presented in Spanish or Portuguese. As the internet achieves broader acceptance
in our core markets, we believe that online advertising and e-commerce will also
experience significant growth.
Responding to this demand, we have designed an approach that provides our
users not only with the best regional and international content, but also with
information and services that are relevant to their daily lives and presented in
the local idiom. We believe that our multi-local/global approach is a
substantially more effective way to attract a large group of internet portal
users and to earn their repeat business. We believe that the combination of the
current low internet penetration rate and the attractive demographic factors in
our core markets should lead to a substantial increase in internet usage, and
with our multi-local/global approach we will be well positioned to capture a
substantial portion of the business that will result. This will provide us with
expanding opportunities to increase access and portal traffic, and to offer
superior online advertising solutions and build our e-commerce business.
The following table summarizes our total revenues, on a pro forma basis
without taking account of the Lycos transaction, for the year ended December 31,
1999 for each of our principal lines of business in each of our principal
geographic markets:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-------------------
(THOUSANDS OF EURO)
<S> <C>
SPAIN
ISP....................................................... 4,033
Portal.................................................... 2,680
Other..................................................... 4,826
------
Total........................................... 11,539
======
BRAZIL
ISP....................................................... 12,316
Portal.................................................... 3,675
Corporate Services(1)..................................... 7,435
------
Total........................................... 23,426
======
</TABLE>
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<PAGE> 105
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-------------------
(THOUSANDS OF EURO)
<S> <C>
MEXICO
ISP....................................................... 10,301
Portal.................................................... 541
Corporate Services(1)..................................... 15,704
Other..................................................... 2,392
------
Total........................................... 28,938
======
PERU
ISP....................................................... 12
Portal.................................................... 30
------
Total........................................... 42
======
CHILE
ISP....................................................... 5,920
Other..................................................... 3,991
------
Total........................................... 9,911
======
ARGENTINA
ISP....................................................... 0
Portal.................................................... 42
------
Total........................................... 42
======
GUATEMALA
ISP....................................................... 2,414
Portal.................................................... 0
------
Total........................................... 2,414
======
UNITED STATES
ISP....................................................... 2,224
Portal.................................................... 0
------
Total........................................... 2,224
======
</TABLE>
---------------
(1) Corporate services are included in "other revenues" in our consolidated
statement of operations.
INTERNET ACCESS SERVICES
At June 30, 2000 we provided internet access services to over 2.6 million
customers in Spain, Latin America and the United States. We target residential
and small office/home office or SOHO internet users in our core markets. The
SOHO market consists of businesses that use telephone lines to connect to the
internet, as opposed to dedicated lines, and is made up of small businesses
(generally with fewer than 10 employees) and businesses conducted out of the
home. Based on the number of subscribers in our target residential and SOHO
markets, we believe we are currently the leading ISP service provider in Spain,
Chile, Peru and Guatemala and the second-ranking ISP in Brazil and Mexico. The
table below provides information on our ISP customer base as of the dates
indicated.
V-9
<PAGE> 106
<TABLE>
<CAPTION>
AT
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 2000 2000
------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Spain................................. 359,000 659,000 938,000 1,250,000
Brazil(1)............................. 267,000 346,000 558,000 733,000
Mexico................................ 49,000 82,000 215,000 373,000
Chile................................. 81,000 118,000 151,000 186,000
United States......................... 46,000 44,000 43,000 25,000
Peru.................................. 53,000 62,000 80,000 86,000
Guatemala............................. 6,000 6,000 6,000 6,000
------- ------------ --------- ---------
Total....................... 861,000 1,317,000 1,992,000 2,659,000
======= ============ ========= =========
</TABLE>
---------------
(1) Including customers under franchise agreement with local ISP providers.
We intend to leverage our ISP expertise by moving into new value-added
services using the internet protocol (IP). These value-added services will
include voice and fax over IP and video streaming. In addition, we introduced
ADSL access to the internet in Spain and Brazil in 1999. We also plan to offer
it in Peru, Chile, Central America and the United States.
Although we were created by Telefonica to focus on customers in the
residential and SOHO markets, we have some customers in Brazil, Mexico, Chile
and Guatemala who are part of the larger corporate market. Other Telefonica
group members provide internet access to corporate customers in Chile and
Guatemala.
Product Line
We offer a broad range of internet access products tailored to the needs of
our customers and adapted to local market conditions. We continuously adapt our
product line to market needs and competitive demands using data collected in our
extensive market research efforts. When required by market conditions, we extend
products that are locally offered to other markets. We follow a strategy of
market and client segmentation, and an active policy of migrating clients to
higher levels of services. Each access product consists of a telephone dial-up
service. Our products include:
Standard Access This product usually consists of one e-mail
address and between two and ten megabytes of disk
space for a personal home page. In order to best
satisfy customer needs and to adapt our standard
access product to local market conditions, we
offer different subscription methods for our
standard access product, including, in most
cases:
- unlimited connection time for a fixed monthly
subscription fee;
- limited connection time (usually 5, 15 or 25
hours) for a fixed monthly subscription fee
combined with a per-minute fee for time spent
in excess of the limited connection time;
- unlimited connection time for connections
during certain hours of the day (typically
from 8:00 P.M. to 8:00 A.M.) for a reduced
monthly subscription fee; or
- a per-minute fee without a fixed monthly
subscription fee.
Free Access We introduced free internet access in Spain in
June 1999, in Brazil in February 2000, and in
Chile and Mexico in March 2000. With this
product, the customer pays no
V-10
<PAGE> 107
subscription fee, and is only charged by the
telephone company for use of the phone line, plus
fees for any value-added services the customer
uses. The standard free access product usually
includes one e-mail address and five megabytes of
disk space for a typical personal home page.
Pre-paid Access This product allows customers to access the
internet for a limited amount of time at a
reduced subscription fee. We offer this service
in Guatemala through Price Mart, an international
chain that distributes consumer products. In
Chile we decided to discontinue this product
because we launched free internet access service
(Terra Libre) in March 2000.
Flat Rate Access In July 2000, we launched limited flat rate
access in Spain during the evening and on
weekends and national holidays for Ptas.2,750 per
month. For this price, users receive unlimited
telephone calls to connect to the internet during
such periods. In addition, in September 2000 we
launched flat rate access in Chile under which
users receive unlimited telephone calls to
connect to the internet for a fixed price.
Professional and Family
Access We target SOHO customers with advanced features
such as multiple e-mail accounts with large disk
space capacity, multi-user access and higher file
transfer speed. We also offer services to assist
SOHO customers in creating their own e-commerce
sites. The pricing for this product includes both
subscription fees and value-added service fees.
In some countries, we provide a special family
access. This product targets the family segment
by offering specific features not included in
other products such as a filtering service that
blocks access to certain URL addresses. In
addition, we plan to enable users of the family
product to access some of our value-added sites
without payment of an additional fee.
ADSL Access In October 1999, we launched ADSL broadband
internet access in Spain. We also began to offer
ADSL in Brazil in November 1999 on a limited
basis, and are currently offering it throughout
Brazil wherever the local telephone company has
the appropriate infrastructure available. We are
planing to offer it in Peru in the second half of
2000. We also plan to offer it in Chile, Central
America and the United States. We are prepared to
offer broadband service in other markets as
competitive conditions dictate. Our ADSL products
consist of internet access with speeds of 256,512
and 2,000 Kbps and a series of value-added
services such as virtual private networks (not
available in Spain).
Mobile Access We expect to launch GSM and Wireless Application
Protocol (WAP) access services in the future
through our joint venture with Telefonica
Moviles.
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<PAGE> 108
Access Revenues
Our internet access products generate one or a combination of three sources
of revenue for us:
- subscription fees;
- traffic-inducement fees (we began earning traffic-inducement fees in
Spain in October 1999, in Guatemala in May 2000 and in El Salvador in
July 2000, and traffic-related fees in Chile and Mexico in the first
quarter of 2000); and
- value-added service fees.
Approximately 35% of our customers at June 30, 2000 pay subscription fees
for basic internet access. The remaining portion subscribe to our free access
product.
We believe that free access is a viable model when revenue sharing with the
telephone operator is possible and attractive. In Spain, our customer base grew
by 110,000 people from June 14, 1999 to July 18, 1999, the first five weeks
after the introduction of free access, thereby generating significant additional
opportunities for traffic-inducement revenues despite the lack of subscription
fees. In Brazil, we launched free ISP at the beginning of February 2000 and
added 105,000 new free subscribers by the end of that month. We launched free
ISP at the beginning of March in Chile and Mexico, which led to our customer
base growing by 13,400 and 100,000 new free subscribers, respectively, by the
end of the month. At June 30, 2000, approximately 65% of our ISP customer base
consisted of free access customers. We expect that our subscription fee revenue
will decrease as a percentage of total revenue as free access becomes more
popular in those countries where we offer it, as we extend free access to other
markets when competitive conditions require, and as we develop other sources of
revenue such as value-added service fees.
We have the opportunity to earn additional fees for features that can be
added to our basic internet access service, including:
- filtering capabilities, which allow businesses to block access to
certain URL addresses; and
- roaming, which allows a customer to access the internet while in another
country for the price of a local telephone call. We plan to offer
roaming to all of our customers in Spain. We already provide roaming in
all cities within our network (more than 100), as well as international
roaming in Brazil, throughout more than 50 cities in Mexico, and through
I-Pass, a roaming services provider, in Guatemala and in Chile. We
expect to offer this product in Peru and in the United States in the
second half of 2000.
We plan to extend most value-added services we offer to all of our ISP
markets, and to increase the range of these value-added services to include:
- short messages to mobile telephones;
- voice and fax over IP;
- video streaming; and
- video conferencing.
Infrastructure and Customer Support
Infrastructure. We provide our customers with advanced technology
infrastructure to make our internet access services reliable, secure and
efficient.
Customers connect to our internet access services with dial-up connections
through local telephone companies in the countries in which we operate.
Telefonica group companies operate local telephone companies in Spain, Brazil,
Peru and Chile, although customers can connect to our ISPs using competing local
service providers. Through points of presence, or POPs, our customers connect to
data centers that house our servers, which are connected via leased lines to the
internet.
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In Spain, Peru and Chile, we lease our data network, including POPs and internet
connectivity links, from members of the Telefonica group. In Mexico and
Guatemala, we own POPs, and in Brazil we own and lease POPs from local
technology partners. In both Brazil and Mexico, we lease internet connectivity
lines from local operators. In Spain, Peru, the United States and Chile, we
share our leased POPs with other ISPs. We are the exclusive users of our owned
POPs. With our extensive network of POPs, most of our customers can use our
services to connect to the internet with a local call.
We own all of our servers, which route user traffic to its final
destination. Our servers are housed in data centers in major cities in the
countries in which we operate. These data centers are owned and operated by
local technology partners.
We believe the telephony infrastructure in the countries where we currently
operate is sufficient to accommodate our business and our anticipated growth.
The following table summarizes the ownership of our technology
infrastructure and the percentage of each country's population that can use our
services to connect to the internet with a local call as of June 30, 2000.
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
CONNECTION TO OF POPULATION
DATA NETWORK DATA CENTERS COVERED BY LOCAL CALL
------------- ------------ ----------------------
<S> <C> <C> <C>
Spain.......... 140 leased POPs 1 data center located 100%
in Madrid and operated
by the Telefonica
group
Brazil......... 35 owned POPs 2 data centers located 38%
75 leased POPs in Porto Alegre and
Sao Paulo and operated
by Terra Networks
Mexico......... 49 owned POPs 1 data center located 90%
in Monterrey and
operated by Terra
Networks
Peru........... 7 leased POPs 1 data center located 100%
in Lima and operated
by the Telefonica
group
Chile.......... 7 leased POPs 1 data center located 90%
in Santiago and
operated by the
Telefonica group
Guatemala...... 1 leased POPs 1 data center operated 20%
1 owned POPs by Terra Networks
United Data centers in each
States....... 748 leased POPs of Hackensack, NJ, 80% of the U.S. Hispanic
161 owned POPs operated by IDT, population
Andover, MA, operated
by Navisite, Herden,
VA, operated by
Exodus, and Miami, FL,
operated by Terra
Networks
</TABLE>
We plan to connect our Latin American sites to the Spanish and U.S. sites.
We believe that this will enable us to provide our customers with enhanced
services.
We monitor our network, services and applications at all times. We operate
platforms in Brazil and Mexico and, through our current partner IDT and
ourselves in the United States in order to
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supervise our data networks, servers and systems that are used in connection
with our internet access services. In Spain, Peru, Guatemala and Chile we rely
on members of the Telefonica group to supervise network operations and provide
us with virtually constant feedback. Our close involvement in our infrastructure
allows us to maintain a strong local presence and to better serve our customers.
We rely on the operators of our data centers to ensure the physical integrity of
our servers against fire, flood and, where appropriate, earthquakes, and each
data center is equipped with backup electrical service provided by its own
on-site generators. In addition, all of our data centers are equipped with
access control systems.
Customer Support. We maintain customer support facilities in each country
where we operate an ISP. Our support facilities handle multiple account issues
for our customers, ranging from initial sales and sign-up to technical support
and account administration. Our facilities maintain databases that allow
customer support staff to track purchase history, payment history, caller
history and contact history, and report, analyze and solve technical issues in
an efficient and organized manner. We maintain lists of frequently asked
questions in order to respond to common queries.
We also offer internet-based online self-help. Most questions come from new
users, and an online list of frequently asked questions allows our customer
service representatives to address a large number of new users' questions
efficiently. In Brazil and Mexico, for example, our customers are able to access
their accounts online and change their service plans. New customers can
subscribe to our service online.
We outsource most of our customer support facilities related to our access
business to Atento Holdings, S.A., a member of the Telefonica group. We expect
that this outsourcing will enable us to be cost-efficient without sacrificing
quality of service.
PORTAL SERVICES
We currently operate portals customized for internet users in Spain,
Brazil, Mexico, Argentina, Peru, Chile, Guatemala, the United States, Venezuela,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Uruguay and Colombia. In
June 2000, our portals generated more than one billion page views. We recently
launched in the United States an English-language portal targeted at the U.S.
Hispanic population. We plan to launch portals in one or more additional Latin
American countries by the end of 2000.
Each of our portals features content that is customized to the local market
it serves, presented in the local idiom, because language and vocabulary differ
significantly from region to region. For example, our Mexican portal offers
Mexican news and sports information, as well as "celebrity chat" features with
well-known Mexican personalities. Our Brazilian portal features Brazilian news
and sports information, and celebrity chats with well-known sports
personalities, as well as links to 51 city specific gateways where users receive
information relating to communities within Brazil as of June 30, 2000.
We are able to offer local content through partnering with established
providers who focus on the particular local market, such as Grupo Estado in
Brazil, Grupo Reforma in Mexico and Consorcio Periodistico de Chile in Chile. In
addition, each of our portals offers content that is of interest to users in
more than one country, presented in Spanish or Portuguese. We are able to offer
or plan to offer this content through our partnerships with leading
international providers, such as Buena Vista (Disney Blast), MTV and Reuters. We
are the exclusive internet content provider for certain entities in our markets,
such as Agencia Estado, one of the largest media groups in Brazil, and Isto E,
one of the largest magazine publishers in Brazil. We seek exclusive
relationships with content providers where possible. In addition, we use our
extensive market research to adapt our content continuously to be responsive to
what is relevant and interesting to our users from region to region.
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<PAGE> 111
Our multi-local/global model allows us to create an internet "home" for our
users, and transforms our portals into the final internet destination for many
of our users. We believe that our multi-local/global model is instrumental in
differentiating our portals from competitors.
Background
We have built our portal business through strategic acquisitions in Spain,
Brazil, Mexico, Argentina and Venezuela, and have created our own portals in the
other markets we serve. We have built our own portal to target the U.S. Hispanic
market. The table below provides information about our principal portal brands.
<TABLE>
<CAPTION>
MILLIONS OF PAGE VIEWS IN
DATE ACQUIRED OR ----------------------------------------
PORTAL LAUNCHED DECEMBER 1999 MARCH 2000 JUNE 2000
------ ---------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Terra Spain....................... April 1999 89.2 134.7 175.0
Terra Brazil...................... June 1999 266.7 389.4 537.8
Terra Chile....................... September 1999 7.3 15.8 25.0
Terra Mexico...................... September 1999 67.3 115.7 156.4
Terra Peru........................ September 1999 0.5 2.0 5.2
Terra Argentina................... November 1999 2.8 5.3 10.4
Terra United States............... January 2000 -- 55.4 112.4
Terra Central America(1).......... March 2000 -- 5.9 6.5
Terra Venezuela................... April 2000 -- 3.3 3.5
----- ----- -------
Total................... 433.8 727.5 1,032.2
===== ===== =======
</TABLE>
---------------
(1) Includes portals in Guatemala, El Salvador, Panama, Costa Rica, Nicaragua
and Honduras.
Content
We design each of our portals as a one-stop gateway where both content and
advertising reflect the specific country's culture, idioms and tastes. Our
portals offer a broad range of functionality, which we believe is instrumental
in enabling users to build online communities organized around topics or areas
of interest. Being part of an online community encourages a user to contribute
actively to the dialogue and content within the community, and therefore
enriches the user's online experience. We believe that fostering online
communities will encourage users to return to our portals repeatedly. This in
turn will make our portals attractive to internet advertisers. Our portals offer
or we expect they will offer:
Online communities and
chat....................... These services create online communities where
users can interact in group or one-on-one
discussions. These communities include broad
interest areas like sports, science and current
events. Users can meet in a variety of ways,
including through personal postings and in
discussion forums. Our users can host their own
scheduled chats, create their own interest-specific
rooms or participate in moderated celebrity events.
Instant messenger.......... This service allows our users to quickly exchange
messages with their online friends. Unlike e-mail,
instant messages appear as soon as they are sent.
Directories and yellow
pages...................... We offer online directories and yellow pages to our
users in partnership with Telefonica Publicidad e
Informacion, a member of the Telefonica group.
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<PAGE> 112
E-mail by phone............ This service allows our users to hear their e-mail
messages with their telephone.
Free e-mail................ We had over 3 million registered e-mail users at
June 30, 2000, including approximately 2,000,000 in
Spain, 396,000 in the United States, 572,000 in
Mexico, 110,000 in Chile, 55,000 in Argentina and
24,000 in Venezuela.
Our Spanish free e-mail allows users to access
electronic mail from any computer with a standard
web browser.
Personal pages............. This service allows our users to build their own
personal page.
Search engines............. We provide our users with powerful and
sophisticated search capabilities to carry out
extensive searches in our portals. We currently
feature Altavista, Magallanes, Inktomi and
Realnames search engines.
Unified messaging.......... We plan to offer this service which handles voice
messages and e-mail messages through a web site,
beginning in the second half of 2000.
Virtual disk............... This free service gives our users storage space on
the internet that can be accessed anywhere,
anytime.
Voiceover IP............... This service allows our users to make calls through
the internet rather than through a conventional
telephone.
Web fax.................... This service allows our users to send messages from
their personal computer to a fax machine.
In addition to these services, our portals also include a number of
channels that feature content grouped around a common theme. A particular
channel may feature local content, global content, or a mixture of the two.
Users can personalize some channels so that they will be alerted to current
information of particular interest to them. In addition, many channels provide a
convenient link to our chat communities and bulletin boards, where users can
share experiences through an on-going communication process. In this manner
these channels reinforce our strategy of helping users build vibrant online
communities. Some of the channels our portals typically feature include:
Art........................ News, picture galleries and educational content
focused on the arts.
Computing.................. Access to a large number of public domain and
"shareware" software programs that users can
transfer to their own disks, as well as links to
hardware and software vendors.
Culture.................... News, books, releases and literary articles of
cultural interest.
Current events............. Current events and other information as they occur.
Education.................. Information on courses, schools and new
developments.
Employment................. Information on opportunities in the job market.
Finance.................... Market news, research reports and an online
investment portal.
Food....................... Information on foods, restaurants and recipes.
Games...................... Downloadable games, tricks and batches of popular
video games.
Health..................... News, reports and articles related to general
health issues.
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Home and family............ News related to family issues, health and fashion,
including a wide range of links to fashion web
sites.
Internet................... News regarding internet business and legal issues,
and virtual communities for users interested in
internet-related topics.
Leisure.................... A wide range of news and articles related to music,
television and tourism.
Media and Marketing........ News and information about journalism, marketing
and the media business.
Science.................... News, educational information, and games targeting
users with specific interest in scientific topics.
Shows...................... News and reviews of movies, theatre and other
entertainment.
Society.................... Links and news related to social issues, such as
the environment.
Sports..................... Local and global sport news and information
including results, commentary and analysis.
Teens...................... Information and services targeted to the teenager
audience, including jokes, chats and bulletin
boards.
Tourism.................... Information and services regarding popular places
to visit.
Content Partnerships. Our network of third-party content providers is a
crucial element of our multi-local/global portal model. We have arrangements
with leading local and international content providers in order to offer rich
and varied content across our portal network.
We feature content from the following content providers:
Agencia EFE................ News
AP......................... News
Bloomberg.................. Financial news (Brazil only)
Buena Vista (Disney
Blast)..................... Entertainment
Knight Ridder.............. News and other content from the Miami Herald
Mondosonoro................ Music
Motor Press................ Automobiles
MTV........................ Music
Quokka Sports.............. Sports news
Reuters.................... News and financial news (executed for our Spanish
and Latin American portals)
Uproar Networks............ Games
Urano...................... Interactive Television
Whatis.com................. Computer Dictionary
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In addition, our portals feature or will feature local content from the
following providers, among others:
SPAIN
Estudio Brainstorm......... Games and content relating to science
Vinculo Media.............. Entertainment news and other content
Guia TV.................... Television programming information
La Buena Mesa.............. Content relating to gastronomy
Historia 16................ Content relating to art and history
DTM........................ Real estate information
G&J........................ Magazines
BRAZIL
Grupo Estado............... News and other content
Grupo RBS.................. Local news and other content
Carta Capital.............. Financial and business information and other
content
Casseta & Planeta.......... Entertainment information and other content
Grupo Jayme Camara......... News and other content
Diario do Grande ABC....... News
MEXICO
Grupo Reforma.............. Local and national news, sports and entertainment
information, interactive content such as "celebrity
chats", online classified ads, video clips and
other content
UNITED STATES
Miami Herald............... News and other content
CHILE
Consorcio Periodistico de
Chile (COPESA)............. News and other content
COLOMBIA
El Tiempo.................. News and other content
Semana..................... Magazines
Community-Generated Content. In addition to content provided by third
parties, all of our portals feature community-generated content through services
such as Almas Gemelas (personal ads in Brazil), LimaLimon (personal ads in
Mexico), Comunidades Virtuales (online communities), Bolsas de Trabajo (job
markets) and Encuestas (opinion polls). Community-generated content strengthens
the local character of each of our portals and reinforces our strategy of
providing information and services that are relevant to our users' daily lives.
Revenues
Our portal business earns revenues principally from advertisers. Our
multi-local/global portal model creates a rich variety of online products that
allows us to be an attractive host to online advertisers. We host and serve
advertising, and also strategically direct internet traffic to web sites
designed, maintained or promoted on our network. We strive to be more than a
seller of advertising space. Instead, we position ourselves as a solution
provider with global reach, but with a strong local focus. This allows us to
attract advertisers with international and local advertising needs, as well as
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advertisers with purely local needs. Our strategy is further reinforced by our
network of sales offices. All sales offices can book advertising for any of our
portals. For example, a Spanish advertiser interested in reaching the Mexican
market can book advertising for our Mexican portal through our office in Madrid.
In addition, our portal business has strong synergies with our access,
e-commerce, advertising and internet solutions businesses. We encourage portal
users to become access customers, and we drive portal traffic to our e-commerce
sites. Our e-commerce activities in turn help us attract advertisers, who are
able to reach consumers at the exact moment they are ready to buy. We believe
success in our e-commerce and advertising businesses will attract companies that
seek to use our internet solution services, such as web design and hosting.
We attempt to maximize our advertising revenues, which we derive
principally from:
- advertising arrangements, under which we earn revenues mainly based on a
cost-per-thousand-impressions basis or based on the number of days an
advertisement is displayed; and
- sponsorship arrangements, under which we earn revenues based on the
number of impressions delivered or days the sponsorship is displayed,
plus exclusivity fees for displaying advertisements only from our sponsor
in the particular product category; we may in addition earn revenues for
helping the sponsor design and customize the campaign for our users.
We provide advertisers with a variety of different advertising options,
including:
- traditional banner advertising;
- banner advertising with enhancements, such as audio and video;
- pop-up windows;
- contextual link advertising;
- sponsorship;
- integrated advertising;
- direct marketing; and
- e-mail advertising.
Although we attract advertisers by offering a variety of competitive
products, we work to retain them with excellent service. In order to provide the
best service to our advertising clients, we provide advertisers with detailed
and timely information on their target markets and the effectiveness of their
campaigns, and with recommendations on how to improve their campaigns.
We have built a dedicated advertising client service team that focuses on
maintaining close relationships with major advertisers and leading advertising
agencies throughout our core markets. This team is focused solely on selling
advertising on our portal network. Our sales team is complemented by our
telemarketing department, since many accounts can be more efficiently serviced
by telephone and e-mail.
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Our efforts have attracted local and global advertisers such as:
<TABLE>
<S> <C> <C>
- Audi - Daimler Chrysler - Oracle
- Banco Bilbao Vizcaya Argentaria - Dell Computer - Patagon
- Bankinter - Ford - Petrobras
- Banamex - Heineken - Pfizer
- Bradesco - Iberia - Renault
- British Airways - IBM - SAP
- Caja Madrid - Intel - Saraiva
- Canon - Kodak - Siemens
- Chevrolet - Nortel Networks - Unibanco
- Compaq Computer - Ogilvy - Visa
</TABLE>
Marketing and Brand Awareness
Our marketing efforts are designed to help us increase our customer base
and consolidate our leadership in the Spanish, Latin American and U.S. Hispanic
portal markets. Our marketing campaigns principally target the residential and
SOHO markets, as well as advertisers and vendors. Central to our marketing
efforts are the following strategies:
- actively participating in the development of portal and ISP markets in
Latin America;
- continuously expanding our portal customer base and achieving strong
customer loyalty;
- creating large communities of local portal users;
- creating messages tailored to local markets;
- aggressively building our brand name; and
- rapidly responding to market changes by introducing new products and
services.
Developing Portal and ISP Markets. We actively participate in developing
portal and ISP markets in Latin America, Spain and the United States. We conduct
extensive market research in order to understand the needs of users in
particular markets. We believe that people will come to associate our brands
with the internet through our efforts.
Expanding Our Portal and ISP Customer Base and Achieve Strong User
Loyalty. We design our local marketing efforts to introduce the use of the
internet into the everyday lives of our potential customers. We believe that out
marketing campaigns, affordable pricing, dedicated customer service and strong
local presence will help us attract new customers. In addition, we actively
exploit synergies between our access business and our portal business by
configuring our portals as the default web page in all of our ISP connection
software.
We plan to continue to commit substantial resources to building strong user
loyalty. In order to retain existing customers, we will work to ensure that our
portal services are the most competitive in the market, and we will adapt our
portal offerings according to our customers' demands. We are committed to
ensuring that our customers receive the information that they need every day.
Creating Large Communities of Local Portal Users. We are working to build
large local communities of portal users within each of our core markets of
Spain, Latin America and the U.S. Hispanic population. We believe that we will
be able to attract new users to our portals with our strong brand name, and will
build on the strength of our brand name to help make TERRA the most
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recognized portal brand in the Spanish- and Portuguese-speaking world. We seek
to create strong communities by:
- encouraging a sense of community among users by allowing users to create
and share their own content;
- creating brand loyalty; and
- improving our advertising and e-commerce offerings by using our data
warehousing capabilities to profile the interest and habits of our
users.
Aggressively Building Our Brand. We believe that building our brand is
essential to attract, retain and obtain revenue from our potential internet user
base, and we plan to aggressively build our global brand name, TERRA. During
2000 we began migrating our local brands, such as ZAZ, Chevere and Infosel, to
our global brand, TERRA. Terra is a global brand which we position as a local
brand, or "glocal". We use advertising and public relations to build our brands,
including advertising on radio, newspapers, television, online advertising,
public billboards, direct marketing, public relations, interactive ads and
special ads. Through our advertising efforts, we seek to:
- introduce potential customers to our brand;
- identify our brand with the highest quality products, services and
customer support; and
- build a strong media presence, which we believe should cause internet
users to identify our brand with portal services in their countries.
Rapidly Responding to Market Changes. We believe that responding quickly
to changes in the internet market will keep our brand competitive. We plan to
continue to enter into new strategic alliances with local and global content
providers to introduce new products to market in the shortest amount of time. To
this end, we seek to enter into alliances with global partners who can
contribute state-of-the-art technologies to our operations.
Terra Mobile
In July 2000, we and Telefonica Moviles, S.A. established Terra Mobile,
S.A. to develop and operate mobile internet portals accessible from wireless
devices. We will own 49% of Terra Mobile and Telefonica Moviles will own 51%. It
is expected that Terra Mobile will offer a wide range of content and services
through its portals, including:
- information services, such as news and entertainment listings;
- information management and personal communications services, such as
agendas and e-mail;
- entertainment services, such as games; and
- e-commerce services, which will permit users to purchase products and
services from their mobile handsets.
The Terra Mobile portals are expected to be launched in the second half of
2000.
On July 12, 2000, Terra Mobile agreed to acquire IOBOX OY, a Finnish
company specializing in the development and provision of internet services for
mobile telephones, for approximately E215 million. Such purchase price may be
adjusted based upon specified criteria.
Infrastructure and Customer Support
We support our portal and e-commerce services with our proprietary servers.
Our scalable network architecture is redundant and fully-distributed, which
enables several servers to support one service. In this way, we help ensure that
our customers' page views will not be interrupted upon
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server failure. We employ high levels of security, including hardened servers
and firewalls to protect against intrusion.
Our network architecture is structured with sets of front-end and back-end
servers that handle high user traffic and large volumes of information. Our
front-end servers employ load balancing systems to manage users' requests, which
enables our systems to respond to user requests in less than one second.
Back-end servers are grouped in high availability configuration clusters and
provide critical support for information intensive applications, our content
databases and storage. The following table summarizes the monthly capacity of
our servers in our largest markets as of June 30, 2000.
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM MONTHLY PAGE
MONTHLY VISITS VIEWS
-------------- ------------
(MILLIONS) (MILLIONS)
<S> <C> <C>
Terra Spain..................................... 40 200
Terra Brazil.................................... 30 800
Terra Mexico.................................... 75 450
Terra United States............................. 12 135
</TABLE>
The various features on our portals are implemented using a combination of
our proprietary software applications, software applications developed by our
content providers, and software technologies developed by global leaders such as
Microsoft, Netscape, Allaire and Oracle. We also integrate technology from
industry leaders to provide us with the ability to monitor and track traffic on
our portals, demographic characteristics of our users and advertising reports.
We believe that this combination of software components is more reliable and
scalable than single-source solutions.
We provide online user support through e-mail as well as web pages with
answers to frequently asked questions and general tips.
E-Commerce Activities
We plan to build on our leading position in the access and Spanish- and
Portuguese-language portal markets to penetrate the developing e-commerce market
in Spain and Latin America.
Today, most e-commerce transactions are concentrated in a narrow range of
products. These are products that require price comparison (like airline
tickets) or extensive research (like purchasing a personal computer or personal
computer software), or those that are standard (like books and compact disks),
so that the user knows exactly the product he or she is buying. eStats expects
that much of the growth in e-commerce will be in purchases of these products.
According to Jupiter, a telecommunications and an e-commerce consulting firm, in
1998 sales of products over the internet consisted of the following:
<TABLE>
<CAPTION>
1998 PERCENTAGE OF
PRODUCT OR SERVICE E-COMMERCE MARKET
------------------ ------------------
<S> <C>
Computer hardware and software............................. 49%
Travel..................................................... 23%
Books...................................................... 14%
Music...................................................... 5%
Other...................................................... 9%
</TABLE>
We intend to play a leading role in the development of e-commerce in the
Spanish- and Portuguese-speaking world. Our e-commerce strategy is based on:
- creating a selected network of partners to capture value in every part
of the e-commerce chain;
- facilitating our customers' purchases in a secure and reliable internet
environment; and
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- developing a complete solution that covers the entire spectrum of the
e-commerce business.
Selected Network of Partners. We are developing our e-commerce solutions
with global and local leaders in each product category. We believe that this
will enable us to extract more value from the business than being a simple
e-commerce platform provider. To this end, our goal is to enter into strategic
alliances and joint ventures with global and local leaders in each product
category. For example, in the fast-growing sector of online travel, in July 1999
we agreed to create a 50/50 joint venture with Amadeus Global Travel
Distribution, S.A., a global leader in the travel industry that operates a
travel reservation and distribution system, to develop a web site for travel and
related services targeted at the Spanish- and Portuguese-speaking world. This
joint venture is expected to commence commercial operations in Spain in mid-2000
and in Brazil and Mexico later that year. This web site will provide our users
with news articles and in-depth profiles and other information about travel
destinations, as well as with the ability to research and purchase flights,
hotels, rental cars and vacation packages in real time. We will contribute
travel-related news and content to the site, and will advertise the site on our
portals, while Amadeus will contribute its expertise in the travel industry and
electronic distribution know-how. We have agreed to be exclusive partners for
travel-related internet services throughout the Spanish- and Portuguese-speaking
world, where we each currently enjoy a strong presence.
In January 2000, we entered into a strategic alliance with Banco Bilbao
Vizcaya Argentaria, S.A. to collaborate on the development of new internet
services and applications. As part of this agreement, we agreed to take a
significant minority stake in Uno-e Bank, the online bank being developed by
Banco Bilbao Vizcaya Argentaria. In addition, Banco Bilbao Vizcaya Argentaria
acquired 3% of our share capital from Telefonica at the market price. In March
2000, we announced the proposed merger of Uno-e Bank and First-e group plc to
create UnoFirst Group, expected to become the first global on-line bank and
financial services provider. On July 3, 2000, an agreement was executed in order
to commence the implementation of the merger. We expect that the merger will be
completed at the beginning of 2001. In accordance with the agreement, we and
Banco Bilbao Vizcaya Argentaria will own through a holding company 67.5% of
UnoFirst. Banco Bilbao Vizcaya Argentaria will own 51% and we will own the
remaining 49% of such holding company. First-e's current sole shareholder, Enba
plc, an Irish e-finance incubator company, or Enba's existing shareholders will
own the remaining stake of UnoFirst. Under the agreement, which is subject to
certain conditions and approvals, we and Banco Bilbao Vizcaya Argentaria will
contribute our interests in Uno-e Bank to UnoFirst, subscribe to a E362 million
capital increase in UnoFirst and pay Enba E291 million. Enba will contribute its
interests in First-e to UnoFirst.
In March 2000, we entered into an agreement with Logista, Banco Bilbao
Vizcaya Argentaria and Todisa, a member of the Bertelsmann AG group, to develop
a logistic platform for Spain and Latin America. The new company, which is
called S3P, will provide logistical and distribution services, such as billing,
packaging and payment monitoring, to businesses in the e-commerce field.
In September 2000, we entered into a joint venture with Meta4 to create a
virtual "business-to-employee" marketplace that will offer a comprehensive range
of interactive services and products for the management of human resources
within companies. The new venture is expected to be launched initially in Spain.
We also have a network of local e-commerce partners, including:
SPAIN
Banco Zaragozano (consumer
bank).................... Banco Zaragozano is a Spanish bank. We have a
strategic alliance with Banco Zaragozano to
facilitate VISA credit card payments for e-commerce
purchases mode through our Spanish portal.
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La Caixa (savings bank).... In October 1999, we entered into an agreement with
the Spanish bank La Caixa to develop a service that
will allow internet users to reserve and purchase
tickets for entertainment events over the internet.
From our Spanish portal, users are able to purchase
tickets for movies, sporting events, and musical,
dance and theatrical performances taking place in
principal cities throughout Spain. The backbone of
this service, ServiCaixa, is an automatic teller
machine network already operated by La Caixa.
TelePizza.................. TelePizza is a leading fast food company in Spain
with over 500 Spanish stores at December 31, 1999
and extensive experience in delivering products to
homes. We have a joint venture agreement with
TelePizza to develop an electronic commerce
platform that will offer the rapid delivery of
convenience products such as videos, books, compact
disks, food, etc. The joint venture, A tu hora,
S.A., was incorporated on July 28, 2000.
El Corte Ingles............ In January 2000, we entered into a strategic
alliance with Spain's leading department store, El
Corte Ingles, to sell computer hardware, software
and other accessories through our Spanish portal.
According to the terms of our agreement, we will
provide technical support for the site and the
marketing efforts and a division of El Corte Ingles
will manage the product offerings, product delivery
and customer service.
GTI (Software)............. GTI, Cia de Distribucion de Software is a leading
Spanish software company that sells software,
computer hardware and other accessories through our
Spanish portal.
BRAZIL TCE (electronics)... TCE is a Brazilian retailer of electronics,
including computers. We are the exclusive
e-commerce partner of TCE on Spanish- and
Portuguese-language portals.
Farmacia Panvel
(pharmaceuticals)........ Farmacia Panvel is southern Brazil's largest
pharmacy chain. We are the exclusive e-commerce
partner of Farmacia Panvel on Spanish- and
Portuguese-language portals.
Cia. Hering (clothing)..... Cia. Hering is a Brazilian manufacturer of
clothing. We are an e-commerce partner of Cia.
Hering on our Brazilian portal.
Se Supermercados
(grocery).................. Se Supermercados is a leading supermarket in
metropolitan Sao Paulo. We are the exclusive
e-commerce partner of Se Supermercados on Spanish-
and Portuguese-language portals.
MEXICO Mexicana de Aviacion
(travel)................... Mexicana de Aviacion is a leading Mexican airline.
We provide our portal users with a "virtual
counter" through which they can make reservations
and purchase tickets.
TravelNet (travel)......... TravelNet provides travel itineraries and packages
online. We are the exclusive e-commerce partner of
TravelNet on Spanish- and Portuguese-language
portals.
Facilitating Purchases in a Secure and Reliable Environment. We design our
e-commerce solutions to make internet shopping easier for our customers and to
reduce their concerns about the security of web-based purchases. We have
introduced a search tool that enables our U.S. customers
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to input desired criteria, such as type of product, price and other
characteristics, in order to search the databases of participating e-commerce
stores to find their goods. We expect to introduce this service in other markets
throughout 2000. In addition, we assist our customers in making large purchases
online by providing access to automated financing capabilities. We work closely
with companies specializing in e-commerce security to provide our customers with
state-of-the-art security measures on all of our e-commerce sites.
Developing a Complete E-Commerce Solution. We are currently building a
range of e-commerce applications that will allow us to compete in all current
e-commerce businesses:
- Business-to-consumer platform for small- and medium-sized
enterprises. We plan to develop a complete business-to-consumer
e-commerce platform that will enable small and medium-sized enterprises,
or SMEs, to sell their products on the internet. This platform will:
-- provide vendors with e-commerce infrastructure, including hosting
and web-design services;
-- support the consumer's purchase decisions though directories, search
engines, advertising and product aggregation;
-- assist in closing the transaction, and arranging for payment and
delivery of the product; and
-- facilitate the vendor's post-sale services and support.
- Consumer-to-consumer e-commerce. We plan to develop a complete
consumer-to-consumer e-commerce platform that will enable consumers to
sell their products on the internet. Our most significant activity to
date is our strategic alliance with Aremate.com, Inc., which is known
throughout Latin America as Deremate.com, one of Latin America's leading
online auctioneers.
- Business-to-business e-commerce. We are developing vertical e-commerce
portals that provides business- to-consumer and business-to-business
services. We also plan to develop business-to-business e-commerce
solutions through alliances with leaders in this category. We have
identified business-to-business e-commerce services oriented to SMEs to
be an area of growth. Therefore, we intend to offer these services to
SMEs, including complete e-commerce platforms, corporate web site
development and electronic shopping mall creation.
In Brazil, we work with companies like Cia. Suzano, one of Brazil's
largest paper manufacturers, to create corporate extranet sites that
allow business customers to view product offerings, place orders online
and view past invoices. In June 1999, we launched our "Virtual
Distributor" product, a standardized extranet that companies can use to
publish product catalogues, store corporate customer databases and
receive orders from customers.
We also develop business-to-business e-commerce solutions and assist
companies in developing extranets to connect distributors, remote sales
personnel and customers in Mexico. Our leading business-to-business
e-commerce service, which was launched in the second half of 1998,
allows companies to connect with their corporate suppliers in order to
place orders online and review invoices.
In addition, in February 2000, we and Sun Microsystems Inc. entered into
a memorandum of understanding to jointly develop technological projects
for the creation and distribution of services via the internet. The
agreement contemplates our launching a gateway "StarPortal" in all of
the countries where we operate. This gateway will enable business
customers to access office applications such as word processing and
spreadsheets through the internet.
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Revenues
We began to earn e-commerce revenues during the first half of 2000. We
derive e-commerce revenues from commissions that we earn on each product or
service sold on our network. The amount of commissions that we receive depends
on the agreement with the supplier. In addition, we seek to capitalize on other
revenue streams that we can earn based on our involvement in every part of the
e-commerce value chain.
STRATEGIC INVESTMENTS
We have investments in various internet businesses. These businesses
represent a source for new opportunities for future growth and creation of
shareholder value. We intend to apply our existing commercial and technological
knowledge to maximize value creation in new ventures by actively participating
in their operation, by contributing personnel and technology resources. In
addition to our individual investments, we plan to partner with other leading
venture capital firms in order to make certain other strategic investments.
Our investment philosophy is guided by our desire to identify internet
businesses that:
- provide us with competitive advantages;
- enable us to position ourselves as a leader in existing and new markets;
and
- offer the potential for attractive returns on our investments.
Corporation Real Time Team, S.L. We own 25% of Corporation Real Time Team,
S.L., known as Tecknoland, with an option to acquire another 26%, as described
under "-- Overview -- History." Founded in February 1995, Corporation Real Time
Team is a developer of online services and interactive products such as online
advertising campaigns, virtual communities and online stores.
Ifigenia Plus, S.L. In July 2000 we increased our stake in Ifigenia, a
Spanish company, from 10% to 100%. Ifigenia develops and provides digital
content on topics including Spanish education, culture, art, entertainment and
tourism. We paid E3.9 million at the closing of the transaction and will make a
further payment one year from the closing based on certain performance criteria.
Aremate.com. In February 2000, we entered into a strategic alliance with
Aremate.com, Inc., which is generally known throughout Latin America as
Deremate.com. Aremate.com is one of Latin America's leading online auctioneers.
Under the alliance, we agreed to purchase a 30% interest in Aremate.com in
exchange for $45 million and received an option to buy an additional interest
for $10 million by January 2001 if Aremate.com has not previously registered its
shares in the United States.
CORPORATE SERVICES
In addition to providing internet access and portal services, we provide
corporate services in Mexico such as Infosel Financiero, a financial information
service, and electronic trading services that facilitate fixed-income trading
activity among banks and brokerage firms.
Infosel Financiero, launched in 1990, provides real-time stock prices,
stock indexes, financial news and trend analysis to market professionals in
Mexico and New York, competing with services such as Reuters and Bloomberg. This
service accounted for 46% of Infosel's 1999 revenues.
Infosel operates LINCE, a proprietary electronic trading network for
fixed-income securities. LINCE's participants are primarily banks and brokerage
firms in Mexico. LINCE participants input to the network prices and quantities
of fixed-income securities that they want to sell or buy. These orders are
visible to other LINCE participants, who can accept the sell or buy order over
the network. Transactions executed over the LINCE network are settled through
customary mechanisms not involving Infosel, and Infosel does not hold
participants' funds. Fees generated by LINCE accounted for 4% of Infosel's 1999
revenues.
Infosel has entered into a memorandum of understanding with Remate
Electronico S.A. de C.V., the Mexican affiliate of Cantor Fitzgerald, a U.S.
interdealer broker. Under this MOU, Infosel and
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Remate Electronico have agreed to combine their Mexican electronic trading
operations. Infosel will provide and maintain the LINCE hardware and technology,
and will provide technical support. Infosel will retain ownership of the LINCE
technology along with the LINCE trademark. Infosel will have the exclusive right
to distribute transaction information through its financial information service.
Remate Electronico will manage the venture and control the customer
relationships, and initially will own the venture, although the legal form of
the venture has not been determined. Remate Electronico will be entitled to all
revenues earned by the venture. Infosel will earn a technology license fee equal
to 20% of these revenues. A portion of this license fee will be paid to Infosel
in the form of shares in the venture until Infosel's ownership interest in the
venture equals 20%.
In addition, Infosel operates an electronic information transmission system
that operates through a private TCP/IP network between companies, called EDI
Comercial. It is used for business-to-business transactions, allowing its
customers to exchange orders and manage their inventories. Clients are charged a
fixed amount per year for access to this service and fees depending on the
number of orders and size. This service accounted for 4% of Infosel's 1999
revenues.
In Brazil, we offer corporate services such as web hosting services and web
design and maintenance.
COMPETITION
The Spanish, Latin American and U.S. Hispanic markets for internet access,
portal services and e-commerce are very competitive. We expect that intense
competition in these areas will increase as:
- the number of strategic alliances among our competitors continues to
grow;
- internet use in Spain and Latin America continues to grow;
- technological developments introduce new platforms for internet access;
and
- an increased number of global and local companies enter these markets.
Increased competition could result in:
- loss of users;
- loss of market share;
- reduced growth of page views;
- price reductions and lower profit margins; and
- lower advertising rates.
Any one of these could materially and adversely affect our business,
financial condition and results of operations.
ACCESS SERVICES
We believe that the ability to compete successfully in the internet access
market in Spain, Latin America and the U.S. Hispanic community depends on a
number of factors including:
- strength of local brand names;
- speed and reliability of technology infrastructure;
- quality of customer support;
- the availability of financial resources to support our growth strategy;
- adequacy of access services; and
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- presence in news access systems, cellular phones, cable tv, etc.
In Spain, we compete primarily with full-service telecommunications
operators that offer internet access services, and in Latin America we compete
with local as well as global ISPs. In the U.S., we compete with both local
full-service telecommunications operators and local ISPs. Our principal
competitors include:
<TABLE>
<CAPTION>
COUNTRY ACCESS PROVIDER
------- ---------------
<S> <C>
Spain.............................. Retevision, Jazztel, Airtel, BT, Uni 2
Brazil............................. Universo Online, IG, PSI Net
Mexico............................. Microsoft/Telmex, IFX, PSI Net
Peru............................... RCP
Chile.............................. ENTEL, PSI Net, Unete
United States...................... America Online, Microsoft, Earthlink, AT&T
</TABLE>
Some of these competitors have longer operating histories and greater name
recognition in some markets, and may make more attractive offers to companies to
distribute their products.
We believe that we are in a good position to compete with each of these
competitors. We believe that we have competitive advantages based upon our
extensive technology infrastructure, strong local brand names and dedicated
customer support. We plan to continue to focus on our ability to provide
state-of-the-art technology to our customers in order to provide them with
faster and more reliable internet connections, and to strengthen our local
brands.
PORTAL SERVICES
We believe that our ability to compete successfully in the portal services
market in Spain, Latin America and the U.S. Hispanic community depends on
several factors, including:
- quality of customer experience on the portal site;
- quantity and quality of content provided on the portal site, including
its relevance to local customers and how often it is updated;
- exclusivity of content and services;
- creation of a sense of a community;
- brand recognition; and
- customer service.
Our principal competitors include:
<TABLE>
<CAPTION>
COUNTRY PORTAL
------- ------
<S> <C>
Spain................................ Ya.com (T-Online), Yahoo! Espana,
Eresmas Interactiva (Retevision)
Brazil............................... Universo Online, Starmedia
Mexico............................... Telmex, El Sitio
Peru................................. El Comercio
Chile................................ ENTEL, Universo Online
United States........................ Starmedia, Yupi, El Sitio
Argentina............................ El Sitio, Universo Online
Colombia............................. El Colombiano, Yupi
</TABLE>
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Many of these competitors, as well as a number of potential new
competitors, may have longer operating histories in the portal services market,
greater name recognition in some markets and greater financial and technological
resources. These competitors may be able to undertake more extensive marketing
campaigns for their brands and services, and make more attractive offers to
content providers in order to enter into exclusive arrangements with them.
We also compete with traditional forms of media like newspapers, magazines,
radio and television for customers, advertisers and advertising revenue. If
advertisers perceive the internet or our portals to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budget to internet advertising or to advertising on our
portals.
We believe, however, that we are in a good position to compete with these
portal service providers. Our competitive advantages include:
- strong presence in our key markets;
- our multi-local/global approach to content;
- extensive relationships with local and global partners and content
providers;
- our strong local brand names;
- in-depth understanding of local markets and customer needs; and
- dedicated customer support.
We plan to continue to enhance our ability to provide varied, exclusive
content and interactive services and to build on the strength of our local
brands to increase the value of our global portal brand.
E-COMMERCE SERVICES
We believe that our ability to compete successfully in the
business-to-consumer, consumer-to-consumer and business-to-business e-commerce
markets in Spain, Latin America and the U.S. Hispanic community depends on
several factors, including:
- customer confidence relating to the security of web-based purchases;
- quality and variety of product offerings by industry leaders; and
- end-to-end services, from providing vendors with e-commerce
infrastructure to providing post-sale service and support to vendor and
consumer.
We compete with global e-commerce providers. Many of our competitors may
have greater name recognition in some markets, adopt more aggressive advertising
pricing policies and be able to enter into more attractive partnerships with
leading product suppliers.
GOVERNMENT REGULATION
To date, regulations have not materially restricted use of the internet in
our markets. However, the legal and regulatory environment that pertains to the
internet is uncertain and may change. New laws and regulations may be adopted.
Existing laws may be applied to the internet and new forms of e-commerce.
Uncertainty and new regulations could increase our costs and prevent us from
delivering our products and services over the internet. It could also slow the
growth of the internet significantly. This could delay growth in demand for our
network and limit the growth of our revenues. New and existing laws may cover
issues like:
- sales and other taxes;
- user privacy;
- pricing controls;
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- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement;
- financial services;
- consumer banking;
- pornography; and
- other claims based on the nature and content of internet materials.
SPANISH REGULATION
The main Spanish law governing telecommunication services (including the
ISP business) is Law 11/1998, of April 24, on Telecommunications ("Law
11/1998"), as further developed by Royal Decree 1652/1998, of July 24, and
Ministerial Order dated September 22, 1998. This regulatory framework governs
licenses and authorizations for the provision of telecommunication services and
the establishment and development of telecommunication networks.
Under Law 11/1998 and the related regulations, entities providing,
establishing or developing value added telecommunication services in the form of
ISP services must apply for a "Type C General Authorization" and be registered
with a special official registry maintained by the Telecommunications Market
Commission (Comision del Mercado de las Telecomunicaciones, hereinafter "CMT").
Ten years after registration, and every ten years after that date, any holder of
a Type C General Authorization must notify the CMT whether or not it intends to
continue providing the relevant authorized services. Failure to notify the CMT
would cause the registration to be revoked. As a general matter, Type C General
Authorizations may also be revoked if the holder ceases to render the relevant
authorized services or if applicable regulations are breached by the holder of
such license.
Consumer Protection. Spanish general laws and regulations on consumer
protection, contract conditions, competition and advertising generally apply to
portal and electronic commerce services, as well as to internet content, to the
same extent they would apply to any provider of services to consumers in Spain
unrelated to the internet. The main Spanish consumer protection law is Act
26/1984 on General Protection of Consumers and Users. Act 26/1984 generally
addresses consumer protection, misleading advertising and unfair contracts. Such
general legislations applies to portal and e-commerce services, as well as the
internet content, to the same extent it would apply in any provider of goods and
services to consumers in Spain unrelated to the internet. The expected growth
and demand for online commerce has led the Spanish authorities to adopt Royal
Decree 1906/1999 on the General Terms of Telephonic or Electronic Contracts.
This Royal Decree established special duties for the companies offering such
contracts. In particular, it permits the consumer to cancel the contract within
seven days of purchase.
E-commerce. E-commerce operations are not currently regulated in Spain,
but may become subject to considerable regulation in the future. The Spanish
authorities are developing legislation relating to e-commerce in two main areas:
electronic signatures and e-commerce activities. The Spanish government has
approved Royal Decree 14/1999 on Electronic Signatures, establishing the legal
requirements for electronic signatures and permitting the admissibility of
electronic signatures as evidence in legal proceedings.
EU and Privacy. Given the global nature of the internet and the
possibilities for developing electronic commerce activities, as well as the need
for uniformity with respect to relevant regulations
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in different jurisdictions, the European Commission is currently involved in
developing directives relating to digital services and the legal aspects of
electronic commerce within the EU.
EU Directive 95/46/EC of October 24, 1995 and EU Directive 97/66/EC of
December 15, 1997 regulate consumer privacy which may involve the automated
processing of personal information or inclusion of such data in a database. The
processing of personal data must be carried out with consent or be necessary for
the performance of a contract, among other things. The EU Directives, however,
permit, under certain circumstances, that personal data be used or disclosed to
a third party in the context of legitimate ordinary business activities or for
the purposes of commercial marketing. Spain has adopted legislation implementing
the standards required by the 1995 directive, which has been in effect since
January 14, 2000.
Tariffs. Prices for internet access paid by consumers are determined in
Spain by the internet access providers like us. Some internet service providers
offer these services free of charge, while others charge fees to be paid usually
on an annual, bi-annual, quarterly or monthly basis. Holders of general
authorizations, such as the Type C General Authorization we have, are required
to pay an annual tariff to the Spanish State based on the relevant licensee's
gross operating income. Such annual tariff is determined on a yearly basis, with
a cap of 0.2% of gross operating income. In 1999, the rate was fixed at 0.15%
thereof and this rate has not been modified for year 2000.
Other than VAT, there are no specific taxes levied on ISP, portal or
electronic commerce services in Spain.
LOCAL REGULATION
Discussed below is a brief summary of the laws and regulations applicable
to our principal Latin American operations.
Brazilian Regulation. The Brazilian House of Representatives is currently
considering a law governing e-commerce that will, among other things, subject
internet service providers to civil and criminal sanctions if they knowingly
provide services that allow illegal goods or services to be sold on the
internet. This bill would also require internet service providers to keep
confidential all non-public information that was transmitted or stored on its
network, unless a court orders that such information may be disclosed.
Furthermore, the Brazilian National Telecommunications Agency is considering
regulating the ability of internet service providers to use cable networks to
provide internet access.
Mexican Regulation. The Federal Telecommunications Commission in Mexico
requires that providers of value added services must register these services
with the Telecommunications Commission prior to offering them to the public. If
a provider of value added services does not register each service with the
Commission, the Commission can impose a de minimis fine. We are in the process
of registering all of our services with the Commission. We have registered the
following services with the Commission: e-mail, voice-mail, fax, internet,
electronic exchange of data and database long distance access.
Argentine Regulation. Under Argentine law, the Argentine National
Government does not regulate or control the information available on the
internet, and does not intervene in the production, creation or transmission of
the information available through the internet. However, Argentine laws and
regulations on consumer protection, contract, competition and advertising
generally apply to portal and electronic commerce service providers in the same
way as they would apply to any provider of services to consumers in Argentina.
In addition, the Argentine Constitution protects a person's right to know the
information that any public or private database contains about him or her, and
grants that person the right to demand that information be changed or removed
from the database if that information is false or discriminatory.
Peruvian Regulation. A provider of value added services, such as us, must
register with the Ministry of Transports, Communications, Housing and
Construction. This registration may be
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cancelled if provision of a value added service causes harmful interference to
the network over which it operates.
General laws and regulations on consumer protection, contract, competition,
copyright and advertising apply to portal and electronic commerce service
providers in the same way that they would apply to any other provider of goods
or services.
Chilean Regulation. Chilean law regulates consumer privacy with respect to
automated processing of personal information or the inclusion of such
information in a database. An entity can process personal information only if
the statute authorizes it or if the person provides consent to use that personal
information. Chilean law permits an entity to use personal data without consent
under limited circumstances, such as information obtained from public sources.
Venezuelan Regulation. Data Protection in Venezuela is mainly regulated by
Articles 28, 48, 60 and 143 of the National Constitution. In general, these
constitutional rights have not been developed by laws or regulations and,
therefore, the limits and the terms and conditions under which private parties
may exercise those rights (including data protection when using internet
protocol) are not yet determined.
United States Regulation. The Federal Trade Commission recently issued a
rule that governs the online collection of personal data from children under the
age of 13, including a requirement to obtain parental consent to collect,
disclose and use that information.
On June 30, 2000, the U.S. Electronic Signatures in Global and National
Commerce Act became effective. This act
- removes some barriers to internet commerce by providing that contracts
formed online have the same force of law as pen and paper contracts;
- seeks to provide a single, national regulation of electronic signatures
and transactions;
- protects consumers by requiring an express "opt-in" to the electronic
delivery of information; and
- eliminates many traditional paper-based record-keeping requirements.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We pursue the registration of our trademarks on a global basis, with
particular emphasis on the United States, Spain and Latin America. We believe
that we will be able to secure adequate protection for our trademarks in the
United States and other countries.
We are in the process of registering the TERRA brand in the countries where
we operate. The trademark TERRA has already been granted in Spain, Brazil,
Mexico, Chile, Nicaragua, Uruguay, the United States, Venezuela, Peru and the
Dominican Republic (in this country as TERRA.COM). We currently hold trademark
registrations for OLE in Spain and INFOSEL in Mexico, and we have applied for
registration of the ZAZ trademark in Brazil. The granting of the trademark in
all other countries in which it was applied for is still pending, although the
processing of the trademark applications is following its normal course.
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We hold trademarks and registrations for these marks in some other
countries as well. Policing unauthorized use of our marks is also difficult and
expensive. In addition, it is possible that our competitors will adopt product
or service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion.
We actively seek to protect our marks against similar and confusing marks
of third parties by:
- using a watch service that identifies applications to register
trademarks;
- filing oppositions to third parties' applications for trademarks; and
- bringing lawsuits against infringers.
Trademark infringement actions may be time-consuming and expensive. Our
inability to effectively protect our trademarks and service marks would have a
material adverse effect on our business, financial condition and results of
operations.
Many parties are actively developing chat, home page, search and related
web technologies. We expect these developers to continue to take steps to
protect these technologies, including seeking patent protection. There may be
patents issued or pending that are held by others and that cover significant
parts of our technology, business methods or services. For example, we are aware
that a number of patents have been issued in the areas of e-commerce, web-based
information indexing and retrieval and online direct marketing. Disputes over
rights to these technologies are likely to arise in the future. We cannot be
certain that our products do not or will not infringe valid patents, copyrights
or other intellectual property rights held by third parties. We may be subject
to legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. In the event that we
determine that licensing this intellectual property is appropriate, we may not
be able to obtain a license on reasonable terms or at all. We may also incur
substantial expenses in defending against third-party infringement claims,
regardless of the merit of these claims. Successful infringement claims against
us may result in substantial monetary liability or may prevent us from
conducting all or a part of our business.
We also intend to continue to license technology from third parties,
including our web-server and encryption technology. The market is evolving and
we may need to license additional technologies to remain competitive. We may not
be able to license these technologies on commercially reasonable terms or at
all. In addition, we may fail to successfully integrate any licensed technology
into our services. Our inability to obtain any of these licenses could delay
product and service development until alternative technologies can be
identified, licensed and integrated.
ORGANIZATIONAL STRUCTURE
OUR RELATIONSHIP WITH THE TELEFONICA GROUP
We are currently a majority-owned subsidiary of Telefonica, S.A., a leading
diversified telecommunications and multimedia group.
We are the principal company through which the Telefonica group develops:
- internet access services for residential and SOHO customers through
dial-up access and broadband;
- internet portals and the full range of services that can be provided
through internet portals; such as news shopping and online chat;
- online advertising and marketing solutions; and
- e-commerce activities.
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We expect to generate significant future growth opportunities by building
on our relationship with the Telefonica group, and we plan to continue to do so
by capitalizing on our access to Telefonica's:
- telecommunications and infrastructure assets in Spain and Latin America;
- global and local media assets;
- customer relationships throughout Spain and Latin America across a
variety of access media;
- research and development capabilities for the development of new
communication technologies and value-added services;
- access to leading content-providers and e-commerce companies; and
- strong presence and reputation in the capital markets.
Telefonica's Customer Base
The Telefonica group serves approximately 60 million customers in Spain and
Latin America across a wide range of distribution platforms, including at
December 31, 1999:
- 37.6 million fixed-line telephone customers;
- 19.5 million wireless and mobile communications customers; and
- 1.0 million pay-TV customers.
Although most users today access the internet through a dial-up connection
over the public switched telephone network, we believe that IP distribution
platforms will continue to evolve in the future. We believe that internet users
will increasingly access internet content through their wireless devices,
personal digital assistants and other platforms. Our access to the Telefonica
group's customers who are already using these future IP platforms will enable us
to respond quickly to new technological developments. In order to take full
advantage of the anticipated proliferation in IP access media, we expect to
enter into alliances and joint ventures with other Telefonica group companies.
For example, we and Telefonica Moviles are establishing a joint venture to
develop a wireless internet portal.
Telefonica's Telecommunications and Infrastructure Assets
The Telefonica group's principal telecommunications and infrastructure
interests in Spain, Latin America and Europe include:
<TABLE>
<CAPTION>
1998
POPULATION OF
COMPANY COUNTRY SERVICE AREA SERVICES PROVIDED
------- ------- ------------- -----------------
(MILLIONS)
<S> <C> <C> <C>
Telefonica de Espana, S.A. ...... Spain 39 Basic telephony, long distance
services, public telephony and
leasing and sale of equipment and
terminals
Telefonica Servicios Moviles,
S.A. .......................... Spain 39 Mobile telephony
Telefonica Data, S.A. ........... Spain 39 Paging and data transmission
Telefonica Publicidad e
Informacion.................... Spain 39 Directory publications
Atento Holding
Telecomunicaciones............. Spain 39 Customer relations and management
services
</TABLE>
V-34
<PAGE> 131
<TABLE>
<CAPTION>
1998
POPULATION OF
COMPANY COUNTRY SERVICE AREA SERVICES PROVIDED
------- ------- ------------- -----------------
(MILLIONS)
<S> <C> <C> <C>
Telefonica Cable S.A. ........... Spain 39 Cable-modem transmission
Telefonica Compania de
Telecomunicaciones de Chile.... Chile 14.8 Basic telephony, long distance
services, public telephony,
mobile telephony, leasing and
sale of equipment and terminals,
cable television paging and data
transmission.
Telefonica de Argentina, S.A. ... Argentina 36 Basic telephony, long distance
services, mobile telephony,
paging, yellow pages, and
value-added services
Telefonica del Peru, S.A.A. ..... Peru 26.1 Basic telephony, long distance
services, mobile telephony,
paging, cable television, data
transmission and yellow pages
CRT Celular, S.A. ............... Brazil 9.5 Cellular telephony
Telecominicacoes de Sao Paulo,
S.A. -- Telesp................. Brazil 34.1 Basic telephony, public
telephony, data transmission,
value-added services, telephone
directories and 300 service
Tele Sudeste Celular
Particapacoes S.A. ............ Brazil 16.6 Cellular telephony
Tele Leste Celular Participacoes
S.A. .......................... Brazil 14.5 Cellular telephony
Telesp Celular Participacoes
S.A. .......................... Brazil 34.1 Cellular telephony
Telefonica El Salvador, S.A. .... El Salvador 5.8 Comprehensive telecommunications
services
European Telecom International
GmbH........................... Austria 8 Long distance services and data
transmission
Azienda Comunale Energia e
Ambiente-Telefonica, SpA....... Italy 5.2 Voice, data and internet services
Medi Telecom..................... Morocco 27.3 Cellular telephony
Telefonica de Centroamerica
S.A. .......................... Guatemala 12.0 Comprehensive telecommunications
services
Compania Anonima Nacional de
Telefonos de Venezuela C.A.
(CANTV)........................ Venezuela 23.2 Comprehensive telecom services
Tele-Escucha, S.A. .............. Guatemala 12.0 Radio paging services
Telefonica Larga Distancia de
Puerto Rico, Inc............... Puerto Rico 3.8 Long-distance services
</TABLE>
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<PAGE> 132
Telefonica's Media Assets
The Telefonica group's principal media assets in Spain, Latin America and
Europe include:
<TABLE>
<CAPTION>
1998
POPULATION OF
COMPANY COUNTRY SERVICE AREA SERVICES PROVIDED
------- ------- ------------- -----------------
(MILLIONS)
<S> <C> <C> <C>
Telefonica Media, S.A. ........... Spain 39 Holding company for Telefonica's
media assets
Gestora de Medios Audiovisuales
Futbol, S.A. ................... Spain 39 Sports rights, mainly Spanish
soccer
Telefonica Servicios
Audiovisuales, S.A. ............ Spain 39 Satellite uplink and television
production infrastructure
Uniprex, S.A...................... Spain 39 Radio stations
Atlantida Comunicaciones.......... Argentina 36 Free television, radio stations
and publishing
Telefonica Media Argentina
S.A. ........................... Argentina 36 Sports rights, multimedia
Endemol Entertainment Holding
N.V. ........................... Netherlands 16 Television production
Telefonica Multimedia de Peru
(Cable Magico).................. Peru 26.1 Cable television
</TABLE>
In addition, the Telefonica group has interests in the following media
companies:
<TABLE>
<CAPTION>
1998
POPULATION OF
COMPANY COUNTRY SERVICE AREA SERVICES PROVIDED
------- ------- ------------- -----------------
(MILLIONS)
<S> <C> <C> <C>
Antena 3 TV, S.A............... Spain 39 Free television
DTS Distribuidora de Television
Digital, S.A................. Spain 39 Satellite digital pay
television under the brand Via
Digital
Lolafilms, S.A................. Spain 39 Movie production
Torneos y Competencias......... Argentina 36 Free television and sports
rights
Patagonic Film Group........... Argentina 36 Multimedia content production
Pearson plc.................... United Kingdom 59 Publishing and content
production
</TABLE>
Possible Conflicts with Other Members of the Telefonica group
The board of Telefonica, S.A. formally resolved in August 1999 that we
would be the vehicle through which the Telefonica group would develop the
internet activities then being undertaken by us. At the time, these activities
included the residential and SOHO access services and most of the portals and
e-commerce activities described in this proxy statement/prospectus.
Nevertheless, other companies in the Telefonica group may engage in activities
such as e-commerce and other interactive businesses as well, and some of these
may overlap with our activities. For example, regulatory constraints require
some Telefonica group companies to make their services available to our
competitors. In addition, Telefonica de Argentina, S.A., which is a full service
telecommunications operator in Argentina, operates an ISP and a portal targeting
the residential and SOHO markets. Although Telefonica has announced its
intention to operate its businesses along global business lines, these
activities are not at present a part of us.
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<PAGE> 133
In the future, as the scope of internet businesses continues to expand,
Telefonica S.A. may be called upon to address competitive conflicts between us
and other companies in the Telefonica group. These conflicts would be addressed
by the executive committee of the Board of Directors of Telefonica, S.A.
SUBSIDIARIES
The following chart summarizes our interest in our principal subsidiaries
as of December 31, 1999.
<TABLE>
<CAPTION>
TERRA'S
COUNTRY OF OWNERSHIP TERRA'S
COMPANY INCORPORATION INTEREST VOTING POWER
------- ------------- --------- ------------
<S> <C> <C> <C>
Terra Networks Argentina, S.A................. Argentina 99.9% 99.9%
Netgocios S.A................................. Argentina 100.0% 100.0%
Donde Latinoamericana S.A..................... Argentina 100.0% 100.0%
Telefonica Servicios y Contenidos por la Red,
S.A......................................... Spain 100.0% 100.0%
Ifigenia Plus, S.L. .......................... Spain 10% 10%
Terra Interactiva de Contenidos, S.A.......... Spain 100.0% 100.0%
Ordenamiento de Links Especializados (Ole).... Spain 100.0% 100.0%
Advertising Quality, S.L. .................... Spain 50% 50%
Plataformas Tematicas Internet, S.L. ......... Spain 40% 40%
Telefonica Interactiva Brazil Ltda. .......... Brazil 99.9% 99.9%
Terra Networks Brazil, S.A.................... Brazil 96% 96%
Terra Networks USA, Inc....................... Florida, United States 100.0% 100.0%
Terra Networks Interactive Services USA,
L.L.C. ..................................... Delaware, United States 51% 51%
Terra Networks Portal Services USA, L.L.C. ... Delaware, United States 90% 90%
Terra Networks Guatemala, S.A................. Guatemala 95% 95%
Centro de Investigacion y Experimentacion de
Realidad Virtual, S.A....................... Spain 100.0% 100.0%
Corporacion Real Time Team, S.L. ............. Spain 25% 25%
Terra Networks Peru, S.A. .................... Peru 99.9% 99.9%
Terra Networks Mexico, S.A. de C.V............ Mexico 100.0% 100.0%
Informacion Selectiva, S.A.................... Mexico 100.0% 100.0%
Interdata Infosel, S.A. de C.V................ Mexico 100.0% 100.0%
Infoshare Communications, Inc................. Texas, United States 100.0% 100.0%
Guadalajara Teleport, S.A. de C.V............. Mexico 100.0% 100.0%
Terra Networks Chile Holding Limitada......... Chile 99.9% 99.9%
Terra Networks Chile, S.A..................... Chile 100% 100%
</TABLE>
PROPERTY, PLANTS AND EQUIPMENT
Our principal executive offices are located in approximately 3,000 square
meters of office space in Madrid, under a lease that expires in May 2002. We
plan to have some of our executive offices in Barcelona in the future. We also
lease office space in:
- Sao Paulo, Porta Alegre and more than 100 other locations throughout
Brazil;
- Monterrey, Mexico City, Guadalajara and more than 43 other locations
throughout Mexico;
- Bogota, Colombia;
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<PAGE> 134
- Santiago and Concepcion, Chile;
- Lima, Peru;
- Buenos Aires and Cordoba, Argentina;
- New York City, Miami, Los Angeles, Dallas, San Francisco and Chicago,
United States;
- Barcelona, Spain;
- Caracas, Venezuela;
- Tegucigalpa, Honduras; and
- Montevideo, Uruguay.
EXCHANGE CONTROLS
FOREIGN INVESTMENT AND EXCHANGE CONTROL REGULATIONS
In 1991, Spain adopted the European Union standards for free movement of
capital and services. As a result, exchange controls and restrictions on foreign
investments have generally been abolished.
Pursuant to Spanish Law 18/1992 on Foreign Investments (Ley 18/1992, de 1
de julio) and Royal Decree 664/1999 (Real Decreto 664/1999, de 23 de abril),
foreign investors may freely invest in shares of Spanish companies, except in
the case of certain strategic industries.
Shares in Spanish companies held by foreign investors must be reported to
the Spanish Registry of Foreign Investments by the depositary bank or relevant
SCLV member. When a foreign investor acquires shares that are subject to the
reporting requirements of the CNMV, notice must be given by the foreign investor
directly to the Registry of Foreign Investment in addition to the notices of
majority interests that must be sent to the company, the CNMV and the applicable
stock exchanges. This notice must be given through a bank or other financial
institution duly registered with the Bank of Spain and the CNMV or through bank
accounts opened with any branch of such registered entities.
Investment by foreigners domiciled in tax haven jurisdictions (countries
identified in Royal Decree 1080/1997 (Real Decreto 1980/1997, de 5 de julio) is
subject to special reporting requirements.
PREEMPTIVE RIGHTS
Pursuant to the Spanish Corporation Law, shareholders and holders of
convertible bonds have preemptive rights to subscribe for any new shares issued
by us, including the ordinary shares and for bonds issued which are convertible
into ordinary shares. These preemptive rights may be abolished in certain
circumstances if our shareholders pass a resolution at a shareholders' meeting
in accordance with Article 159 of the Spanish Corporation Law.
Shares issuable upon exercise of rights must be registered under the
Securities Act of 1933 in order to be offered to holders of ADRs. If Terra
Networks decided not to register the Shares, the rights would not be distributed
to holders of ADRs. Pursuant to the Deposit Agreement, however, the Depositary
will use its best efforts to sell the ordinary shares that it receives and will
distribute the proceeds of the sale to holders of ADRs.
LEGAL PROCEEDINGS
There are no material legal proceeding pending or to our knowledge
threatened against or affecting us except as noted below.
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<PAGE> 135
Telefonica CTC Chile has received communications from certain shareholders,
questioning certain aspects of our acquisition of our Chilean business,
including the purchase price paid by Terra Networks, the structure of the
acquisition and the actions of Telefonica CTC Chile's board of directors and
controlling shareholder in connection with the transaction. On June 5, 2000,
shareholders of Telefonica CTC Chile filed a legal claim against the directors
of Telefonica CTC Chile and Telefonica Mundo 188 who approved the acquisition,
as well as against the chief executive officers of both companies, alleging
damages in the amount of approximately $28.7 million. Telefonica CTC Chile is
not a party to this legal action.
Telefonica CTC Chile cannot ensure that a shareholder action will not be
brought against Telefonica CTC Chile or that, if brought, such action would not
result in an adverse decision which would materially adversely affect the
business, the consolidated financial position or results of operations of
Telefonica CTC Chile and its subsidiaries, considered as a whole. In addition,
we cannot guarantee that any action would not materially adversely affect our
business, financial condition or results of operations.
On May 5, 1999, the Spanish Telecommunications Commission instituted an
administrative proceeding against our subsidiary Telefonica Servicios y
Contenidos por la Red S.A. (TSCR) alleging anti-competitive behavior in
connection with a multimedia package that TSCR distributed. TSCR responded to
the claim in June 1999, and is awaiting final resolution. We do not believe that
an adverse resolution of this claim would materially affect its business.
The Spanish Agency of Data Protection instituted a proceeding against TSCR
on July 10, 1999. This claim states that TSCR wrongfully required subscribers to
provide certain financial information. On January 3, 2000 the Agency of Data
Protection imposed on TSCR a fine of E60 thousand. We have filed an
administrative judicial appeal against this decision.
Time Warner and Ole are engaged in a legal proceeding in Spain to resolve a
trademark dispute concerning the Ole trademark registered by us and the Mundo
Ole trademark registered by Time Warner. This proceeding is in its initial
stages. We do not believe, however, that an adverse resolution of this claim
would materially affect our business.
We have entered into an agreement with Telefonica Data Espana, S.A.
covering the traffic-inducement fees that Telefonica Data will pay us, as
described under "Operating and Financial Review and Prospects". The Spanish
Telecommunications Market Commission is currently examining this commercial
relationship. We cannot predict the outcome of this examination.
A Galician audio visual company, Terra GMC, S.L., has submitted a formal
notarial demand to us in connection with our use of the "TERRA" trademark. Terra
GMC, S.L. has requested that the registration of TERRA trademark by Terra
Networks be canceled and nullified and demands that they be awarded damages. We
have replied to this demand by serving Terra GMC, S.L. a formal notarial
communication, indicating that Terra GMC, S.L.'s only legal title to the "TERRA"
trademark derives from their corporate name, while Terra Networks' legal title
stems from both our corporate name, which has been duly recorded at the
Mercantile Registry, as well as the "Terra" trademark, which has also been duly
awarded and registered.
On October 19, 1999, upon the request of the "Asociacion de Internautas",
the Spanish Service for the Defence of Competition initiated a sanction
proceeding against Telefonica, S.A. and certain subsidiaries of the Telefonica
group (including Terra Networks) that conduct business in the ADSL market. The
proceeding relates to certain restrictive practices prohibited pursuant to the
Spanish Competition Act. However, we do not have a dominant position in the
relevant market or provide the relevant services to end users. The SDC has not
notified us of the facts which may constitute an infraction.
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<PAGE> 136
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data have been derived from our
consolidated financial statements appearing elsewhere in this proxy
statement/prospectus. The selected consolidated financial data set forth below
should be read in conjunction with the other information which appears in this
section as well as the consolidated financial statements and notes to those
statements appearing elsewhere in this proxy statement/prospectus.
In reading the information provided below, you should consider the
following:
- Our historical financial results are based on the financial results of
companies that were under the Telefonica group's control during the
periods presented. These companies operated our residential and SOHO ISP
business in Spain (but not our Spanish portal business) and our business
in Chile. Because these operations did not begin until December 1995,
financial data as of and prior to January 1, 1996 is not available. Our
business in Peru was not significant during the periods covered by our
consolidated financial statements. We acquired our:
- Spanish portal business in April 1999;
- Brazilian ISP and portal business in June 1999;
- Guatemalan ISP business in July 1999;
- Argentine portal business in September 1999;
- Mexican ISP and portal business in October 1999; and
- Venezuelan portal business in March 2000.
We have included the results of operations of these businesses in our
consolidated results of operations from the dates that we acquired them for
financial reporting purposes. Please see note 2(c) to our consolidated
financial statements appearing elsewhere in this proxy
statement/prospectus.
- We have agreed to acquire IDT's interest in both our joint ventures with
IDT that operate our U.S. ISP and portal joint ventures, respectively.
This acquisition has not yet closed. In addition, we acquired our
Colombian portal business in July 2000. These acquisitions are not
reflected in our historical consolidated financial statements.
- Because of these acquisitions, the introduction of free ISP in Spain in
June 1999, in Brazil in February 2000 and in Chile and Mexico in March
2000, and the introduction of limited flat rate access in Spain in July
2000 and in Chile in September 2000, among other factors, our historical
financial statements are not a reliable indicator of our future
performance.
- All information is presented in Spanish GAAP except as noted. The
principal differences between Spanish GAAP and U.S. GAAP are explained
in note 20 to our consolidated financial statements appearing elsewhere
in this proxy statement/prospectus.
- Financial data as of and for periods prior to January 1, 1999 were
restated from Spanish pesetas into euro using the exchange rate in
effect at January 1, 1999. See note 3 to our consolidated financial
statements appearing elsewhere in this proxy statement/prospectus.
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<PAGE> 137
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
(THOUSANDS OF EURO, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Access............................ 818 2,390 9,646 24,817 5,169 45,395
Advertising....................... -- 72 1,115 5,123 1,076 17,093
Other............................. -- 88 1,384 20,291 2,110 20,011
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............. 818 2,550 12,145 50,231 8,355 82,499
Operating expenses:
Goods purchased................... (708) (1,054) (8,475) (31,044) (10,399) (57,811)
Personnel expenses................ (661) (928) (3,175) (19,942) (3,424) (36,521)
Depreciation and amortization..... (123) (464) (701) (6,272) (763) (26,884)
Other............................. (658) (2,144) (5,555) (83,904) (11,608) (142,039)
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses
before financial
expenses.................. (2,150) (4,590) (17,906) (141,162) (26,194) (263,255)
----------- ----------- ----------- ----------- ----------- -----------
Operating loss...................... (1,332) (2,040) (5,761) (90,931) (17,839) (180,756)
Amortization of goodwill(1)......... -- (310) (339) (28,654) (3,227) (57,288)
Financial income (expense), net..... (25) (81) (90) 1,839 (85) 321
Equity share of affiliate losses,
net............................... -- -- -- (60) -- (4,789)
Extraordinary income (expense)(2)... 14 97 (562) (1,425) 1 (486)
Corporate income tax credit......... -- 363 1,334 35,899 4,109 76,158
Minority interest................... -- 465 1,673 1,928 1,725 1,718
----------- ----------- ----------- ----------- ----------- -----------
Net loss (Spanish GAAP)............. (1,343) (1,506) (3,745) (81,404) (15,316) (165,122)
=========== =========== =========== =========== =========== ===========
Net loss (U.S. GAAP)................ (1,343) (1,899) (5,061) (139,310) (21,836) (267,262)
Basic and diluted net loss per
ordinary share (U.S. GAAP)........ (0.007) (0.010) (0.026) (0.684) (0.112) (0.955)
Weighted average ordinary shares
outstanding....................... 193,525,585 193,525,585 193,525,585 203,763,953 194,085,972 280,000,000
Dividends per share................. -- -- -- -- -- --
</TABLE>
---------------
(1) Under U.S. GAAP goodwill amortization is included in operating expenses.
(2) Extraordinary income (expense) items under Spanish GAAP would not qualify
as extraordinary items under U.S. GAAP.
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, JUNE 30,
--------------------------------------- -----------
1996 1997 1998 1999 2000
------ ------ ------ --------- -----------
(THOUSANDS OF EURO)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash....................................................... 232 1,753 148 20,439 28,188
Working capital............................................ (2,122) (246) (3,701) 501,260 164,340
Total assets (Spanish GAAP)................................ 1,683 11,797 18,617 1,405,465 1,345,113
Total assets (U.S. GAAP)................................... -- 11,390 16,884 1,301,359 1,055,614
Total long-term obligations (Spanish GAAP)................. -- 183 221 15,183 41,597
Shareholders' equity (Spanish GAAP)........................ 1,190 2,998 3,593 1,233,527 1,071,173
Shareholders' equity (U.S. GAAP)........................... 1,172 2,603 1,882 1,129,471 835,561
Capital stock (excluding long term debt and redeemable
preferred stock)......................................... 150 1,332 5,589 560,000 560,000
</TABLE>
OVERVIEW
We provide internet access and local language interactive content and
services to Spanish- and Portuguese-speaking residential and small office/home
office, or SOHO, customers. We also recently launched an English-language portal
directed at the U.S. Hispanic market.
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<PAGE> 138
We have a limited operating history for you to use as a basis for
evaluating our business. You must consider the risks and difficulties frequently
encountered by early stage companies like ours in new and rapidly evolving
markets.
We have incurred significant net losses and negative cash flows since our
inception. Our losses have been funded primarily through shareholder
contributions and our initial public offering of our ordinary shares.
We have in the past and expect to continue to invest heavily in marketing
and brand development, acquired businesses, content enhancements, and technology
and infrastructure development. As a result, we believe that we will continue to
incur net losses and negative cash flows from operations for at least the next
few years. After that, depending upon competitive conditions and the dynamics of
the industry, we may continue to pursue a strategy that emphasizes strength of
market share and market presence at the expense of profitability. Moreover, the
rate at which these losses will be incurred may increase from current levels.
CHANGES IN THE COMPOSITION OF THE GROUP
In April 1999, Telefonica, S.A. transferred to us its existing ISP business
for Spanish residential and SOHO customers, which had been in operation since
December 1995. In October 1999, we acquired the residential and SOHO internet
activities of Telefonica group companies operating in Peru and Chile. Previously
each of these businesses had been under the control of Telefonica, S.A.
Therefore, our historical financial statements as of and for the years ended
December 31, 1997, 1998 and 1999 reflect the operations, assets and liabilities
of these businesses.
During 1999 we undertook a series of acquisitions of unrelated companies.
The most significant of these were our acquisitions of:
- Ordenamientos de Links Especializados, S.L., which operated the Ole
portal in Spain, and which we acquired in April 1999 for financial
reporting purposes;
- Nutec Informatica, S.A., which operated the ZAZ ISP, portal and other
online services in Brazil, and which we acquired in late June 1999 for
financial reporting purposes; and
- Informacion Selectiva, S.A. de C.V., which operated the Infosel ISP,
portal and other online services in Mexico, and which we acquired in
November 1999 for financial reporting purposes.
Our historical consolidated financial statements for the year ended
December 31, 1999 include these companies as of the dates we acquired them.
In addition, we have made several acquisitions in 2000. The most
significant of these was our acquisition of the Colombian portal laciudad.com,
which we acquired in July 2000 for financial reporting purposes. We also
acquired the Venezuelan portal Chevere in March 2000 for financial reporting
purposes and have agreed to acquire IDT's interest in both our joint ventures
with IDT that operate our U.S. ISP and portal businesses, respectively. This
transaction has not yet closed.
Please see "-- Overview -- History" for a more complete description of
these acquisitions.
BRAZILIAN AND MEXICAN OPERATIONS
We commenced our Brazilian operations with our acquisition of ZAZ in June
1999 and our Mexican operations with our acquisition of Infosel in October 1999.
As a result, our 1999 consolidated results of operations do not include a full
year of the results of operations of these businesses. Because of the
significance of these operations, we are including below a discussion of the
results of operations of each of such businesses during 1999 and the six months
ended June 30, 2000. Our operations in Brazil are currently conducted through
Terra Networks Brazil and our operations in Mexico are currently conducted
through Terra Networks Mexico.
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<PAGE> 139
Brazil -- ZAZ. ZAZ provides internet access and operates a portal serving
the Brazilian market. In addition, ZAZ provides corporate internet solutions
including web design and web hosting, and participates in the growing Brazilian
e-commerce market.
ZAZ has experienced rapid revenue growth in recent periods. For the six
months ended June 30, 2000, ZAZ recorded gross revenues of R$47.7 million
(expressed in Brazilian reais, ZAZ's reporting currency) (equivalent to E27.8
million at the June 30, 2000 exchange rate), a 141% increase over R$19.8 million
in gross revenues for the six months ended June 30, 1999. In 1999, ZAZ recorded
gross revenues of R$47 million, a 55% increase over R$30.4 million in gross
revenues for 1998. In 1998, ZAZ recorded gross revenues of R$30.4 million, a 53%
increase over gross revenues for 1997. Revenue growth from period to period has
been driven primarily by ZAZ's expanding ISP subscriber base and increased
revenues earned from portal advertising.
ZAZ's revenue growth has been matched by increases in operating expenses in
order to support its growing ISP subscriber base and other internet activities.
As a result, for the six months ended June 30, 2000 ZAZ recorded a loss from
operations of R$73.1 million, a 3,223% increase over a loss from operations of
R$2.2 million for the six months ended June 30, 1999. ZAZ recorded a loss from
operations of R$36 million for 1999, a 2,900% increase from R$1.2 million for
1998. In 1998, ZAZ recorded a loss from operations of R$1.2 million, an
improvement over the R$3.4 million loss for 1997.
Mexico -- Infosel. Infosel provides news and information to the Mexican
financial industry through its Infosel Financiero service, operates LINCE, an
electronic trading network for Mexican fixed-income securities, provides
internet access in Mexico and operates in the growing Mexican e-commerce market.
Infosel also operates an internet portal serving the Mexican market. Infosel is
one of the oldest participants in the Latin American online industry, having
first provided its Infosel Financiero service in 1990.
For the six months ended June 30, 2000, Infosel recorded net sales of
Ps.201.3 million (expressed in Mexican pesos, Infosel's reporting currency)
(equivalent to E22.1 million at the June 30, 2000 exchange rate), a 60% increase
over net sales of Ps.126.2 million for the six months ended June 30, 1999. For
the year ended December 31, 1999, Infosel recorded net sales of Ps.294 million,
a 17% increase compared to Ps.252 million in net sales for year end 1998. In
1998, Infosel recorded net sales of Ps.252 million, a 16% increase over net
sales for 1997.
Revenues from Infosel Financiero declined to Ps.55.2 million in the six
months ended June 30, 2000 compared to Ps.60 million for the six months ended
June 30, 1999 due to a minor decrease in our market share. Revenues from Infosel
Financiero increased by 1.5% to Ps.135 million for 1999 compared to 1998.
Primarily because of the lingering effects of the Mexican financial crisis,
revenues from Infosel Financiero declined 3% to Ps.133 million in 1998 compared
to 1997.
Revenues relating to LINCE declined to Ps.5.3 million in the six months
ended June 30, 2000 from Ps.6.5 million for the six months ended June 30, 1999.
Revenues relating to LINCE declined by 48% to Ps.12 million for 1999 compared to
Ps.23 million for 1998. The decrease in each period was primarily due to a
reduction in the volume of trading in the public debt markets during the period.
Revenues relating to LINCE for 1998 compared to 1997 remained relatively
unchanged.
Infosel has experienced substantial growth in operating expenses, primarily
those incurred to expand its growing internet operations. As a result, Infosel's
operating losses have increased substantially in recent periods. Infosel
recorded a loss from operations of Ps.304.8 million for the six months ended
June 30, 2000, a 1,338% increase from a loss from operations of Ps.21.2 million
for the six months ended June 30, 1999. Infosel recorded a loss from operations
of Ps.108 million for 1999. In 1998, Infosel recorded a loss from operations of
Ps.43 million, substantially exceeding the Ps.6 million operating loss for 1997.
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DOUBLECLICK IBEROAMERICA
In May 1999, an affiliate of Telefonica contributed to us its interest in
DoubleClick Iberoamerica, S.L., a company that provides internet advertising
services. DoubleClick Iberoamerica is a joint venture with DoubleClick Inc. In
November 1999 we dissolved this joint venture by selling our interest to
DoubleClick International Advertising Limited for E1.25 million, which gave rise
to extraordinary revenue of E720 thousand. For the year ended December 31, 1999,
DoubleClick Iberoamerica accounted for less than 3% of our operating revenues.
The results of operations of DoubleClick Iberoamerica are reflected in our
consolidated financial statements up to its sale because it operated under the
control of Telefonica, S.A.
INTRODUCTION OF THE EURO
The euro was introduced on January 1, 1999 and adopted by us at that time.
We have retroactively restated financial information for periods prior to the
introduction of the euro presented throughout this document using the exchange
rate fixed on January 1, 1999 of E1.00 = Ptas.166.386. The comparative financial
statements reported in euro depict the same trends that would have been
presented had we continued to present financial statements in Spanish pesetas.
However, financial information for periods prior to January 1, 1999 is not
comparable with that of other companies reporting in euro that restated these
amounts from a currency other than the Spanish peseta. Please see note 3 to our
consolidated historical financial statements for further information.
REVENUES
We generate access revenues, advertising revenues, e-commerce revenues and
other revenues. For the six months ended June 30, 2000, access revenues
represented approximately 55%, advertising revenues approximately 21%,
e-commerce revenues approximately 3% and other revenues approximately 21% of our
consolidated total revenues for the period. For 1999, access revenues accounted
for approximately 49%, advertising revenues accounted for approximately 10% and
other revenues accounted for approximately 40% of our consolidated total
revenues. We did not generate significant e-commerce revenues during 1999. In
addition, we derived 72% of our revenues for the six months ended June 30, 2000,
and 73% for the year ended December 31, 1999 in Latin America. On a pro forma
basis, we would have derived 24% of our revenues for the six months ended June
30, 2000 and 22% for the year ended December 31, 1999 in Latin America.
ACCESS REVENUES
We derive access revenues from subscriber fees paid by our customers for
dial-up access to our ISPs, traffic-inducement fees paid to us for traffic we
induce over a data network and value-added fees. Subscriber fees represented 45%
of our total consolidated revenues for the six months ended June 30, 2000, and
47% for 1999. On a pro forma basis, subscriber fees would have accounted for 15%
of our total consolidated revenues for the six months ended June 30, 2000, and
12% for 1999. Revenues from subscriber fees are recognized as service is
rendered, provided that collection of the resulting receivable is probable. In
addition to subscriber fees, we also earn advertising revenues in our access
business. These advertising revenues result chiefly from the display of
advertising on the homepages of our ISPs.
In June 1999, we introduced free ISP service in Spain. In addition, we
launched an extensive advertising campaign to promote our ISP service. This
effort produced a significant increase in the number of our subscribers.
Customers of our free ISP service do not pay subscriber fees. During the first
half of 1999, subscriber fees in Spain accounted for approximately 44% of our
total subscription revenues and approximately 27% of our consolidated revenues.
During the whole year, they accounted for approximately 10% of our total
subscription revenues and approximately 5% of our consolidated revenues. During
the first half of 2000, subscriber fees in Spain accounted for
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approximately 6% of our total subscription revenues and approximately 3% of our
consolidated revenues. We expect that the introduction of free ISP in Spain will
continue to substantially eliminate these subscriber fees.
In order to offset in part the loss of subscriber fees in Spain, we have
entered into an agreement with Telefonica Data Espana S.A. under which it pays
us traffic-inducement fees for usage of its data transmission network. We began
earning traffic-inducement fees on October 1, 1999. Our traffic inducement fees
are equal to the total number of minutes of traffic consumed by our Spanish ISP
customers who dial in using Telefonica Data Espana's network on a monthly basis,
multiplied by a factor as indicated below:
<TABLE>
<CAPTION>
FACTOR TRAFFIC INDUCED PER MONTH
(PESETAS/MINUTE) (MINUTES)
---------------- -------------------------
<S> <C>
0.38................................. From 0 up to 83,333,000
0.47................................. From 83,333,001 up to 208,333,000
0.57................................. From 208,333,001 up to 416,667,000
0.66................................. From 416,667,001 up to 625,000,000
0.76................................. From 625,000,001 up to 833,333,000
0.85................................. From 833,333,001 up to 1,041,667,000
0.95................................. From 1,041,667,001 up to 1,250,000,000
1.04................................. From 1,250,000,001 onwards
</TABLE>
Telefonica Data Espana provides traffic-inducement fees according to the
same schedule to all ISPs who induce traffic over its data transmission network.
Telefonica Data Espana has the ability to change this fee schedule
unilaterally upon the occurrence of regulatory changes affecting the
traffic-inducement agreement or changes in the amounts that Telefonica Data
Espana in turn receives from the telephone network operator for inducing traffic
over that network.
Traffic-inducement fees are recorded as minutes of usage are incurred.
These fees were generated beginning in the fourth quarter of 1999 and accounted
for approximately 13% of our ISP revenues in Spain and approximately 3% of our
consolidated revenues in 1999. For the six months ended June 30, 2000, they
accounted for approximately 53% of our ISP revenues in Spain and approximately
10% of our consolidated revenues. We entered into traffic-inducement agreements
in Guatemala and El Salvador in August 2000, with effect from May and July 2000,
respectively. Traffic-inducement fees under these agreements will be reflected
in our results of operations from the dates we entered into such agreements.
In February 2000, we introduced free ISP service in Brazil, and in March
2000 we introduced free ISP service in Chile and Mexico. We are currently
negotiating traffic-inducement arrangements in Brazil. However, we cannot
guarantee that we will be able to reach an agreement. Until any such arrangement
is in place, we will not earn subscription revenues or traffic-inducement fees
from users of our free ISP service in Brazil. In Chile, the telephone operator
receives 43% of the cost of a local call to connect to the internet and we
receive up to the remaining 57%. In Mexico, we have reached an agreement with a
backbone operator to share with us some of the benefits of the traffic we induce
to it. We account for these revenues in Chile and Mexico as traffic-inducement
fees.
We may offer free ISP service in other countries in the future.
Our traffic-inducement fees in Spain and elsewhere could be adversely
affected by the introduction of flat rates for telephone calls to connect to the
internet. Unmetered flat rates allow a user to pay a pre-set amount for
unlimited telephone calls to connect to the internet, instead of paying for each
call at the local rate. The Spanish government announced on June 23, 2000 plans
to introduce limited flat rate access in Spain beginning in November 2000. Under
the plan announced by the government, users will pay Ptas.2,750 (E16.53) per
month for unlimited telephone calls to
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connect to the internet during the evening and on weekends and national
holidays. The government has not yet announced the specific terms of such plan,
such as whether such fee will be paid to the access provider or the
telecommunications operator.
In July 2000, we introduced limited flat rate access in Spain under which
users pay us Ptas.2,750 per month for unlimited telephone calls to connect to
the internet during the evening and on weekends and national holidays. We do not
receive traffic inducement fees for such calls. Instead, we pay Telefonica Data
Espana a fee based on the aggregate minutes of traffic consumed. We may change
the terms of our plan following the establishment by the Spanish government of
the final terms of the plan to be introduced in November 2000. In addition, in
September 2000 we began offering flat rate internet access in Chile under which
users pay a fixed rate for unlimited telephone calls to connect to the internet.
Although we are continuing to evaluate the effect of the introduction of
flat rate internet access, it is possible that it could have a material adverse
effect on our business, financial condition and results of operations. We
expect, however, that any such effect will be offset over time as users spend
more time online because of the lower marginal cost of internet usage, which
should have a beneficial effect on our advertising and potential e-commerce
revenues.
We expect traffic-inducement fees and access revenues as a whole to decline
in the future as a percentage of our total revenues as demand for our
advertising and e-commerce services increases.
We have not generated significant value-added fees to date.
ADVERTISING REVENUES
We derive our portal revenues chiefly from advertising. Advertising
revenues accounted for 21% of our total consolidated revenues for the six months
ended June 30, 2000, and 10% for 1999. On a pro forma basis, advertising
revenues would have accounted for 51% of our total consolidated revenues for the
six months ended June 30, 2000, and 53% for 1999.
Advertising revenues are derived principally from:
- advertising arrangements under which we receive revenues, generally
based on cost per-thousand impressions;
- sponsorship arrangements that allow advertisers to sponsor an area on
one of our portals in exchange for a fixed payment; and
- fees for design, coordination and integration of advertising campaigns
and sponsorships to be placed on one of our portals.
Advertising and sponsorship rates generally depend on:
- whether the page views are for general audiences or targeted audiences;
- which of the specific channels on our portals display the advertising;
and
- the number of guaranteed page views, if any.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant obligations remain and
collection of the resulting receivable is probable. To the extent minimum
guaranteed page view levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. Payments received
from advertisers prior to displaying advertisements on our portals are recorded
as deferred revenues. Revenues from sponsorship arrangements are recognized
ratably over the contract term, provided that no significant obligations remain
and collection of the resulting receivable is probable.
We expect advertising fees to grow over the next few years. However, we
expect advertising revenue to decline as a percentage of our portal revenue as
our e-commerce revenue increases.
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E-COMMERCE REVENUES
We derive revenues from E-commerce transactions conducted through our
portals. Revenues from our share of the proceeds from sales are recognized on
notification of sales attributable to one of our portals. E-commerce revenues
accounted for approximately 3% of our total consolidated revenues for the six
months ended June 30, 2000. We accounted for these E-commerce revenues under
"other revenues". We did not have significant E-commerce revenues during 1999.
On a pro forma basis, e-commerce revenues would have accounted for 25% of our
total consolidated revenues for the six months ended June 30, 2000, and 23% for
1999. On a stand-alone basis without accounting for the Lycos transaction, we
expect E-commerce revenues to comprise a significant portion of our portal
revenue base, primarily because of:
- our plans to actively develop this part of our business, for example
through continuing to enter into strategic alliances with product and
service providers;
- our expectation that consumers will spend increasing amounts of money on
E-commerce transactions; and
- our expectation that increasing competition from other access providers
and portal operators will put increased pressure on our ability to earn
access and advertising revenues, which today account for the bulk of our
revenues.
OTHER REVENUES
We derive other revenue from corporate services such as web hosting
services and web design and maintenance, financial information services, such as
Infosel Financiero, LINCE, our electronic trading network, and our electronic
information transmission system, EDI Commercial. Other revenues accounted for
approximately 21% of our consolidated revenues for the six months ended June 30,
2000 and approximately 40% for 1999. On a pro forma basis, other revenues would
have accounted for 7% of our total consolidated revenues for the six months
ended June 30, 2000, and 11% for 1999.
We expect our other revenues to decline as a percentage of our total
revenue over the next few years as our advertising and E-commerce revenues
increase.
OPERATING EXPENSES
GOODS PURCHASED
Expenses relating to goods purchased include telecommunication expenses,
expenses recorded for the purchase of customer connection kits and modems,
technical help desk expenses and expenses relating to the purchase of
advertising space. Goods purchased accounted for approximately 22% of our
consolidated operating expenses before financial expenses and amortization of
goodwill both for the six months ended June 30, 2000 and the year ended December
31, 1999. On a pro forma basis, goods purchased would have accounted for
approximately 15% of our consolidated operating expenses before financial
expenses and amortization of goodwill for the six months ended June 30, 2000,
and approximately 13% for 1999.
PERSONNEL EXPENSES
Personnel expenses include all expenses associated with salaries and other
employee benefits, regardless of the job classification of the employee.
Personnel expenses accounted for approximately 14% of our consolidated operating
expenses both for the six months ended June 30, 2000 and the year ended December
31, 1999. On a pro forma basis, personnel expenses would have accounted for
approximately 39% of our consolidated operating expenses before financial
expenses and amortization of goodwill for the six months ended June 30, 2000,
and approximately 55% for 1999.
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We have established an employee stock option plan. In connection with our
stock option plan, all of the plan shares have been transferred to two banks at
book value. The banks have in turn granted options to us to purchase these plan
shares at book value. Under Spanish GAAP, we record as an expense the cost of
the option granted by the banks. This expense is amortized over the life of the
option. Under U.S. GAAP, however, we have to record in each year, as personnel
expense, the difference between the market value of the plan shares and the
value at which the employees may exercise their unexercised options. Please see
" -- Share Ownership -- Employee Stock Option Plan".
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses include depreciation charges
relating to our tangible assets, such as points of presence (POPs) in our ISP
business, and amortization charges relating to our intangible assets,
principally software. Depreciation and amortization expenses accounted for 10%
of consolidated operating expenses before financial expenses and amortization of
goodwill for the six months ended June 30, 2000 and 4% for 1999. Under Spanish
GAAP, amortization of goodwill is recorded separately, and does not appear as an
operating expense. On a pro forma basis, depreciation and amortization would
have accounted for 9% of our consolidated operating expenses before financial
expenses and amortization of goodwill for the six months ended June 30, 2000,
and 5% of 1999.
OTHER OPERATING EXPENSES
Other operating expenses principally include:
- professional services, including consultant fees, auditors' fees and
payments to Telefonica for professional services rendered to us by
employees of Telefonica;
- rental expenses;
- marketing expenses; and
- utilities.
For consulting services provided to us by McKinsey & Co. from December 1998
through December 1999, we recorded an expense of E1,638 thousand. These amounts
are reflected as other operating expenses.
McKinsey has agreed to continue to provide consulting services to us
through December 2000. For these services, we will pay McKinsey E60,000 per
month in fees and reimburse up to E30,000 per month in expenses. In addition, we
will pay an additional amount based on the market value of our shares during
December 2000.
Other operating expenses accounted for 54% of our consolidated operating
expenses for the six months ended June 30, 2000 and 59% for 1999.
GOODWILL
We generated substantial amounts of goodwill from our acquisitions, most
importantly our acquisitions of Ole, ZAZ and Infosel. Because part of our
strategy involves making significant acquisitions, we expect to continue to
generate significant amounts of goodwill. At June 30, 2000, we had goodwill of
E510 million, equal to 38% of our total assets at that date.
We amortize the goodwill of our acquired businesses on a straight-line
basis over five years. We recorded E57.3 million in amortization of goodwill for
the six months ended June 30, 2000 and E28.7 million for 1999. On a pro forma
basis, we would have recorded E1,345.7 million in amortization of goodwill for
the six months ended June 30, 2000 and E2,632.4 million for 1999. Expenses
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associated with goodwill amortization may increase as we continue to acquire
businesses whose purchase price exceeds the fair value of their assets.
FOREIGN CURRENCY FLUCTUATION
We publish our financial statements in euro, while a substantial portion of
our revenues and expenses are denominated in other currencies, principally the
Brazilian real, the Mexican peso, the Guatemalan quetzal, the Chilean peso and
the United States dollar. Our results of operations are affected by fluctuations
in exchange rates between the euro and such currencies. In the six months ended
June 30, 2000, fluctuations in the exchange rates had a E1.3 million negative
impact on our results of operations.
Transactions which have the purpose and effect of eliminating or
significantly reducing exchange, interest rate or market risk in asset/liability
positions or in other transactions are deemed to be hedging transactions. The
gains or losses arising over the term of these derivatives are allocated to
income using the same method as that used for the recognition of gains or losses
arising from the underlying instrument and the main transaction.
As of June 30, 2000, there were no unmatured derivatives. The "Financial
income (expense)" caption in the accompanying consolidated statement of
operations reflects the effect of the transactions carried out in 1999. This
effect was not material.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues
Our revenues for the six months ended June 30, 2000 and 1999 were
principally derived from our internet access businesses in Brazil, Spain and
Mexico. Our access revenues represented 55% and 62%, respectively, of our total
consolidated revenues for the six months ended June 30, 2000 and 1999.
Total Revenues. Our total revenues increased 882% to E82.5 million for the
six months ended June 30, 2000 from E8.4 million for the six months ended June
30, 1999, primarily for the reasons discussed below.
Access Revenues. Our access revenues increased 773% to E45.4 million for
the six months ended June 30, 2000 from E5.2 million for the six months ended
June 30, 1999, primarily because of our acquisitions of our Brazilian and the
Mexican ISP businesses. Our Brazilian and Mexican ISP businesses accounted for
42% and 16%, respectively, of our total access revenues for the six months ended
June 30, 2000.
The growth of our ISP businesses in Spain and Chile was also significant.
Access revenues from our ISP business in Spain increased 295% to E8.7 million
for the six months ended June 30, 2000 from E2.2 million for the six months
ended June 30, 1999, primarily due to an increase of 562% in the average number
of subscribers. Access revenues from our Chilean ISP increased 69% to E4.9
million for the six months ended June 30, 2000 from E2.9 million for the six
months ended June 30, 1999, primarily due to a 181% increase in the average
number of subscribers. Because we introduced free ISP access in Spain in June
1999 and in Chile in March 2000, our number of total customers in these
countries increased at a greater rate than our access revenues, thereby reducing
the average number of paying subscribers.
The table below provides comparative information regarding our ISP
subscriber base and usage for the periods indicated. The average number of
subscribers is calculated as the sum of the number of subscribers at the
beginning of the period and at the end of each quarter, divided by the number of
quarters in the period, plus one.
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<TABLE>
<CAPTION>
AVERAGE NUMBER OF
NUMBER OF SUBSCRIBERS DURING THE AVERAGE AGGREGATE
SUBSCRIBERS SIX MONTHS ENDED MONTHLY USAGE
AT JUNE 30, JUNE 30, FOR THE
-------------------- ---------------------- SIX MONTHS ENDED
BUSINESS 1999 2000 1999 2000 JUNE 30, 2000
-------- ------- --------- -------- ---------- -----------------
(THOUSAND OF
MINUTES)
<S> <C> <C> <C> <C> <C>
Spanish ISP................ 186,000 1,250,000 102,500 678,500 302,609
Brazilian ISP.............. 194,000 733,000 168,000 419,500 295,567
Mexican ISP................ 45,000 373,000 39,000 153,000 161,300
Chilean ISP................ 54,500 186,000 42,000 118,000 133,437
Peruvian ISP............... -- 86,000 -- 70,000 16,038
U.S. ISP................... -- 25,000 -- 39,000 n.a.
Guatemalan ISP............. 5,500 6,000 5,500 6,000 5,399
------- --------- ------- ---------
Total............ 485,000 2,659,000 357,000 1,484,000
======= ========= ======= =========
</TABLE>
We believe that further penetration of free ISP services in the countries
in which we operate will continue to reduce our access revenue from basic
internet access services. Although we expect part of that decline to be offset
by other revenues from premium ADSL internet access, other value-added services
we expect to introduce and traffic-inducement fees in those markets where we
have entered into traffic-inducement arrangements, we expect access revenue to
decline over time as a percentage of our total revenues.
Advertising Revenues. Advertising revenues increased 1,455% to E17.1
million for the six months ended June 30, 2000 from E1.1 for the six months
ended June 30, 1999, principally as a result of an increase in the number of
page views generated by the portals we currently operate, many of which we
acquired during the last quarter of 1999. For instance, our Brazilian and
Mexican businesses accounted for 34% and 19%, respectively, of our total
advertising revenues for the six months ended June 30, 2000. Advertising
revenues in Spain increased 482% to E6.4 million for the six months ended June
30, 2000 from E1.1 million for the six months ended June 30, 1999, principally
as a result of a 338% increase in the number page views due to the introduction
of new services, such as messages to mobile telephones, financial services and
personal web pages, among others.
Other Revenues. Other revenues increased 852% to E20.0 million for the six
months ended June 30, 2000 from E2.1 million for the six months ended June 30,
1999. Approximately 69% of this increase was due to the acquisition of ZAZ and
Infosel, which provide corporate services such as web hosting and web design and
maintenance in Brazil (ZAZ) and financial related services, such as Infosel
Financiero and Lince, in Mexico (Infosel). Other revenues in our business in
Spain increased significantly in the six months ended June 30, 2000 principally
because of the increase in sales of modems and web phones.
Operating Expenses
Total Operating Expenses. Our total operating expenses for the six months
ended June 30, 2000 increased over 900% to E263.3 million from E26.2 million for
the six months ended June 30, 1999 for the reasons discussed below.
Goods Purchased. Goods purchased increased 456% to E57.8 million for the
six months ended June 30, 2000 from E10.4 million for the six months ended June
30, 1999. This increase was driven primarily by our Brazilian operations, which
accounted for 41% of our total goods purchased expense during the period.
Goods purchased relating to our ISP business in Spain increased 89% to
E14.0 million for the six months ended June 30, 2000 from E7.4 million for the
six months ended June 30, 1999. This increase was principally due to an increase
in network communications expenses and technical help
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desk expenses to support the growth in the number of subscribers. Goods
purchased expenses associated with our Chilean ISP increased 146% to E5.9
million for the six months ended June 30, 2000 from E2.4 million for the six
months ended June 30, 1999 principally due to telecommunications expenses to
support the growth in the number of subscribers.
Personnel Expenses. Personnel expenses increased 974% to E36.5 million for
the six months ended June 30, 2000 from E3.4 million for the six months ended
June 30, 1999. This increase was principally due to an increase in the total
number of employees, as a result of our acquisitions during 1999 and our
expansion in Spain and Latin America. Personnel expenses from our Brazilian and
Mexican businesses accounted for 24% and 30%, respectively, of our total
personnel expenses for the six months ended June 30, 2000.
Depreciation and Amortization: Depreciation and amortization expense
increased approximately 3,425% to E26.9 million for the six months ended June
30, 2000 from E763 thousand for the six months ended June 30, 1999. This
increase was principally due to POPs, software and hardware added in 1999
relating to our acquisitions during the last quarter of 1999, as well as
amortization of start-up expenses, including expenses associated with our global
initial public offering and the launching of the Terra brand in new markets.
Other Operating Expenses. Other operating expenses increased over 1,120%
to E142.0 million for the six months ended June 30, 2000 from E11.6 million for
the six months ended June 30, 1999. This increase was principally due to:
- A significant increase in our marketing expenses to E82.0 million in the
six months ended June 30, 2000 from E5.9 million in the six months ended
June 30, 1999, primarily as a result of the launch of the Terra brand in
new markets (including the United States) and our free ISP access
marketing campaign in Brazil and Mexico. Specifically, marketing
expenses relating to our Brazilian, Mexican and U.S. businesses
represented 32%, 24% and 15%, respectively, of our total marketing
expenses for the six months ended June 30, 2000. In addition, marketing
expenses related to our business in Spain increased 353% to E19.5
million from E4.3 million, principally as a result of a significant
campaign to advertise new content offered on our portal and our access
service, and to build global brand awareness. These expenses represented
22% of our total marketing expenses for the six months ended June 30,
2000.
- Professional services costs, including consulting fees, advisory fees
and costs associated with market research, which increased 1,084% to
E22.5 million for the six months ended June 30, 2000 from E1.9 million
for the six months ended June 30, 1999, primarily due to increased
consulting fees.
Amortization of Goodwill. Amortization of goodwill increased to E57.3
million for the six months ended June 30, 2000 from E3.2 million for the six
months ended June 30, 1999 principally as a result of the acquisitions we made
during 1999. The amortization of the goodwill generated in the acquisitions of
our Brazilian and Mexican businesses amounted to E20.9 million and E26.6
million, respectively, for the six months ended June 30, 2000.
Financial Income (Expense), Net. Net financial income was E321 thousand
for the six months ended June 30, 2000 compared with a net financial expense of
E85 thousand for the six months ended June 30, 1999, principally due to income
we received from short-term financing we provided to related companies.
Equity Share of Affiliate Losses, Net. Net equity share of losses of our
affiliates was E4.8 million for the six months ended June 30, 2000 compared with
an immaterial amount for the six months ended June 30, 1999 primarily as a
result of our share of the loss of Aremate.com.
Extraordinary Income (Expense), Net. Net extraordinary expense was E486
thousand for the six months ended June 30, 2000 compared to E1 thousand in net
extraordinary income for the six
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months ended June 30, 1999, principally as a result of expenses arising from the
disposition of fixed assets. However, such items would not meet the criteria of
extraordinary items under U.S. GAAP.
Corporate Income Tax Credit. Because we had operating losses, we were able
to deduct these losses from our consolidated corporate income tax obligation. We
booked an account receivable in the form of a tax credit amounting to E142.0
million for the six months ended June 30, 2000, as well as a long-term deferred
tax liability of E23.6 million in order to eliminate from the accounts the
duplication arising from aggregating the individual tax assets taken into
account in the investment portfolio provision recorded by us. The corporate
income tax legislation in effect in the countries in which companies in the
Terra group are taxed provides that, in certain circumstances, tax losses
incurred in prior years may be carried forward to offset against taxable income
in subsequent years. Specifically, the last years for offset of the main tax
losses incurred by companies in the Terra group are as follows:
- In Spain and Mexico, tax losses may be carried forward to offset against
taxable income during a period of ten years from the year in which they
were incurred.
- In Brazil and Chile, there is no deadline for the offset of tax losses,
although in Brazil the amount that the losses offset may not exceed 30%
of total taxable income.
- In Peru and Argentina, tax losses may be carried forward to offset
taxable income during a period of four and five years, respectively,
from the year in which they were incurred.
Under Spanish tax law, the credit will be payable to us when we begin to record
profits.
Minority Interest. Minority interest remained relatively unchanged at E1.7
million for both the six months ended June 30, 2000 and June 30, 1999. However,
the composition of this balance is different for each period as a result of the
acquisitions we have made during the second half of 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Our revenues for the years ended 1999 and 1998 were principally derived
from the internet access business in Brazil, Mexico and Chile and corporate
services in Brazil and Mexico.
Total Revenues. Our total revenues increased 315% to E50.2 million for the
year ended 1999 from E12.1 million for year end 1998 primarily due to our
acquisitions during the period. Revenues from our Brazilian and Mexican
operations accounted for 29% and 22%, respectively, of our total revenues for
1999.
Access Revenues. Our access revenues increased 158% to E24.8 million for
the year ended 1999 from E9.6 million for the year ended 1998, primarily because
of sharp growth in the number of subscribers.
The table below provides comparative information regarding our ISP
subscriber base and usage for the periods indicated. Because we introduced free
ISP access in Spain in June 1999, our number of total customers in Spain
increased at a greater rate than in prior periods. The average number of
subscribers is calculated as the sum of the number of subscribers at the
beginning of the period and at the end of each quarter, divided by the number of
quarters in the period, plus one.
V-52
<PAGE> 149
<TABLE>
<CAPTION>
AVERAGE NUMBER OF
NUMBER OF SUBSCRIBERS DURING AVERAGE AGGREGATE
SUBSCRIBERS YEAR ENDED MONTHLY USAGE
AT DECEMBER 31, DECEMBER 31, FOR THE
-------------------- ------------------ YEAR ENDED
BUSINESS 1998 1999 1998 1999 DECEMBER 31, 1999
-------- ------- --------- ------- ------- ---------------------
(THOUSANDS OF
MINUTES)
<S> <C> <C> <C> <C> <C>
Spanish ISP............... 49,312 659,000 25,790 234,000 74,122
Chilean ISP............... 25,274 118,000 16,667 61,000 81,000
Mexican ISP............... 29,500 82,000 15,000 44,500 N.A.
Brazilian ISP............. 143,000 346,000 103,000 215,000 147,000
Guatemalan ISP............ 5,000 6,000 3,900 5,600 4,500
U.S. ISP.................. -- 44,000 -- 45,000 N.A.
Peruvian ISP.............. -- 62,000 -- 50,500 29,290
------- --------- ------- -------
Total........... 252,086 1,317,000 164,357 655,600
======= ========= ======= =======
</TABLE>
Advertising Revenues. Advertising revenues increased 363% in 1999 to E5.1
million from E1.4 million in 1998, principally as a result of a 124% increase in
the number of page views generated by our portals due to an improvement in
content offerings, including local content offerings, and the launching of the
Terra brand in several new markets. During 1999, approximately 90% of our
advertising revenue came from Spain and Brazil. We acquired during the last
quarter of 1999 many of the portals we currently operate. We expect our
adverting revenues to increase significantly in 2000 due to the inclusion of a
full year of the results of operations of these portals.
Other Revenues. Other revenues increased over 1,350% to E20.3 million in
1999 from E1.4 million in 1998. Approximately 57% of this increase was due to
the acquisition of ZAZ and Infosel, which develop corporate services such as web
hosting and web design and maintenance in Brazil (ZAZ) and financial related
services, such as Infosel Financiero and Lince, in Mexico (Infosel).
Operating Expenses
Total Operating Expenses. Our total operating expenses in 1999 increased
689% to E141.2 million from E17.9 million in 1998 for the reasons discussed
below.
Goods Purchased. Goods purchased increased 265% in 1999 to E31.0 million
from E8.5 million in 1998. This increase was driven primarily by our Spanish
operation where goods purchased increased to E16.9 million in 1999 from E4.1
million in 1998.
Personnel Expenses. Personnel expenses increased 522% to E19.9 million in
1999 from E3.2 million in 1998. The increase was principally due to an increase
in the total number of employees to 2,119 (approximately 1,400 employees on
fixed contracts and 700 on temporary contracts) at December 31, 1999 compared to
139 employees at December 31, 1998. This increase was due to our acquisitions
during 1999 and our expansion in Spain and Latin America. Personnel expenses
from our Brazilian and Mexican operations accounted for 21% and 25%,
respectively, of our total personnel expenses for 1999.
Depreciation and Amortization. Depreciation and amortization expense
increased 799% to E6.3 million in 1999 from E701 thousand in 1998. The increase
was principally due to POPs and hardware added in 1998 relating to our ISP
business in Spain, which we began to depreciate in 1999, and amortization of
start-up expenses of Terra Networks, including expenses associated with our
initial public offering.
Other Operating Expenses. Other operating expenses increased nearly 1400%
to E83.9 million in 1999 from E5.6 million in 1998 principally as a result of:
- a significant increase in our marketing expenses to E48.1 million from
E2.3 million, due to the launch of our TERRA brand and our free ISP
marketing campaign in Spain; and
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<PAGE> 150
- an increase in professional services costs, including consulting fees,
advisory fees and costs associated with market research, to E10.3
million in 1999 from E557 thousand in 1998.
Amortization of Goodwill. Amortization of goodwill increased to E28.7
million in 1999 from E339 thousand in 1998 primarily as a result of the
acquisitions we made during 1999.
Financial Income (Expense), Net. Net financial income was E1.8 million in
1999 compared with a net financial expense of E90 thousand in 1998 principally
due to income received from short-term financial investments.
Extraordinary Income (Expense), Net. Net extraordinary expense increased
to E1.4 million in 1999 from E562 thousand in 1998 mainly due to adjustments
related to prior years' expenses of the companies we acquired in 1999.
Corporate Income Tax Credit. Because we had operating losses, we were able
to deduct these losses from our consolidated corporate income tax obligation. We
booked an account receivable in the form of a tax credit amounting to E52.5
million in 1999. The corporate income tax legislation in force in the countries
in which our companies are taxed provides that, in certain circumstances, tax
losses incurred in prior years may be carried forward for offset against the
taxable income obtained in subsequent years. For a discussion of during what
periods the offset will be available, see "-- Six Months Ended June 30, 2000
Compared to Six Months Ended June 30, 1999 -- Corporate Income Tax Credit".
Minority Interest. Minority interest increased to E1.9 million in 1999
from E1.7 million in 1998 due to our acquisitions in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total Revenues. Our revenues for the years ended December 31, 1998 and
1997 were principally derived from the internet access business in Spain and
Chile and, to a lesser extent, from advertising revenue generated by DoubleClick
Iberoamerica.
Our revenues increased 365% to E12.1 million in 1998 from E2.6 million in
1997, principally as a result of an increase in subscription revenue from our
Chilean ISP and our Spanish ISP. Our subscription revenue in Chile increased
269% to E5.2 million in 1998 from E1.4 million in 1997, primarily due to a 214%
increase in the number of subscribers and because our Chilean business only
commenced operations in July 1997. Subscription revenue relating to our Spanish
ISP increased significantly to E4.4 million in 1998 from E981 thousand in 1997,
primarily as a result of a 393% increase in the average number of subscribers.
The table below provides comparative information regarding our ISP
subscriber base for 1998 and 1997. The average number of subscribers is
calculated as the sum of the number of subscribers at the beginning of the
period and at the end of each quarter, divided by the number of quarters in the
period plus one.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE NUMBER
SUBSCRIBERS AT OF SUBSCRIBERS
DECEMBER 31, DURING
---------------- ---------------
BUSINESS 1997 1998 1997 1998
-------- ------ ------ ----- ------
<S> <C> <C> <C> <C>
Spanish ISP........................................... 9,555 49,312 5,230 25,790
Chilean ISP........................................... 8,059 25,274 4,028 16,667
------ ------ ----- ------
Total....................................... 17,614 74,586 9,258 42,457
====== ====== ===== ======
</TABLE>
In addition, advertising revenue increased to E1.1 million in 1998 from E72
thousand in 1997, primarily as a result of advertising revenue generated by
DoubleClick Iberoamerica.
V-54
<PAGE> 151
Other revenue. Other revenue increased 1,473% to E1.4 million in 1998 from
E88 thousand in 1997. This increase was principally due to fees earned by Terra
Networks Chile (formerly CTC Internet) in connection with access services
provided to customers (mainly schools and universities) of the CTC Group.
Operating Expenses
Total Operating Expenses. Total operating expenses increased 290% to E17.9
million in 1998 from E4.6 million in 1997 for the reasons discussed below.
Goods Purchased. Goods purchased increased 673% to E8.5 million in 1998
from E1.1 million in 1997, primarily as a result of an increase in network
communications expenses commensurate with the growth in our ISPs in Spain and
Chile, as well as expenses relating to the purchase of advertising space.
Expenses relating to our Spanish ISP increased 363% to E4.1 million in 1998 from
E885 thousand in 1997. Expenses relating to our Chilean ISP increased to E3.5
million in 1998 from E169 thousand in 1997. In addition, DoubleClick
Iberoamerica incurred approximately E803 thousand in expenses in 1998 relating
to the purchase of advertising space.
Personnel Expenses. Our personnel expenses increased 242% to E3.2 million
in 1998 from E928 thousand in 1997, primarily as a result of increases in salary
expenses in Chile reflecting an increase in the total number of full-time and
temporary employees. The total number of full-time employees relating to our
Chilean ISP increased to 78 at December 31, 1998 from 59 at December 31, 1997.
The number of Spanish ISP employees increased to 54 at December 31, 1998 from 9
at December 31, 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased 51% to E701 thousand in 1998 from E464 thousand in 1997, primarily due
to increased depreciation expenses associated with POPs added to our network
infrastructure and computer hardware in both Spain and Chile, as well as
increased amortization costs relating to our investments in computer software.
Other Operating Expenses. Other operating expenses increased 167% to E5.6
million in 1998 from E2.1 million in 1997 primarily as a result of increases in:
- marketing expenses in both Spain and Chile, principally due to increased
competition and our initiation of various advertising campaigns;
- fees paid for professional services, which include those services
provided by consultants, independent auditors and other professionals;
- rental expenses relating to our Spanish ISP business; and
- utility costs.
Amortization of Goodwill. Amortization of goodwill increased 9.4% to E339
thousand in 1998 from E310 thousand 1997, primarily as a result of goodwill
arising from the acquisition of certain assets of Reuna S.A., an ISP in Chile we
acquired in 1997.
Financial Income (Expense), Net. Net financial expense increased 11% to
E90 thousand in 1998 from E81 thousand in 1997, principally as a result of
interest paid on short-term financing provided to us by related companies.
Extraordinary Income (Expense), Net. Net extraordinary expense was E562
thousand in 1998 compared to E97 thousand in net extraordinary income in 1997,
primarily as a result of an extraordinary expense of E599 thousand recorded in
1998, relating to expenses incurred by Reuna S.A. in connection with the
commencement of our Chilean ISP business in 1997. Spanish GAAP allows items
outside the ordinary course of business to be classified as extraordinary items.
However, such items would not meet the criteria of extraordinary items under
U.S. GAAP.
V-55
<PAGE> 152
Corporate Income Tax Credit. Because we had operating losses, Telefonica,
S.A. was able to deduct these losses from its consolidated corporate income tax
obligation. We booked an account receivable in the form of a tax credit from
Telefonica corresponding to the amount Telefonica was eligible to deduct. Under
Spanish GAAP the losses may be carried forward ten years. This amount increased
to E1.3 million in 1998 from E363 thousand in 1997. Under Spanish tax law, the
credit will be payable to us when we record profits.
Minority Interest. Minority interest increased to E1.7 million in 1998
from E465 thousand in 1997 due to the commencement of operations in Chile in
July 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have primarily financed our operations from funds raised in our global
initial public offering completed in November 1999, capital contributions and
short-term debt financing from members of the Telefonica group, cash generated
from operations and funds raised from the sale of ordinary shares to our
principal shareholders. In September 2000, we completed a E2.2 billion rights
offering. Based on our existing business plan, we expect that these sources will
enable us to meet our operational funding needs and budgeted capital
expenditures for at least the next two years. However, we expect that any
significant acquisition for cash that we make during this period could require
external financing. We cannot assure you that we will be able to obtain
sufficient funds to finance our operating losses, make necessary capital
expenditures and continue to execute our business plan, which includes
continuing to acquire internet-related businesses.
We expect to fund our future operations, acquisitions, joint ventures and
infrastructure improvements to support our strategic plan through a combination
of:
- proceeds from our rights offering;
- operating cashflow;
- financing provided at market rates by subsidiaries of Telefonica, S.A.;
and
- to the extent necessary, additional equity offerings and debt offerings.
The Telefonica group companies are not obligated to provide any future
financing to us, in the form of loans, capital contributions or otherwise.
Amortization of goodwill expense, which affects our results of operations,
is not a cash item and therefore does not affect our ability to generate cash or
our cash needs.
CAPITAL EXPENDITURES
The table below shows our capital expenditures for hardware and software
during each of the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------- ENDED
1997 1998 1999 JUNE 30, 2000
---- ----- ------ -------------
(THOUSANDS OF EURO)
<S> <C> <C> <C> <C>
Hardware............................................ 471 2,882 18,926 25,146
Software............................................ 446 171 6,930 15,686
--- ----- ------ ------
Total..................................... 917 3,053 25,856 40,832
=== ===== ====== ======
</TABLE>
We expect our capital expenditures during 2000, 2001 and 2002 relating to
computer hardware to be as set forth in the table below.
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<PAGE> 153
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
2000 2001 2002
------ ------ ------
(THOUSANDS OF EURO)
<S> <C> <C> <C>
Spain....................................................... 14,201 6,130 1,533
Brazil...................................................... 9,455 18,238 26,911
Mexico...................................................... 23,831 11,136 12,008
United States............................................... 7,728 8,500 9,350
Other....................................................... 16,930 10,832 12,592
------ ------ ------
Total............................................. 72,145 54,836 62,394
====== ====== ======
</TABLE>
In addition, we expect capital expenditures during 2000, 2001 and 2002
relating to the acquisition of software to be as set forth in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
2000 2001 2002
------ ------ ------
(THOUSANDS OF EURO)
<S> <C> <C> <C>
Spain....................................................... 3,819 2,043 2,043
Brazil...................................................... 5,901 5,321 6,345
Mexico...................................................... 278 4,439 4,786
United States............................................... 2,649 3,310 4,138
Other....................................................... 5,486 4,594 5,186
------ ------ ------
Total............................................. 18,133 19,707 22,498
====== ====== ======
</TABLE>
The foregoing amounts are estimates only and our actual capital
expenditures may be less than or exceed these amounts. In particular, our
capital expenditures will increase significantly in the future to the extent we
acquire significant additional businesses.
CASH FLOWS
To date, we have experienced significant negative cash flows from operating
activities resulting from our net operating losses. Net cash used in operating
activities was E161 million for the six months ended June 30, 2000 and E574
million for the year ended December 31, 1999.
Net cash used in investing activities was E200 million for the six months
ended June 30, 2000 and E724 million for the year ended December 31, 1999,
primarily consisting of our acquisitions during the period.
Net cash provided by financing activities consisted of E10 million for the
six months ended June 30, 2000 and E1,318 million for the year ended December
31, 1999. Approximately 65% of the net cash provided by financing activities for
the year ended December 31, 1999 was generated by our initial public offering
and the remaining part of this financing was provided by members of the
Telefonica group in the form of short-term loans and capital contributions.
DEBT
We capitalized in September 1999 E266.8 million in short-term liabilities
owed to members of the Telefonica group, in exchange for which Telefonica
received 133.4 million of our ordinary shares. Following the capitalization of
these liabilities, as of June 30, 2000 we had approximately E6.9 million in debt
outstanding, mainly attributable to our operations in Brazil.
As of June 30, 2000, there were no unmatured derivatives. The "Financial
income (expense), net" caption in the accompanying consolidated statement of
operations reflects the effect of the transactions carried out in 1999. This
effect was not material.
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<PAGE> 154
RESEARCH AND DEVELOPMENT
We implement an active policy of creating and introducing new services and
systems in conjunction with the main suppliers in the market. We also maintain a
close relationship with Telefonica Investigacion y Desarrollo, S.A. in the
development of new technological solutions.
In our relationship with Telefonica Investigacion y Desarrollo, we benefit
from its research and development program, which forms part of an annual
research and development plan with a budget for 1999 of around E9 million (to
which we contributed approximately 3%). Also, when developing new products,
Telefonica Investigacion y Desarrollo is the main supplier of research and
development services to us and other members of the Telefonica group.
We have not had material research and development expenditures during the
last three years.
THE INTRODUCTION OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union, including Spain, established fixed conversion rates between their
existing sovereign currencies and the euro. The participating countries adopted
the euro as their common currency on the same day. The euro trades on currency
exchanges and is available for non-cash transactions during the transition
period between January 1, 1999 and January 1, 2002. During this transition
period, the existing currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro and public and private
parties may pay for goods and services using either the euro or existing
currencies.
During the transition period, we and our suppliers and customers must
manage transactions in both the euro and the participating countries' respective
individual currencies. This could cause, but has not to date caused, logistical
problems. We have incurred, and may further incur, increased operational costs
to modify or upgrade our information systems in order to:
- convert individual currencies to euro;
- execute conversion calculations utilizing six-digit exchange rates and
other prescribed requirements; and
- accommodate the new euro currency symbol.
We have selected our computer and operational systems in an attempt to
ensure that our ability to transact business will not be impaired by
complications resulting from the introduction of the euro. We believe that our
systems have not been adversely impacted by the euro conversion. There can be no
assurance that our third-party suppliers and customers will be able to
successfully implement the necessary protocols.
Our orders to suppliers are generally stated in euro and pesetas. We have
already given suppliers the option of billing us in euro or pesetas. We have
also told our customers that they can pay us in euro. Our bills to customers
state the amount due in both euro and pesetas. We have also contacted our
collecting agents for the purpose of facilitating payments in euro by us to our
suppliers and by our customers to us. Thus far, we have not experienced any
significant problems with third parties as a result of the introduction of the
euro.
We believe that the introduction of the euro will reduce our exposure to
risk from foreign currency and interest rate fluctuations. We estimate that we
have spent approximately E90 thousand on the introduction of the euro, primarily
related to the purchase of an accounting and billing system which also served to
address our lack of systems and any Year 2000 issues.
We plan to spend an additional approximately E1.7 million on matters
relating to the introduction of the euro in the next three years.
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<PAGE> 155
YEAR 2000
The changeover to the year 2000 has not had a material adverse effect on
our business, results of operations or financial condition.
U.S. GAAP RECONCILIATION
Under U.S. GAAP, shareholders' equity was E835.6 million at June 30, 2000
compared with E1,071.1 under Spanish GAAP. Under U.S. GAAP shareholders' equity
was E1,129 million at December 31, 1999 compared with E1,234 million under
Spanish GAAP. At December 31, 1998 shareholders equity was E1.9 million under
U.S. GAAP compared with E3.6 million, under Spanish GAAP.
We had a net loss of E267.3 million for the six months ended June 30, 2000
under U.S. GAAP compared with a net loss of E165.1 million under Spanish GAAP
during such period. Under U.S. GAAP net loss was E139 million compared to E81.4
million under Spanish GAAP for the year ended December 31, 1999. For the year
ended December 31, 1998 net loss was E5.1 million under U.S. GAAP compared to a
net loss of E3.7 million under Spanish GAAP. Please see note 20 to our
consolidated financial statements.
On a pro forma basis, goodwill represented approximately 76.3% of our pro
forma assets as of June 30, 2000 and 76.7% of our pro forma assets as of
December 31, 1999. Goodwill is being amortized on a straight-line basis over
five years. Under Spanish GAAP an impairment loss on goodwill is recognized for
the difference between the estimated fair value based on our business plan and
the carrying value of the goodwill. For U.S. GAAP purposes we review events and
changes in circumstances to determine whether the recoverability of the carrying
value of goodwill should be reassessed. Should events or circumstances indicate
that the carrying value may not be recoverable based on undiscounted future cash
flows, an impairment loss measured by the difference between the discounted
future cash flows and the carrying value of goodwill would be recognized by us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates because of our subsidiaries' operations, mainly in Latin America and
United States. The currency of many Latin American countries, including Brazil
and Mexico, have experienced substantial depreciation and volatility in the past
and our revenues may decline in value if the local currencies depreciate
relative to the euro.
We do not use derivative instruments, such as foreign exchange forward
contracts, foreign currency options, interest rate swaps and forward rate
agreements, to manage these market risks, nor do we hold or issue derivative or
other financial instruments for trading purposes.
MANAGEMENT
Under Spanish corporate law, the Board of Directors is responsible for the
management, administration and representation in all matters concerning our
business, subject to the provisions of the by-laws (estatutos sociales) and
resolutions adopted at general shareholders' meetings. We will endeavor to
appoint a majority of the members of the Board of Directors from outside of the
company, including representatives of the significant shareholders and
independent directors. Under the Codigo de Buen Gobierno (Code of Good Corporate
Governance) of the CNMV the following persons would not be considered
independent directors: persons who have had a significant commercial or business
relationship with the company or have been officers of the company during the
two years prior to the date of appointment or have family links with the company
or with the members of the Board of Directors.
Directors are elected by our shareholders to serve a five-year term. A
director may be re-elected to serve for an unlimited number of terms. If a
director does not serve out his or her entire term, the
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<PAGE> 156
Board of Directors may fill the vacancy by appointing a shareholder as a
replacement director to serve until the next general shareholders' meeting, when
the appointment may be ratified or a new director to fill the vacancy is elected
or replaced. A director may resign or be removed from office by the shareholders
at the general shareholders' meeting. Our bylaws provide that a majority of the
members of the board (represented in person or by proxy) constitute a quorum.
Resolutions of the Board of Directors are passed by a simple majority of the
directors present or represented at a board meeting.
Under Spanish corporate law, the Board of Directors may delegate its powers
to an executive committee or delegate committee or to one or more managing
directors (consejeros delegados). Spanish corporate law provides that
resolutions appointing an executive committee or any managing director or
authorizing the permanent delegation of all, or part of, the board's power
require a two-thirds majority of the members of the Board of Directors. Certain
powers provided in Spanish corporate law may not be delegated.
As of September 19, 2000, the members of our board and their respective
positions are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Joaquim Agut Bonsfills................................ Executive Chairman 46
Abel Linares Palacios................................. Director 39
Cesar Alierta Izuel................................... Director 55
Alberto Cortina de Alcocer............................ Director 54
Alejandro Junco de la Vega Elizondo................... Director 24
Francisco Moreno de Alboran y de Vierna............... Director 56
Nelson P. Sirotsky.................................... Director 47
Bert C. Roberts, Jr................................... Director 57
John De Mol........................................... Director 45
Jose Maria Mas Millet................................. Secretary and Director 46
</TABLE>
All of our directors, except for Messrs. Agut, Linares, Junco de la Vega,
Roberts and de Mol were elected in 1999, with each director's term expiring in
2004. Messrs. Agut, Linares, Junco de la Vega, Roberts and De Mol were elected
in 2000, with terms expiring in 2005. None of our directors serve on our board
pursuant to any service contract. Telefonica Moviles, S.A. and Telefonica Data,
S.A. have been elected as members of the Board of Directors, but have not yet
accepted such positions.
BIOGRAPHIES OF DIRECTORS
JOAQUIM AGUT BONSFILLS serves as Executive Chairman of our Board of
Directors. From 1997 to August 2000, Mr. Agut served as president and chief
executive officer of GE Power Controls. Prior to that time, he served as vice
president and general manager of marketing and sales of GE Power Controls. Mr.
Agut was also the GE national executive for Spain and Portugal and chairman of
the Pan European GE Quality Council. In December 1999, he was named leader of
the European Corporate Executive Council of General Electric, becoming General
Electric's first executive in Europe.
ABEL LINARES PALACIOS serves as Chief Executive Officer. From 1998 to 1999,
Mr. Linares served as executive vice president of Telefonica Internacional USA,
and during 1999 he served as chief executive officer of Telefonica Publicidad e
Informacion, S.A. He has also held other positions within the Telefonica group,
including president of Telefonica El Salvador, chief executive officer of
Telefonica Central America and senior director of sales and customer services at
Telefonica, S.A.
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CESAR ALIERTA LZUEL serves as a Director. On July 26, 2000, Mr. Alierta was
named chairman of the board of directors of Telefonica, S.A. Mr. Alierta has
served as president of Altadis, S.A. since its inception. He has also served as
general manager of capital markets for Banco Urquijo, a director of the Madrid
Stock Exchange and president of the Spanish Institute of Financial Analysts. Mr.
Alierta also serves on the board of directors of Telefonica Internacional, S.A.
ALBERTO CORTINA DE ALCOCER serves as a Director. Since 1997, Mr. Cortina
has served as chief executive officer of Banco Zaragozano. He also serves on the
board of directors of Telefonica, S.A., Telefonica Internacional, S.A.,
Telefonica Publicidad e Informacion, S.A., A.C. Hoteles and Autopista
Vasco-Aragonesa C.E.S.A.
ALEJANDRO JUNCO DE LA VEGA ELIZONDO serves as a Director. Mr. Junco de la
Vega Elizondo is the director of the internet division of Grupo Reforma. From
1997 until 1999 he served in the executive development program of CEMEX
(Cementos Mexicanos).
FRANCISCO MORENO DE ALBORAN Y DE VIERNA serves as a Director. Mr. Alboran
has served in various positions at McKinsey & Co., including as president of
McKinsey's Spanish organization and a member of its board of directors. Mr.
Alboran is also a member of the board of directors of Circulo de Empresarios.
NELSON P. SIROTSKY serves as a Director. From 1985 to the present, he has
served as chief executive officer of Grupo RBS. Since 1993 he has served on the
boards of directors of Televisao Gaucha S.A. and RBS Participacoes S.A., and
since 1995 he has served on the board of directors of Zero Hora Editora
Jornalistica, S.A. and Radio Gaucha S.A.
BERT C. ROBERTS, JR. serves as a Director. Mr. Roberts also serves as
chairman of the board of directors of WorldCom. Mr. Roberts was a director of
MCI until the merger of MCI and Worldcom in 1998. From 1992 until the merger,
Mr. Roberts served as chairman of the board of directors of MCI. Mr. Roberts was
chief executive officer of MCI from December 1991 to November 1996. Mr. Roberts
is also a director of Telefonica, S.A., The News Corporation Limited, Valence
Technology, Inc. and CAPCure.
JOHN DE MOL serves as a Director. Since 1998 Mr. De Mol has served as the
chairman of the executive board of Endemol Entertainment. He formed John De Mol
Productions in 1979, which merged in 1994 with Joop van den Ende Productions to
create Endemol Entertainment.
JOSE MARIA MAS MILLET serves as a Director. From 1997 until the present,
Mr. Mas has served as secretary of Telefonica, S.A. and as secretary of its
board of directors. Prior to 1997, Mr. Mas practiced law in Spain. Since 1996,
he has served on the board of directors of Caja de Ahorros de Valencia,
Castellon y Alicante.
EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
Our executive officers and senior management and their respective positions
are as follows:
<TABLE>
<CAPTION>
YEAR OF
NAME POSITION AGE APPOINTMENT
---- -------- --- -----------
<S> <C> <C> <C>
Joaquim Agut Bonsfills............. Executive Chairman 46 2000
Abel Linares Palacios.............. Chief Executive Officer 39 2000
Juan Antonio Garcia-Urgeles
Capdevilla....................... Chief Operating Officer 39 2000
Antonio de Esteban Quintana........ Chief Financial Officer 37 1999
Antonio Botas...................... Chief Marketing Officer 36 1999
Luis Velo Puig-Duran............... E-Commerce General Manager 39 2000
Cristina Lamana.................... General Counsel 40 1999
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF
NAME POSITION AGE APPOINTMENT
---- -------- --- -----------
<S> <C> <C> <C>
Carmen Casares..................... Head of Human Resources and General 46 1999
Services
Raul de la Cruz.................... Corporate Sales Director 34 1999
Ramon Ros.......................... Business Development and M&A 32 1999
Director
Rafael Bonnelly.................... Content Director 39 1999
Laura Abasolo...................... Planning Director and Controller 27 1999
Julian De Cabo Moreno.............. Spain General Manager 37 2000
Silvia de Jesus.................... Brazil General Manager 45 1999
Ines Maria Leopoldo................ Argentina General Manager 41 1999
Arturo Galvan...................... Mexico General Manager 37 1999
Rainer Spitzer..................... Peru General Manager 39 1999
Jorge Martina Aste................. Chile General Manager 39 1999
Rolando Rosito Solares............. Guatemala General Manager 32 1999
Manuel Bellod...................... United States General Manager 36 2000
</TABLE>
All of our executive officers and senior management serve at the discretion
of the Board of Directors.
BIOGRAPHIES OF EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
JUAN ANTONIO GARCIA-URGELES CAPDEVILLA serves as Chief Operating Officer.
Mr. Garcia-Urgeles has served in different positions at Microsoft Iberica, among
them as technical director for 5 years, marketing director for 4 years and
corporate customer division general manager since 1999.
ANTONIO DE ESTEBAN QUINTANA serves as our Chief Financial Officer. From
1998 until 1999, Mr. de Esteban served as director of sales for Spain and
Portugal for Barclays Capital. From 1993 until 1998, he served as director of
sales for derivatives products at Bankers Trust International PLC, where he was
named managing director in 1997.
ANTONIO BOTAS serves as our Chief Marketing Officer. From 1997 until
September of 1999 Mr. Botas served as director and general manager of
DoubleClick Iberoamerica. From 1995 until 1997 Mr. Botas served in a number of
executive positions at Telefonica Publicidad e Informacion, S.A. including
director of marketing. From 1991 to 1994 Mr. Botas served as marketing manager
of the Royal Life Insurance Company.
LUIS VELO PUIG-DURAN joined Terra Networks in January 2000 as E-Commerce
General Manager. During the last five years Mr. Velo has developed his
professional career within the Antena 3 TV Group, a Spanish Leading Private TV
Channel, firstly as general manager of Antena 3 Directo (Direct TV Sales
Company) and later on as general manager of Antena 3 Iniciativas Comerciales.
CRISTINA LAMANA serves as General Counsel. Ms. Lamana has practiced law in
her own private practice and at the international law firm of Baker & McKenzie.
She has also served as general counsel for several multinational companies,
including INDRA, S.A. from 1988 to 1992, the Ericsson group in Spain and Latin
America from 1992 to 1998 and the Terra Networks group since 1999.
CARMEN CASARES serves as Head of Human Resources and General Services. Mrs.
Casares has served in different positions at the Telefonica group, among them as
head of human resources
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for Telefonica de Espana for 10 years and sales director for small office/home
office and residential for two years.
RAUL DE LA CRUZ serves as Corporate Sales Director. Mr. de la Cruz served
as sales director at Double Click Iberoamerica from 1997 to 1999, digital
communications director at Clak Comunicaciones Integradas from 1996 to 1997 and
in different positions at Ruiz Nicoli from 1995 to 1996.
RAMON ROS serves as Business Development and M&A Director. From 1991 to
1992, Mr. Ros served in various positions at Banesto, including as portfolio
manager and assistant director of the projects department. During 1993, Mr. Ros
served as an assistant director at Sanofi Beaute -- Elf Aquitane Group. From
1993 to 1994, Mr. Ros served as assistant director to the investment products
group at Banesto. From 1994 to 1999, Mr. Ros served as assistant director at
Corporacion Industrial y Financiera de Banesto.
RAFAEL BONNELLY serves as Content Director. From 1997 to 1999, Mr. Bonnelly
served as vice-president of international business development at Total Sports,
Inc. From 1992 to 1994, Mr. Bonnelly served as president and publisher at
Inter-American Media Corp.
LAURA ABASOLO serves as Planning Director and Controller. Mrs. Abasolo
served at Goldman Sachs & Co. for four years in its M&A Department and at Middle
Bank in its risk management department during 1994.
JULIAN DE CABO MORENO serves as General Manager in Spain. From 1998 until
1999, Mr. De Cabo was vice president of e-commerce Spanish Association, and from
1994 until 1998, he served in various executive positions for companies in
different industry sectors.
SILVIA DE JESUS serves as the General Manager of Terra Networks Brazil.
From 1996 until 1999, Ms. de Jesus served as the chief executive officer of
Nutec lnformatica S.A., and from 1994 until 1996, served as the technology and
communications director for Grupo RBS.
INES MARIA LEOPOLDO serves as our General Manager in Argentina. From 1997
until 1999, Ms. Leopoldo served as systems and new media manager of La Nacion, a
national Argentine newspaper. From 1993 until 1997, she served as director of
business development for Telecom Argentina. Ms. Leopoldo served on the Board of
Directors of Portfolio Personal S.A., the majority shareholder of La Nacion, in
1999.
ARTURO GALVAN serves as the General Manager of Terra Networks Mexico S.A.
de C.V. From 1988 until 1999, Mr. Galvan served as chief executive officer of
Informacion Selectiva, S.A. de C.V. (Infosel).
RAINER SPITZER serves as our General Manager in Peru. From 1998 until 1999,
Mr. Spitzer served in various management positions for companies in the
Telefonica group. From 1994 until 1998, he served in various management
positions for Cantec, a telecommunications company, and served on its board of
directors from 1997 until 1998.
JORGE MARTINA ASTE serves as the General Manager of CTC Internet, S.A. From
1998 until 1999, Mr. Martina served as chief executive officer of CTC Internet,
S.A. From 1996 until 1998, he served in various positions, including chief
executive officer of Metropolis-Intercom, and from 1994 until 1995 served as
chief financial officer for Intercom, S.A.
ROLANDO ROSITO SOLARES serves as our General Manager in Guatemala. From
1996 until 1999, Mr. Rosito served in several executive positions at Infovia,
S.A., including director of marketing and sales. From 1993 until 1996, Mr.
Rosito served as general manager of Proteccion Electronica, S.A.
MANUEL BELLOD serves as United States Country Manager. From 1990 until
1995, Mr. Bellod has served in different positions at Bankers Trust Company and
Donaldson Lufkin & Jenrette always focused on Latin America and emerging
markets.
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COMPENSATION
For the year ended December 31, 1999 the aggregate compensation of all of
our current directors paid or accrued by us was E90 thousand. During the same
period, the aggregate compensation of the current members of our executive
committee and senior management paid or accrued was approximately E543 thousand.
BOARD PRACTICES
COMMITTEES OF THE BOARD
The board has established a delegate committee, an audit committee and a
nominating and compensation committee in accordance with the recommendations set
forth in the Code of Good Corporate Governance. Each of the audit committee and
the nominating and compensation committee is required by board regulations to
have a minimum of three and a maximum of five external directors. The following
is a brief description of the committees of our Board of Directors.
DELEGATE COMMITTEE
The delegate committee has all of the powers of the Board of Directors
other than those non-delegable powers pursuant to Spanish corporate law. The
following directors serve on our delegate committee: Mr. Agut, Mr. Linares, Mr.
Mas and Mr. Sirotsky.
AUDIT COMMITTEE
The audit committee is responsible for supervising corporate accounting and
auditing, nominating our independent auditor and verifying our compliance with
the Internal Regulations of Conduct in the Securities Markets. The following
directors serve on our audit committee: Mr. Alierta, Mr. Junco de la Vega and
Mr. Sirotsky. In particular, the audit committee:
- proposes the appointment of the Auditor, the terms and conditions of its
recruitment, the scope of its work, and the renewal or terminations of
its mandate;
- reviews the accounts of the company, monitors the fulfillment of all the
legal requirements and the correct application of the generally accepted
accounting principles and criteria suggested by the management of the
company;
- serves as the communication channel between the Board of Directors and
the auditor, assesses the results of each audit carried out and mediates
and arbitrates should differences arise between the Board of Directors
and the auditor in connection with the principles and criteria
applicable to the preparation of the financial statements;
- reviews the adequacy and integrity of the internal control procedures
followed in the preparation of the consolidated and individual accounts;
- supervises the fulfilment of the audit contract and ensures that the
opinion on the annual accounts and the main contents of the auditors
report be drafted in clear and accurate way;
- reviews the prospectuses, annual reports and interim financial
information which the company must provide to the markets and its
supervisory bodies; and
- monitors the fulfilment of the Internal Conduct Code in the securities
markets, of the Senior Executives Conduct Code and of the Internal
Regulation of the Board of Directors.
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NOMINATING AND COMPENSATION COMMITTEE
The nominating and compensation committee is responsible for nominating
directors and periodically revising the board's compensation and approving any
transaction with a significant shareholder. The following directors serve on our
nominating and compensation committee: Mr. Alierta, Mr. Junco de la Vega and Mr.
Sirotsky. In particular, the nominating and compensation committee:
- issues reports on the proposals for the appointment of board members and
senior executives of the company and of its subsidiaries;
- approves the remuneration of senior executives;
- determines the remuneration system for the Board of Directors; and
- issue reports on the incentive schemes.
EMPLOYEES
As of June 30, 2000, we had 2,274 employees. The following table breaks
down each category of employee by country in which we operate.
<TABLE>
<CAPTION>
PRODUCT AND PURCHASES
PLATFORM TECHNICAL SERVICE AND CONTENT FINANCE &
COUNTRY (INFRASTRUCTURE) SERVICE DEVELOPMENT DEVELOPMENT MARKETING SALES E-COMMERCE ADMINISTRATION
------- ---------------- --------- ----------- ----------- --------- ----- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Spain................ 37 18 4 87 8 12 17 21
Brazil............... 24 220 25 140 12 91 0 253
Mexico............... 131 163 97 38 20 118 10 130
Chile................ 15 11 16 18 12 21 0 28
Peru................. 6 3 5 7 6 12 0 13
Central America...... 4 12 0 13 3 4 0 20
Argentina............ 3 0 8 29 3 5 5 13
United States........ 2 2 1 47 6 19 7 16
Uruguay.............. 1 0 0 7 2 0 0 3
Venezuela............ 5 0 0 11 0 0 0 3
Headquarters......... 0 19 0 23 17 10 12 91
--- --- --- --- -- --- -- ---
Total................ 227 448 156 420 89 292 51 591
=== === === === == === == ===
<CAPTION>
COUNTRY TOTAL
------- -----
<S> <C>
Spain................ 204
Brazil............... 765
Mexico............... 707
Chile................ 121
Peru................. 51
Central America...... 56
Argentina............ 66
United States........ 100
Uruguay.............. 13
Venezuela............ 19
Headquarters......... 172
-----
Total................ 2,274
=====
</TABLE>
From time to time, we employ independent contractors to support our
research and development, marketing, sales and editorial departments. The
average number of independent contractors we used during 1999 was 448. None of
our personnel are represented under collective bargaining agreements. We
consider our relations with our employees to be good.
SHARE OWNERSHIP
At June 30, 2000, none of our directors or executive officers owned any of
our ordinary shares except Nelson Pacheco Sirotsky who owned 60,000 shares,
Alberto Cortina de Alcocer who owned 175 shares and Abel Linares Palacios who
owned 125 shares.
At June 30, 2000, our executive officers and senior management owned in the
aggregate options to acquire 558,519 of our ordinary shares.
EMPLOYEE STOCK OPTION PLAN
In October 1999 we established an employee stock option plan that we expect
will help us attract, retain and motivate talented employees. We have allocated
14 million ordinary shares for
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distribution under this plan, which represented 5% of our capital stock on a
fully diluted basis as of December 31, 1999.
We have transferred to one or more banks at book value most of the plan
shares. The banks have granted options to us to purchase these plan shares at
book value. We will exercise those options to meet our obligation to our
employees under the plan.
As of June 8, 2000, we had granted 3,203,246 options under this plan. These
options have the following features:
<TABLE>
<S> <C>
Exercise price............................ E11.81
Vesting................................... One-third of the employee's options can
be exercised each year beginning 2 years
after the date the options are granted
Transferability........................... None
Continuing employment requirement......... Employee must maintain employment
continuously from date the option is
granted until option is exercised
Exercise/our settlement options........... Upon exercise of an option, we can elect
to deliver to the employee either:
- one ordinary share; or
- a cash amount equal to the
then-current market price of the share
less the exercise price, less
applicable taxes
Expiration date........................... March 1, 2004
</TABLE>
At our general shareholders' meeting on June 8, 2000, our shareholders
authorized our board of directors to modify the terms of our employee stock
option plan. Under new terms approved by our board of directors, options granted
after June 8, 2000 have exercise prices based on the market price of our shares
during a reference period prior to the date the options are granted. In
addition, such options vest over a four-year period with 25% of the options
exercisable each year beginning one year after the date the options are granted.
All of the other features of the options remain as described above.
Under U.S. GAAP, at the date that the options are committed to be released
to our employees, we will recognize compensation expense for the difference
between the fair value of the stock and the exercise price of the option. The
entire amount of the difference will be recognized at the date that the options
are committed to be released to our employees, because our employees will not
forfeit the options if they discontinue their employment with us.
PRINCIPAL SHAREHOLDERS
As of June 22, 2000, according to the information available in the public
registers of the Spanish National Securities Market Commission, beneficial
owners of 5% or more of our voting stock were as follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
TITLE OF CLASS IDENTITY OF PERSON OR GROUP SHARES CLASS
-------------- --------------------------- ----------- ----------
<S> <C> <C> <C>
Ordinary........................................ Telefonica, S.A. 186,595,585 66.6(1)
Ordinary........................................ Bidasoa, B.V.(2) 16,417,420 5.9
</TABLE>
---------------
(1) Parent company-only. Other Telefonica group companies owned an additional
approximately 1.9% of our ordinary shares at January 5, 2000. Telefonica,
S.A.'s interest in Terra Networks was approximately 69.5% immediately
following consummation of the rights offering.
(2) Formerly the owner of Infosel, our Mexican ISP and portal.
Our majority shareholders have the same voting rights as all of our other
holders of ordinary shares.
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As of December 31, 1999, holders with registered addresses in the United
States owned an aggregate of approximately 2 million of our ordinary shares,
representing approximately 1% of the ordinary shares issued and outstanding. As
of that date, members of Telefonica's board of directors did not own any of our
ordinary shares.
We expect that Telefonica's interest in us will decline to between
approximately 33.6% and 43.5% (between 34.4% and 44.5% including 100% of the
shares expected to be owned by affiliates of Telefonica) as a result of the
Lycos transaction.
RELATED PARTY TRANSACTIONS
ONGOING RELATIONSHIPS WITH MEMBERS OF THE TELEFONICA GROUP
We have entered into or expect to enter into a number of agreements and
relationships with other members of the Telefonica group relating to services
that these companies will provide to us and that we will provide to them. It is
our policy to ensure that the terms of these arrangements are at least as
favorable to us as we could obtain in an arm's-length transaction between
non-affiliated parties, and, whenever possible in light of legal or regulatory
constraints, that we obtain services on a preferential or most-favored-customer
basis.
TRAFFIC-INDUCEMENT FEES
We entered into an agreement with Telefonica Data Espana, S.A. in October
1999 under which Telefonica Data has agreed to pay us traffic-inducement fees
for usage of Telefonica Data's network generated by customers of our Spanish
ISP. The contract has an initial term of one year. Total fees earned by us will
be calculated from a fee schedule based on the total number of monthly minutes.
Telefonica Data will be required to pay equivalent traffic-inducement fees to
other ISPs in Spain. In addition, we entered into traffic-inducement agreements
with affiliates of Telefonica, S.A. in Guatemala and El Salvador in August 2000,
with effect from May and July 2000, respectively. We will earn
traffic-inducement fees under these agreements based on the total number of
minutes consumed. Please see "-- Managements' Discussion and Analysis of Results
of Operations and Financial Condition -- Revenues".
OTHER RELATIONSHIPS
- Telefonica Data Espana, S.A. -- we lease circuits from Telefonica Data.
- Telefonica Media, S.A. -- we obtain content from this company and are
jointly pursuing interactive access through their various distribution
platforms. In addition, Telefonica Media, S.A. has agreed, to the extent
permitted by Spanish law, and subject to market conditions to consider
us as a preferred provider of internet access services to Telefonica
Media. We also work with Telefonica Media to provide services relating
to the development of interactive television and wide-band contents.
- Telefonica Moviles, S.A. -- we will be considered by Telefonica Moviles,
S.A., to the extent permitted by Spanish law, and subject to market
conditions, as a preferred provider of content for its internet related
services. We have developed the content for Telefonica Moviles' wireless
application protocol, or WAP, portal, Oleada. In addition, we and
Telefonica Moviles have established a wireless joint venture to be
49%-owned by Terra and 51%-owned by Telefonica Moviles to operate mobile
internet portals accessible from wireless devices.
- Telefonica Internacional, S.A. -- TISA is the holding company for the
Telefonica group's international assets. TISA has agreed to use its best
efforts to cause all Telefonica group companies to treat us as a
preferred provider of internet access services and content, subject to
market conditions.
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- Telefonica Publicidad e Informacion, S.A. -- TPI publishes yellow pages
directories. We will jointly pursue the development of internet-related
businesses in Spain.
- Telefonica Cable, S.A. -- we provide Telefonica Cable with a service
that allows it to provide internet access to its customers. We will earn
revenues based on the number of Telefonica Cable customers who
subscribe. Telefonica Cable has agreed, to the extent permitted by
Spanish law and subject to market conditions, to consider us as a
preferred provider of internet related services.
- Telefonica y Finanzas, S.A. -- we obtain cash management services from
this company.
- Telefonica de Espana, S.A. -- we distribute our internet access product
through Telefonica de Espana's network of stores throughout Spain.
- Estratel, S.A. -- we obtain help-desk services from this company.
- Atento Holding Telecomunicaciones -- we outsource some of our call
center function to this company.
Certain Transactions
The most significant services that we purchase from other members of the
Telefonica group consist of communications and related services that we use to
provide our internet access and portal services in Spain, Peru and Chile.
Expenses relating to these services were E11.3 million in 1999, E3.5 million in
1998 and E790 thousand in 1997.
OTHER AGREEMENTS
AGREEMENTS WITH BERTELSMANN AG
On May 16, 2000, the following agreements and letters of intent were
signed:
- Strategic alliance among Lycos, Inc., Terra Networks and Bertelsmann AG
for the first and second years from the date the combination between
Lycos, Inc. and Terra Networks is effective. During such years,
Bertelsmann is obliged to pay $325 million for services to be performed
during such period.
- Strategic alliance among Lycos, Inc., Terra Networks, Telefonica, S.A.
and Bertelsmann AG for the third, fourth and fifth years after the date
the combination between Lycos, Inc. and Terra Networks is effective.
During such period, Bertelsmann will purchase up to $675 million of
services. Telefonica has agreed to purchase, if necessary, any portion
of those services that Bertelsmann does not buy, up to $675 million.
- Letter of intent regarding the possible acquisition by Terra Networks of
Bertelsmann AG's approximately 20% stake in Lycos Europe, S.A.
- Letter of intent regarding the potential formation of one or more joint
venture companies in which Bertelsmann AG would hold a 75% or more stake
and Terra Networks up to a 25% stake. Such joint venture companies would
be formed for the sale and purchase of books and products over web sites
in Spain, Portugal and countries in Latin America under the trademark
BOL.
ESTADO GROUP
On April 20, 2000, Terra Networks Brasil, S.A. and Terra Networks signed an
agreement with the Estado Group under which the Estado Group agreed to supply us
with content over five years for distribution on specified websites in Brazil
and outside of Brazil. In return, the Estado Group will receive payments of
$15.0 million in each of the first year (2000) through fourth year (2003) of the
agreement and $8.0 million in the fifth year.
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PART SIX
INFORMATION ABOUT LYCOS
In this Part Six, "Lycos," "we," "us" and "our" refers to Lycos, Inc., and
its consolidated subsidiaries and "common stock" refers to Lycos' common stock,
par value $0.01 per share.
OVERVIEW
Lycos is a global media company operating one of the internet's leading
networks of separately branded websites. The Lycos Network is one of the most
visited online destinations in the world, generating more than 148 million page
views per day. According to a May 2000 Media Metrix report, our network of
branded websites contains three of the twenty most visited U.S. destinations on
the world-wide web. The Lycos Network enables users to quickly access and
retrieve information, communicate with other internet users, easily establish
online communities and engage in commerce. Our popular websites provide a broad
offering of integrated content and services, attracting users into the Lycos
Network through multiple points of entry and creating a large and diverse
audience. During May 2000, according to Media Metrix, we reached more than 32
million unique users.
The Lycos Network provides an attractive medium for advertisers, who can
tailor their offerings to reach our large and diverse audience by advertising
across the Lycos Network or toward narrower demographic segments by advertising
in a specific site or content area. The Lycos Network has attracted a wide
variety of advertisers, including Dell, Intel, General Motors, American
Airlines, Bell Atlantic, Motorola, Johnson & Johnson, OfficeMax and Sears. Our
large audience and distinctly branded sites also appeal to large and small
e-commerce merchants. We facilitate e-commerce in two key ways. First, we
integrate the product and service offerings from merchant partners directly into
our search, navigation and content offerings. Second, through our LYCOShop, we
offer an online shopping marketplace that enables users to easily purchase a
broad variety of goods and services without leaving our sites.
We use our recognized brands and internet operating expertise to create
appealing country-specific content and service offerings for internet users
around the world, either independently or through joint ventures with local
media and technology companies. We currently offer country-specific versions of
our Lycos search and navigation service and other selected network services in
Argentina, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, France,
Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, The
Netherlands, Norway, Peru, The Philippines, Singapore, South Korea, Spain,
Sweden, Switzerland, Taiwan, the United Kingdom and Venezuela. Through the
expansion of the Lycos products and services into these markets, we believe we
have established our position as a global internet leader.
THE LYCOS NETWORK
The Lycos Network attracts a broad demographic base of internet users
through independently branded websites, each of which seeks to address different
interests and needs. Although users typically access the Lycos Network for
specific content through one of our separately branded sites, they are
encouraged to remain in the Lycos Network by the breadth of our offerings and
the easy navigation amongst our sites. The Lycos Network is primarily composed
of the following websites:
lycos.com -- a comprehensive portal which offers search and directory
accompanied by deep vertical content.
hotbot.com -- a sophisticated search service that provides users the ability
to perform advanced web searches.
tripod.com -- a personal publishing community, featuring quality
user-generated content created through easy to use homepage building tools
for beginners and experienced users.
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angelfire.com -- a personal publishing community, similar to Tripod, but
with a focus on a younger age group.
whowhere.com -- a home address, e-mail address and telephone number
directory that assists users in locating individuals worldwide.
mailcity.com -- a web-based e-mail service that offers users a personalized
e-mail account accessible from any computer with an internet connection.
matchmaker.com -- an online dating service.
quote.com -- a broad-based financial site that provides financial market
data such as stock and mutual fund quotes, news and research.
sonique.com -- a website featuring our proprietary music player, which
allows our users to download and listen to various audio formats.
gamesville.com -- an interactive gaming site featuring virtual card games,
trivia quizzes and traditional games such as bingo.
Wired News -- located at Wired.com -- a daily news service offering
reporting and analysis of technology trends.
LYCOShop -- located at Shop.Lycos.com -- an online consumer marketplace
offering products from a wide variety of retailers.
LYCOS Zone -- located at Lycoszone.com -- a premier site offering children's
educational and entertainment content.
We encourage users to remain within the Lycos Network through the use of
links, promotions, shared content and banner advertisements that feature other
Lycos Network properties. For example, when a user conducts a search using the
Lycos.com search service, we offer the user the opportunity to perform the same
search using our HotBot service with one click. Through integration and
cross-promotion of the Lycos Network of websites, we intend to increase the
frequency and length of user visits.
We believe that our network strategy enables Lycos to appeal to a large and
an increasingly diverse internet audience. As a result, the Lycos Network
provides an attractive medium for advertisers who seek to perform broad or
targeted advertising as well as for online merchants. Between January 1998, the
month before Lycos formally launched its network strategy with its acquisition
of Tripod, and May 2000, Lycos' reach in the U.S. grew from approximately 14% of
home users and 22% of users at work to approximately 41.5% of total U.S. online
users, according to Media Metrix.
PRODUCTS AND SERVICES
Lycos offers a comprehensive suite of online products and services. Our
principal offerings are described below.
PREMIER NAVIGATION FUNCTIONALITY
Lycos offers our users the ability to quickly and easily find and access
text, audio, video and other rich media content on the web. Lycos' primary
navigation products include:
Search. We offer two general search services -- HotBot and Lycos Search.
HotBot is designed for a sophisticated user while Lycos Search appeals to a
mainstream user. Since many users enter the internet through search services,
Lycos and HotBot generate a significant portion of the Lycos Network traffic.
HotBot has received many industry awards for its search service, including "Best
Search Engine" by US News & World Report (November 1999) and "Editor's Choice
Search Engine (1999)" by PC Magazine. In addition, in November 1999 HotBot was
selected as the favorite search
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service of internet users surveyed by the Wall Street Journal and in May 2000
HotBot was selected as the leading search site by Forbes magazine. We also offer
our users Lycos Rich Media Search, which enables them to find, download and
listen to various music, audio and video formats (such as MP3).
Guides and Directories. Lycos provides its users with an easy-to-use
framework to efficiently explore the internet through a series of guides and
directories. Lycos' topic-based WebGuides provide categorized areas of interest
that enable users to browse through related information. We also offer a version
of AOL's Open Directory, which is a collection of websites organized by
volunteer editors who have significant interest and expertise in the topics to
which they contribute. The Open Directory compiles highly relevant links in an
easy to navigate database.
Reference Services. Lycos provides a suite of products for its users to
locate other individuals, businesses, products and places. WhoWhere?, a home
address, e-mail address and telephone number directory, assists users in
locating individuals worldwide. Other principal reference services offered by
Lycos include a yellow pages product, which allows users to locate businesses
throughout the United States by searching according to category, business name,
business address or keyword; Lycos Classifieds, which gives users a convenient
way to find where to buy and sell goods and services online; and Lycos RoadMaps,
which allows users to obtain driving directions and maps to virtually any street
address in the United States.
CONTENT AND INFORMATION RESOURCES
Lycos provides a variety of content offerings throughout the Lycos Network,
such as:
Games. We own and operate Gamesville.com, one of the leading online gaming
sites. According to Media Metrix, in May 2000, the Gamesville.com site ranked
first among the top 500 U.S. websites in average usage at approximately 18
minutes per day. The Gamesville.com offering supplements our existing menu of
games which includes various board, card and other traditional games.
Gamesville.com offers users the opportunity to win cash and other prizes
competing in virtual card games, trivia quizzes and other traditional games,
such as bingo. There is no fee for playing these games, and no money is wagered.
Music. Lycos has created a comprehensive group of products in the music
category, under the brand Lycos Music (music.lycos.com). These products include
an MP3 search engine, a 35 channel radio network broadcast over the internet, a
catalog of sound files created by independent bands, an audio player that
downloads various music and audio formats, and news and information from Rolling
Stone and Billboard. We have augmented these products with other relevant
offerings, such as free homepages on which artists can publish their songs and
fans can publish fanpages. We also offer our Sonique music player, which allows
users to download and listen to various music and audio formats.
Personal Finance. Lycos owns and operates Quote.com, a leading personal
finance content site. Lycos provides users with finance and investing tools
through both its Quote.com site and through Lycos Investing
(lycos.investing.com). Quote.com and Lycos Investing provide users with stock
quotes, charts, news, research and analysis, as well as the ability to create
and maintain information on a personal portfolio of stocks, all without charge.
In addition, Quote.com offers users premium services, including streaming real
time stock quotes, for a fee.
Kids. LycosZone (lycos.zone.com) provides a unique collection of products,
content and services for children. We believe LycosZone has rapidly become one
of the most popular websites targeted to children. The offerings include
age-specific games, educational tools and special sections for parents and
teachers. LycosZone provides links to a large number of national and local
educational and information resources geared to children of all ages. LycosZone
users are protected by our proprietary SearchGuard online filter, which blocks
out potentially inappropriate content.
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Technology. Lycos offers daily, in-depth news and analysis of the
technology industry and its impact on business, culture and politics through our
Wired News and HotWired (hotwired.lycos.com) services. These services keep users
informed on the latest developments and trends across a broad range of
technology topics. In addition, our Webmonkey (webmonkey.com) offering provides
a wide array of tutorials on web technology for both amateur and professional
website developers.
Health. In collaboration with Healtheon/WebMD, Lycos Health WebGuide
(webmd.lycos.com) provides a comprehensive health resource. This WebGuide
provides medical reference tools and a full-range of information about healthy
living, including medical news, health tips, chats with medical experts and
specialized communities to help users stay informed about various health issues.
PERSONALIZATION
Through MyLycos, we provide users with the opportunity to personalize their
Lycos experience. MyLycos delivers a personalized version of the Lycos service,
including features such as news, weather, stock quotes, sports scores,
horoscopes, lottery results, local television listings and website reviews, all
tailored by each individual to his or her preferences. We believe MyLycos
provides a value-added service to our users that increases their overall use and
duration of visits to the Lycos Network.
ONLINE COMMUNITY PRODUCTS
Lycos provides a number of services to allow its users to create and
actively manage communities around topics that interest them. Lycos believes
that users who become involved with Lycos online community products and services
are more likely to return to those sites in the future. Consequently, Lycos
seeks to develop an active, loyal user base by building significant community
features into the Lycos Network through the following online products:
Personal Publishing. Through its Angelfire and Tripod services, which
together comprise one of the web's largest online communities, Lycos offers
users the online publishing tools necessary to create and publish their own
personal homepages. The simplest pages can be created and published in minutes,
yet the tools provided allow a user, without any programming skills, to create a
"professional-looking" site that incorporates photos, images, graphics, audio
and video files, and a guestbook. Through what are commonly known as "affiliate
programs", users also can create links to e-commerce sites and earn credit
towards purchases by referring visitors to those e-commerce sites.
Clubs. Lycos Clubs (clubs.lycos.com) offers users the ability to create
their own topic-based clubs enhanced by features such as instant messaging,
e-mail, paging, chat and photo albums that are seamlessly integrated into each
club. Instead of leaving a club to use these features, club members can
instantly communicate from within the club. A creator of a club can open the
club to the general public or can restrict access to a particular group of users
by requiring a password.
E-mail/Instant Messaging. Through our MailCity product, Lycos offers users
a free, personalized web-based e-mail account which can be accessed from any
computer with an internet connection. Since MailCity users do not need to change
their e-mail addresses when they move or change internet service providers, the
same e-mail address can be used indefinitely. In addition, in an alliance with
AOL, we launched the Lycos Instant Messenger service (messenger.lycos.com),
enabling Lycos users to communicate instantly with each other and with AOL
members.
Chat and Bulletin Boards. Lycos offers users the opportunity to
participate in online chat sessions, in which users can interact, in real time,
with multiple users from all over the world. Lycos Chat (chat.lycos.com)
regularly features hosted chats with celebrities and experts on topics of
interest to Lycos users. Lycos Bulletin Board (boards.lycos.com) allows users to
post messages to existing message threads or create a new thread by posting a
message on a topic or topics of the user's choice.
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ADVERTISING REVENUE
According to Forrester Research, worldwide online advertising revenue is
expected to grow from $3.3 billion in 1999 to $33.1 billion in 2004. The large
and diverse audience reach of the Lycos Network, combined with our ability to
segment and target that audience, provides advertisers with an attractive
platform to promote their goods and services. The wide variety of content and
services available on the Lycos Network enables advertisers to focus their
promotional efforts on the Lycos Network sites most relevant to their product or
service offerings. Lycos advises customers on advertisement placement and
design, enabling them to develop and monitor their advertisements for
effectiveness. To facilitate these services, Lycos provides advertisers with
online reports showing impressions (an impression is a one-on-one view of an
advertisement by the end user) and the number of times users "click through" an
advertisement to visit the advertiser's site.
We generate advertising revenue primarily by placing banner advertisements
and sponsorship links on the web pages that are displayed on the Lycos Network.
From each advertisement, a viewer can link directly to the advertiser's website,
thus affording the advertiser the opportunity to interact directly with a
potential customer. Our advertising contracts generally have a term of one to
twelve months. Advertising contracts are sold primarily as:
- 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
- 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).
We employ a direct sales force to address the new and evolving requirements
of the internet advertising market. We have hired the majority of our sales
force from the advertising industry because we believe that an experienced sales
force is critical to initiate and maintain relationships with advertisers and
advertising agencies. Lycos employs advertising sales personnel in Atlanta,
Boston, Chicago, Dallas, Los Angeles, New York, Miami, Philadelphia and San
Francisco.
ELECTRONIC COMMERCE REVENUE
International Data Corporation estimates that revenues from e-commerce will
grow from $50.4 billion in 1998 to $1.3 trillion in 2003. According to a 1999
study by CBS Marketwatch, 78% of all online users search and navigate the web
for product and service information while 36% of all online users search and
navigate the web with a specific intent to buy. With the Lycos Network
generating more than 148 million page views per day in May 2000, Lycos
represents an attractive e-commerce platform. Lycos provides opportunities for
our users to purchase products and services throughout the Lycos Network both by
integrating commerce opportunities into contextually relevant placements on the
Lycos Network sites and through our online marketplace, LYCOShop.
LYCOS NETWORK E-COMMERCE ACTIVITIES
We believe that integrating e-commerce opportunities into the Lycos Network
search and navigation services provides an easy and useful shopping experience
for our users. Specifically, we integrate the opportunity to purchase related
products and services into the results of commerce-related searches performed by
our users. In addition, we provide certain merchant partners with prominent
positioning for their product or service offering in appropriate sites within
the Lycos Network. In return, Lycos generally receives a fixed fee and a share
of the related e-commerce revenue.
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Our e-commerce agreements typically have one to three year terms. In some
instances, we have entered into exclusive sponsorship arrangements for certain
commercial categories. Our e-commerce relationships include agreements with the
following companies:
Apartments.com -- provides users with the ability to find and post listings
for rental apartments.
AT&T -- provides Lycos users with an ability to purchase telecommunication
services over the internet.
Autoweb.com -- provides users with the ability to purchase automobiles and
receive related information online.
LYCOSHOP
In October 1999, we launched LYCOShop, an online marketplace offering
thousands of products and services from a wide variety of brand name retailers
and small specialty stores, including: LL Bean, Coach and Clinique. In addition
to online retailing, LYCOShop also provides our participating merchants and
users with the ability to conduct online auctions and list classified
advertisements for products and services. LYCOShop provides its users with
valuable services, including product reviews and search, navigation and
community at each stage in the buying cycle so that shoppers can research their
buying options, discuss products and services with other consumers and compare
product and price features prior to making a purchase. LYCOShop provides
telephonic customer support to augment online support and provides users with a
rewards program to increase customer loyalty. During the holiday season in 1999
(Thanksgiving to Christmas), the number of unique users on LYCOShop was 450
percent greater than our shopping traffic during the same period in 1998.
For participating merchants, LYCOShop features a sophisticated
store-building product that permits large and small retailers to create and
maintain online stores, accept credit card purchases, track sales, and also sell
their products through auctions and classifieds. Lycos generates revenue from
LYCOShop through merchant site hosting fees, slotting fees and by charging
merchants a percentage of each transaction's value. Our participating merchants
provide fulfillment and distribution services for LYCOShop.
ACQUISITIONS AND STRATEGIC ALLIANCES
We pursue acquisitions and alliances with strategic partners in order to
increase the number of visitors to the Lycos Network, the frequency with which
our users visit the Lycos Network and the amount of time they spend on the Lycos
Network each visit.
RECENT ACQUISITIONS
We have continued to expand our product and service offerings and audience
reach by acquiring businesses, technologies, content and services. Since
February 1998, we have completed nine acquisitions, including the following
acquisitions which we completed since December 1999:
Quote.com. Quote.com provides information, tools and trading capabilities
to independent investors, including financial news, stock quotes and research.
Among the tools offered on the Quote.com website are "QCharts", a Windows-based
real-time market analysis and transaction tool that gives users the ability to
set up their own "trading workstation" by enabling them to open multiple charts
and portfolio sheets all updating automatically in one window of their computer
screen. Quote.com significantly enhances Lycos' financial content offering and
provides Lycos with high-quality products, content and functions in a widely
used area within the Lycos Network.
Gamesville.com. Gamesville.com is a leading interactive entertainment
community where members compete for prizes by playing multi-player real-time
games. The Gamesville.com acquisition complements Lycos' strategic goal of
keeping users in the Lycos Network for longer
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periods of time. Additionally, because Gamesville.com is a registration-based
service, Gamesville.com delivers state-of-the-art, one-to-one targeted database
marketing solutions to brand name advertisers.
Valent Software. Valent is a leading provider of infrastructure and tools
to link online clubs. Valent's NetClubs powers Lycos Clubs, a core community
service within the Lycos Network. The acquisition of Valent is intended to
expand the role of community offerings across the Lycos Network.
Metrosplash, Inc. On July 31, 2000 we acquired Metrosplash, Inc. for
approximately $45 million in cash. Metrosplash, Inc. operates the matchmaker.com
website which provides online dating services. We continuously identify and
evaluate potential acquisition candidates and in many cases engage in
discussions and negotiations regarding potential acquisitions. We currently have
no other agreements with respect to any proposed acquisitions.
STRATEGIC ALLIANCES
To increase traffic to the Lycos Network, enhance the functionality of our
products and services and extend the Lycos brand, we seek to enter into
strategic relationships with business partners who offer content, distribution
and technology capabilities as well as marketing and cross-promotional
opportunities. To date, we have more than 350 alliances with a variety of
companies. Examples of our strategic alliances include:
CONTENT
Healtheon/WebMD -- Through our agreement with Healtheon/WebMD, we provide
our users a comprehensive suite of health-related information. This information
has been incorporated within the existing Lycos Network websites and is
co-branded with Healtheon/WebMD.
Rolling Stone -- We have an agreement that allows us to incorporate content
from Rolling Stone, including artist reviews, into Lycos Music. This content is
co-branded, with both the Rolling Stone and Lycos brands prominently featured.
Business Week -- Business Week provides us with business-related content
that is displayed on a co-branded version of the Business Week site, which is
linked to contextually relevant pages of the Lycos Network. The content includes
information about investing, finance, human resources, company research, and
sales and marketing.
DISTRIBUTION
Computer Manufacturers and Software Developers. Lycos' products and
services are a default offering on software such as IBM's Lotus Notes, and
hardware such as IBM's Aptiva and Thinkpad computers.
Internet Service Providers (ISPs) -- We have agreements with a number of
ISPs, including RCN and its subsidiaries, JavaNet, UltraNet, Erols, StarPower
and AT&T, under which Lycos is a default offering on their homepages.
AOL/Netscape -- Lycos has been designated as a "Premier Provider" of search
and navigation services accessible from the "Net Search" button on the Netscape
browser. AOL/Netscape will commit search exposures during the term of the
Netscape Agreement to Lycos' search services in exchange for a per-impression
payment by Lycos based on the actual number of exposures delivered to Lycos by
AOL/Netscape.
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TECHNOLOGY
Fast Search & Transfer -- We have an agreement with Fast Search & Transfer
that allows us access to their state-of-the-art search technology. We have
incorporated this technology with our existing search technology to provide an
even more robust search product.
LYCOShop -- We have entered into agreements with a number of companies,
including Open Market, Verio, Fairmarket, NetPerceptions, ePinions and
NetCentives, to use their underlying technology for our LYCOShop e-commerce
initiative. These technologies enable store building, transaction processing,
auctions, value-based comparisons, a recommendation engine, product reviews and
the Lycos Rewards program. Our partners typically receive a commission from us
on LYCOShop sales in exchange for use of their technology.
Ericsson -- We are currently developing, in conjunction with Ericsson,
wireless.lycos.com, a website that will enable subscribers to view content
through Short Message Service and Wireless Access Protocol cellular phones. This
service will be co-marketed with Ericsson to wireless carriers with the goal of
making it the default offering for mobile users by offering personalized
services such as stock quotes, news and messaging capabilities.
STRATEGIC INVESTMENTS
Lycos has made direct strategic investments or received warrants in
privately-held internet services companies whose products are integrated into
the Lycos Network. Some of the companies in which we have made investments
include:
- FairMarket, a provider of auctions to business merchants and web
communities;
- Bidder's Edge, a provider of tools and services that enable online
auction users to easily and automatically find similar items from
multiple online auctions;
- Frictionless Commerce, a developer of comparison shopping technologies
that take into account options such as price, product features, brand
reputation and delivery time;
- iCOMS, a provider of engineering, operational and merchant support for
e-commerce services;
- FAST Search and Transfer, a leading internet search technology provider
based in Oslo, Norway; and
- net Shopper.com, a reverse auction site providing for consumer goods and
services.
We have also made investments in Mail.com (which completed its initial
public offering in June 1999), PlanetAll (which was acquired by Amazon.com in
August 1998) and Wit Capital (which completed its initial public offering in
June 1999 and is now known as Wit Soundview Group).
INTERNATIONAL EXPANSION
We believe the international markets will be a significant part of the
internet base in the future. According to International Data Corporation,
internet users outside the United States will increase from 79.4 million in 1998
to 325.5 million in 2003, a compound annual growth rate of approximately 33%. We
often seek to broaden our offerings of localized versions of our products and
services to users outside the United States by partnering with prominent local
media and technology companies. These arrangements are designed to leverage our
brands, technology and internet operating expertise with their promotional,
marketing and sales strengths with the goal of reducing the time to market and
costs associated with our global expansion. In addition, our partners provide
local expertise and infrastructure, localized content and financing.
We believe we have established our position as a global internet leader. We
currently offer 50 localized sites in 22 countries, primarily consisting of
localized versions of the Lycos search and
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navigation service, the Tripod community service and the MailCity e-mail
service. By creating sites in native languages with local content and partnering
with prominent local companies, we believe that we can improve the experience
for internet users in their own countries.
Our current international operations are:
Lycos Europe. In May 1997, we entered into a joint venture agreement with
Bertelsmann Internet Services to create localized versions of the Lycos search
and navigation throughout Europe. Lycos subsequently licensed its Angelfire,
Tripod, Hotbot, Sonique and MyLycos properties to Lycos Europe. This joint
venture, named Lycos Europe, is owned 43.86% by Lycos. Our joint venture
partners, who collectively own 43.86% of Lycos Europe, are Bertelsmann Internet
Holding GmbH, Christoph Mohn Investment Holding GmbH and Fireball Internet GmbH.
The remainder of Lycos Europe's shares are held by the public and were issued
pursuant to an initial public offering of Lycos Europe's shares which was
completed in March 2000. Lycos Europe currently operates localized versions of
the Lycos.com and Tripod sites in Belgium, Denmark, France, Germany, Ireland,
Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom. On May 16, 2000 Terra Networks entered into a letter of intent
regarding Terra Networks' possible acquisition of Bertelsmann's approximately
20% interest in Lycos Europe.
On September 21, 2000, Lycos Europe signed an agreement to acquire all of
the outstanding share capital of Spray Network N.V. in exchange for the issuance
of 84,300,000 shares of Lycos Europe. Spray Network N.V. is a private company
incorporated in the Netherlands and operates an internet new media company that
offers a branded network of media, commerce and communication products and
services throughout Europe. Under the terms of the agreement, Lycos Europe also
may issue up to an additional 10,000,000 shares to certain Spray Network N.V.
shareholders in exchange for cash consideration of E100 million. As a result of
the transaction, Spray Network N.V. shareholders will own approximately 29.26%
of Lycos Europe's outstanding share capital and Lycos' equity ownership in Lycos
Europe will be reduced from 43.86% to 31.03% of Lycos Europe's outstanding share
capital assuming the issuance of 94,300,000 shares.
Lycos Japan. In March 1998, we established Lycos Japan KK as the basis for
a joint venture to promote and operate a Japanese version of the Tripod and
MailCity websites. Our joint venture partners are Sumitomo Corporation, one of
the largest companies in Japan, Internet Initiative Japan, one of Japan's
largest internet service providers, and Kadokawa, a major Japanese publisher.
Lycos beneficially owns approximately 45% of the joint venture.
Lycos Korea. In March 1999, we established Lycos Korea to promote
localized versions of the Lycos and Tripod websites. Our joint venture partner
is Mirae Corporation, a prominent South Korean high-technology company. Lycos
and Mirae each own 44.82% of the joint venture with the remainder held by
certain minority shareholders.
Lycos Asia. In September 1999, we established Lycos Asia to promote
localized versions of the Lycos and Tripod websites in more than 10 countries in
Asia, including Singapore, China, Taiwan, India and Malaysia. Our joint venture
partner is Singapore Telecommunications, and we each own 50% of the joint
venture. Lycos Singapore was launched in December 1999 and currently operates
localized versions of the Lycos.com websites in China, Malaysia, and Singapore.
Lycos Americas. In October 1999, we launched localized versions of the
Lycos and Tripod websites in Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela as well as a United States-based Spanish language version of the
Lycos and Tripod websites. These sites are currently owned entirely by us.
Sympatico-Lycos. In February 2000, we launched Sympatico-Lycos, Inc., a
Canadian company, to promote localized versions of the Lycos web site, Tripod
and MailCity. Lycos' joint venture partner is Bell Actimedia, a prominent online
communications company in Canada. Lycos owns 29% of the joint venture.
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LYCOS VENTURES
In July 1999, we formed Lycos Ventures, a $75 million venture capital fund,
in conjunction with Bear Stearns, Mellon Ventures, Sumitomo Corporation, Vulcan
Ventures and others to make early stage investments in companies involved in
e-commerce, online media or internet technology. We have committed to invest up
to $25 million of the $75 million fund. To date, this fund has made investments
in several companies, including LifeMinders, FogDog Sports, Conducent
Technologies, Planet Feedback, Brainbench, Timesoft, Online Choice, Oyohats and
Shopexpert.
LYCOSLABS
In January 2000, we formed LycosLabs, a full service business incubator
that offers early stage financing and strategy, marketing and business
development services to emerging companies and entrepreneurs.
MARKETING AND BRANDING
We support the Lycos Network globally through an integrated marketing and
branding strategy that includes advertising, public relations and promotions.
Our plan is designed to increase awareness of the Lycos brand, enhance loyalty
and increase usage of the Lycos Network. We believe that continuing to enhance
our brand name recognition is important to attract new users. We seek to
differentiate our offerings by giving them a personality, principally through
our mascot, "Lycos", the black Labrador retriever, and our "Go Get It" slogan.
Our advertising emphasizes that using the Lycos Network is fast, friendly and
fun. Our marketing efforts seek to create a Lycos brand that is consistent in
all of the countries in which we operate.
We advertise both online and through traditional media, such as broadcast
and cable television, local radio, consumer and trade magazines, newspapers and
billboards. We are also extending the Lycos brand name by promoting our products
and services through other media, such as books, movies and videos. Our online
advertising includes banner advertisements throughout the Lycos Network and
across many other sites on the internet. In addition, we promote each of the
sites within the Lycos Network both by creating hyperlinks among the member
sites and through banner promotion within the Lycos Network. We have also
promoted the Lycos brand through non-traditional marketing channels, including:
- professional sports sponsorships, such as sponsorships of a NASCAR
racing team, and an NFL and NHL team, Major League Indoor Soccer, NCAA
basketball games and an America's Cup yacht, and hosting special event
sites such as golf's 2000 USOpen.com and football's 1999 Superbowl.com;
and
- co-branded and cross-promotions with various packaged good companies,
retail outlets and media companies such as Universal Studios.
We also enter into strategic alliances with companies such as Fidelity and
Intel that include co-branded cross-promotions designed to generate off-line
media exposure.
OPERATIONS AND TECHNOLOGY
We use a combination of proprietary and licensed technology to provide our
users with search and navigation services and capabilities that differentiate
the user experience of the Lycos Network from that of our competitors. Our
proprietary technologies include search technology, MyLycos personal page,
SearchGuard online filter and Tripod and Angelfire personal publishing tools.
Through third parties, we license technologies such as search, directory
services, advertisement serving, commerce transaction processing, online product
reviews and value-based comparisons.
The Lycos search and indexing technology was originally developed at
Carnegie Mellon University. In June 1995, Lycos entered into a license agreement
with Carnegie Mellon University
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pursuant to which Carnegie Mellon University granted Lycos a perpetual,
worldwide right to use and sub-license the Lycos search and indexing technology
and other intellectual property rights, including the "Lycos" trademark and the
domain name lycos.com. Carnegie Mellon University has been issued a patent in
the United States relating to Lycos' search and indexing technology.
Most of our technological infrastructure operations are provided to us by
third parties. Exodus Communications hosts our servers and provides network
redundancy. Our outsourcing relationships have allowed us to grow quickly and
have reduced the costs associated with staffing and equipment.
RESEARCH AND DEVELOPMENT
We focus our efforts both on developing our internal technologies and
integrating the technologies of our partners. We continue to develop proprietary
technologies that differentiate the Lycos user experience (such as MyLycos),
tools that strengthen the relationship between our sites (such as universal
registration) and methods of improving targeted advertising and e-commerce on
the Lycos Network. We are also working with partners to distribute our content
over broadband and wireless networks.
COMPETITION
The market for internet products and services, advertising and e-commerce
is highly competitive. Lycos believes the principal competitive factors in this
market are name recognition, quality of content and commerce offerings, site
performance, ease of use, features and quality of support.
A number of companies currently offer competitive products in our target
markets. The primary competitors of our products and services are other
companies providing online services and include About.com, Amazon.com, AOL, Ask
Jeeves, Buy.com, CMGi's AltaVista, Disney's GO Network, DealTime, Excite@Home,
FortuneCity, GoTo.com, Go2.net, Google, Infospace, Looksmart, Microsoft's MSN,
mySimon, NBCi (including Snap and Xoom), CBS StoreRunner, theGlobe.com and
Yahoo!. In addition, a number of companies offering internet products and
services, including direct competitors of Lycos, recently have begun to
integrate multiple features within the products and services they offer to
consumers. These competitors have integrated competing products and services
through internal development, acquisitions, joint ventures and licensing
arrangements.
EMPLOYEES
As of May 31, 2000, Lycos' U.S. operations employed 902 persons, including
419 in sales and marketing, 359 in research and development, product development
and service operations and 124 in finance and administrative functions. Lycos
also employs 48 independent contractors for software development, documentation,
artistic design and editorial reviews. In addition, our international joint
ventures employ an additional 545 persons in Europe and Asia. None of our
employees is represented by a labor union, and Lycos considers its employee
relations to be good.
PROPERTIES
Lycos' corporate headquarters is located in Waltham, Massachusetts. We also
have principal operating offices in New York City and San Francisco. We also
maintain sales offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, Miami,
New York, Philadelphia and San Francisco. We expect that we will need additional
space as we continue to expand our business and believe that we will be able to
obtain additional space as needed on commercially reasonable terms.
Lycos maintains substantially all of its computer systems in the
California, New Jersey and Massachusetts sites of Exodus Communications. Lycos'
operations are dependent in part upon its ability to protect its operating
systems against physical damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins or other similar events. Furthermore,
despite the
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implementation of network security measures by Lycos, its servers are also
vulnerable to computer viruses, break-ins and similar disruptive problems. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of our products and services which could
adversely impact our ability to operate our business.
LEGAL PROCEEDINGS
In November 1999 and July 2000, Fleming W. Reynolds, Sr., Trustee of AIWF
Trust, a former shareholder of WiseWire Corporation, filed related lawsuits 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 these lawsuits subsequently consolidated,
Reynolds 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 common stock in Lycos common stock,
which amounts to approximately 748,000 shares of Lycos common stock. Lycos
believes that the allegations in these complaints are without merit and intends
to contest them vigorously. In August 2000, Reynolds, as Trustee of AIWF Trust,
filed a separate lawsuit in Chancery Court, Sussex County, Delaware, seeking a
declaration that AIWF Trust is entitled to 748,000 shares of Lycos and an
injunction of the combination with Terra Networks until a determination
regarding its shares has been made. Lycos believes that the allegations in this
complaint are without merit and intends to contest them vigorously. Lycos filed
a counterclaim for a determination of the number of shares to which AIWF Trust
is entitled. The Chancery Court has set trial for this matter for October 2000.
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.
In February 1999, we announced our intention to enter into a transaction
with USA Networks, Inc. and certain affiliated companies pursuant to which,
among other things, Lycos would have been merged into a subsidiary of USA
Networks. In May 1999, the parties to the proposed transaction terminated the
merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle County,
by shareholders of Lycos allegedly on behalf of all common stockholders of
Lycos. 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. We believe that the allegations in the complaints are without merit
and intend to contest them vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities law through alleged misrepresentations and omissions relating to the
announced transaction with USA Networks. The consolidated complaint seeks an
unspecified award of damages. We believe that the allegations in the
consolidated complaint are without merit and intend to contest them vigorously.
A motion to dismiss the consolidated complaint is pending.
In July 2000, Lycos filed a lawsuit in Superior Court for Middlesex County,
Commonwealth of Massachusetts, against TJ Motorsports, Inc. (d/b/a Tyler Jet
Motorsports), Burl Outlaw and ISM Motorsports Corp. seeking a declaratory
judgment that Lycos had fulfilled all its contractual obligations in connection
with a sponsorship agreement between Lycos and TJ Motorsports, the owner and
operator of a NASCAR Winston cup race car. Subsequently, in July 2000, Tyler
Jet, L.L.C. (an entity allegedly related to TJ Motorsports) and TeamXtreme
Racing, L.L.C. filed suit against Lycos in United States District Court for the
Eastern District of Texas, Lufkin Division, seeking damages for breach of
contract and fraudulent inducement in connection with the above-
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referenced sponsorship agreement and an earlier sponsorship agreement between
TeamXtreme Racing and Lycos. Plaintiffs in the Texas action seek actual damages
of $15 million and punitive damages of $100 million. Lycos believes that
plaintiffs allegations in the Texas action are without merit and intends to
contest them vigorously.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In addition to historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed in this proxy
statement/prospectus. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and elsewhere
in this proxy statement/prospectus. You should read the following discussion of
our financial condition and results of operations together with our consolidated
financial statements and the related notes and "Part One -- Summary Selected
Historical Lycos Financial Data" included elsewhere in this prospectus/proxy
statement.
YEAR ENDED JULY 31, 2000 COMPARED TO YEAR ENDED JULY 31, 1999
Results of Operations
Total Revenues. Total revenues for the year ended July 31, 2000 increased
$152.5 million, or 110%, to $291.0 million versus $138.5 million for the year
ended July 31, 1999 as a result of growth in the number of advertisers. As of
July 31, 2000, deferred revenues increased to $128.1 million, compared to $120.0
million at July 31, 1999, attributable to advertising contracts and guaranteed
commitments under license and electronic commerce agreements for which there are
significant obligations of Lycos remaining.
Advertising Revenues. Advertising revenues increased $95.2 million, or
99%, to $191.7 for the year ended July 31, 2000, representing 66% of total
revenues, as compared to advertising revenues of $96.5 million for the year
ended July 31, 1999, which represented 70% of total revenues. The increase in
advertising revenue was attributable to:
- an increase in the number of advertisers; and
- an increase in the average size and length of advertising contracts.
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:
- a "run of site" contract under which a customer is guaranteed a number
of impressions;
- a "key word" contract in which a customer purchases the right to
advertise in connection with specified word searches; or
- a "targeted" contract where the customer purchases a specified number of
impressions in one of the targeted categories or on a specified page or
service.
Electronic Commerce and Other Revenues. Electronic commerce and other
revenues increased $57.2 million, or 136%, to $99.3 million for the year ended
July 31, 2000, representing 34% of total revenues, as compared to electronic
commerce and other revenues of $42.1 million for the year ended July 31, 1999,
which represented 30% of total revenues. The increase in electronic commerce and
other revenues is attributable primarily to the addition of several new partners
including, among others, FirstUSA Bank, WebMD, Lifeminders, American Greetings,
AutoWeb, Fidelity, Anyday.com and Evoke.
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.
Electronic commerce revenues are generally recognized upon
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delivery of services provided that no significant Lycos obligations remain and
collection of the receivable is probable. In cases where there are significant
remaining obligations, we defer such revenue until those obligations are
satisfied.
Cost of Revenues. Cost of revenues increased $23.5 million, or 80%, to
$52.8 million for the year ended July 31, 2000, representing 18% of total
revenues, as compared to cost of revenues of $29.3 million for the year ended
July 31, 1999, which 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. The percentage decrease in cost of
revenues is attributable to operational synergies achieved through the
integration of our various acquisitions.
Operating expenses
Research and Development. Research and development expenses increased
$20.4 million, or 76%, to $47.4 million for the year ended July 31, 2000,
representing 16% of total revenues, as compared to research and development
expenses of $27.0 million for the year ended July 31, 1999, which represented
19% of total revenues. Research and development expenses consist primarily of
equipment and salary costs. The percentage decrease is attributable to economies
of scale achieved through the integration of our various acquisitions. 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.
With the exception of acquired technology, all 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 increased $69.5 million,
or 88%, to $148.8 million for the year ended July 31, 2000, representing 51% of
total revenues, as compared to sales and marketing expenses of $79.3 million for
the year ended July 31, 1999, which represented 57% of total revenues. Sales and
marketing expenses consist primarily of compensation, advertising, public
relations, trade shows, travel and costs of marketing literature. The spending
increases were due to the following:
- the addition of sales and marketing personnel;
- increased commissions associated with higher sales; and
- increased expenses relating 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 increased
$14.3 million, or 81%, to $31.8 million for the year ended July 31, 2000,
representing 11% of total revenues, as compared to general and administrative
expenses of $17.5 million for the year ended July 31, 1999, which represented
13% 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. General and administrative expenses include
non-recurring charges of $4.0 million for the year ended July 31, 2000. The non-
recurring charges consist primarily of legal, investment banker and accounting
fees associated with the initial public offering of Lycos Europe in March 2000
and the acquisition of Gamesville.com in December 1999.
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Amortization of Intangible Assets. Amortization of intangible assets
increased $81.7 million, or 156%, to $134.1 million for the year ended July 31,
2000 versus $52.4 million for the year ended July 31, 1999. The increase is
attributable to increased amortization related to developed technology and
goodwill and other intangible assets recorded upon the acquisitions of Wired
Ventures, Internet Music Distribution, Inc., Quote.com and Valent.
Interest Income, net. Interest income increased $17.1 million, or 273%, to
$23.4 million for the year ended July 31, 2000, as compared to interest income
of $6.3 million for the year ended July 31, 1999. Interest income is generated
from investment of our cash equivalents. Interest expense was not significant in
either period. The increase in interest income reflects the investment of higher
cash and cash equivalent balances as a result of our secondary stock offering in
January 2000.
Equity Share of Losses in Affiliates. Our equity share of losses from
Lycos Europe were approximately $24.1 million for the year ended July 31, 2000.
Our equity share of losses from Lycos Japan were approximately $6.2 million and
$1.0 million for the years ended July 31, 2000 and 1999, respectively. Our
equity share of losses from Lycos Asia, which was established during 2000, were
approximately $4.9 million for the year ended July 31, 2000. Equity losses from
Lycos Korea and Lycos Canada were insignificant for the year ended July 31,
2000. Our joint ventures are accounted for under the equity method of
accounting.
We recognized equity income in Lycos Ventures of approximately $2.9 million
for the year ended July 31, 2000. The equity income in Lycos Ventures reflects
unrealized gains recorded by Lycos Ventures as a result of public offerings and
changes in quoted trading prices by certain investees of the Lycos Ventures
venture capital fund.
Gain on Sale of Investments. During March 2000, Lycos Europe completed an
initial public offering on the German Neuer Markt stock exchange which raised
approximately $625 million, net of offering costs. As a result of the offering,
Lycos' percentage ownership in Lycos Europe was reduced to approximately 43.8%
from 50% and Lycos recognized a one-time gain of $270 million. At July 31, 2000
our carrying value of Lycos Europe, which is recorded in investments on the
balance sheet, was $246 million. The fair value of our investment in Lycos
Europe, based on the quoted trading price, was approximately $766 million at
July 31, 2000.
Income Taxes. Our 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. The provision for income taxes relates
primarily to deferred taxes recorded on the gain from the initial public
offering of Lycos Europe, as discussed above.
Liquidity and Capital Resources
At July 31, 2000, we had cash and cash equivalents of $640.1 million. We
regularly invest excess funds in short-term money market funds, government
securities and commercial paper.
We generated cash from operations of $53 million during the year ended July
31, 2000, due primarily to increases in accrued expenses related to the timing
of payments and improved collections on electronic commerce and other
receivable.
We used cash in investing activities of $108.6 million during the year
ended July 31, 2000, due primarily to a $14.5 million loan to Lycos Japan, a $25
million investment in Lycos Asia, a $21.8 million investment in AutoWeb, a $5
million investment in Driveway Corporation, a $2.9 million investment in Lycos
Ventures, a $1.4 million investment in Trellix, $3 million of costs paid in
connection with our acquisition of Quote.com, $32 million paid in connection
with our acquisition of Metrosplash and $3.4 million in capital expenditures of
property and equipment.
We generated cash from financing activities of approximately $529 million
during the year ended July 31, 2000, due primarily to proceeds of $455.6 million
received by us from the issuance of
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6,163,000 shares of common stock in connection with a secondary offering
completed in January 2000 and $84.6 million received by us from the exercise of
employee stock options.
As of July 31, 2000, we had deferred revenues of $128.1 million
representing fees to be earned in the future on noncancelable electronic
commerce agreements. The increase was due to additional electronic commerce
agreements with guaranteed minimums.
We currently believe that available funds and cash flows expected to be
generated by operations, if any, will be sufficient to fund our working capital
and capital expenditures requirements for at least the next year. Thereafter, we
may need to raise additional funds. We may need to raise additional funds sooner
in order to:
- fund more rapid expansion;
- develop new or enhanced products and services;
- respond to competitive pressures; or
- acquire complementary businesses or technologies.
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.
Business Combinations
Acquisition of Metrosplash, Inc. On June 20, 2000, Lycos entered into an
agreement to acquire Metrosplash, Inc. ("Metrosplash"), owner of Matchmaker.com,
a leading personal classifieds site. On July 31, 2000, Lycos completed the
acquisition and Metrosplash became a wholly-owned subsidiary of Lycos. As a
result, all outstanding shares of common stock and preferred stock of
Metrosplash were purchased by Lycos for cash plus the assumption of debt for
approximately $45 million. Additionally, we converted certain outstanding
Metrosplash stock options into 29,401 Lycos options.
The acquisition of Metrosplash 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 Metrosplash will
be included with those of Lycos for periods subsequent to the date of
acquisition.
Acquisition of Quote.com, Inc. On September 2, 1999, we entered into an
agreement and plan of merger with Quote.com, Inc., in a stock-for-stock
transaction. On December 6, 1999 Lycos completed the closing of the merger, and
Quote.com became a wholly-owned subsidiary of Lycos. 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 Lycos.
Additionally, we converted all outstanding Quote.com stock options and warrants
into approximately 239,000 Lycos options and warrants.
The acquisition of Quote.com 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 Quote.com are included
with those of Lycos for periods subsequent to the date of acquisition.
Acquisition of Valent Software Corporation, Inc. In December 1998, we
entered into an agreement with Valent Software Corporation pursuant to which we
invested $2 million of cash in Valent Software Corporation. In exchange for the
$2 million, we received 191,667 shares of Valent Software Corporation Series C
Preferred Stock representing approximately a 16.7% interest in Valent Software
Corporation and an option to acquire all of the remaining outstanding capital
shares of
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Valent Software Corporation. Valent Software Corporation provides the
infrastructure and tools to link online clubs.
In January 2000, we exercised our option to acquire all of the remaining
outstanding capital shares of Valent Software Corporation. On February 2, 2000,
we completed the closing of the merger and Valent Software Corporation became a
wholly-owned subsidiary of Lycos. As a result, all outstanding shares of common
stock and preferred stock of Valent Software Corporation were converted into an
aggregate 564,045 shares of common stock of Lycos. Additionally, we converted
all outstanding Valent Software Corporation stock options and warrants into
40,129 Lycos options and warrants.
The acquisition of Valent Software Corporation 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 Valent Software Corporation are included with those of Lycos for periods
subsequent to the date of acquisition.
Investments
Joint Venture with Bell ActiMedia. In February 2000, we announced the
formation of a new internet joint venture in Canada, "Sympatico-Lycos", to
provide expanded internet resources for the business-to-consumer marketplace in
Canada. Under the terms of the agreement, Bell ActiMedia will contribute $25
million in cash and certain on-line assets, including internet portal Sympatico.
Lycos' ownership in the joint venture is 29%. Lycos will also contribute its
technologies and brands in exchange for a royalty, which is based on certain
milestones achieved by Sympatico-Lycos. Separately, Bell ActiMedia and Lycos
signed a $40 million three-year distribution agreement under which Bell
ActiMedia products and services will be promoted to users who access the Lycos
Network from Canada.
Investment in AutoWeb. In April 2000, we entered into an agreement with
AutoWeb, Inc. pursuant to which we purchased 3,035,025 shares of AutoWeb for
$21.8 million in cash. The investment represents an approximate 10% ownership in
AutoWeb and was based on quoted trading prices of AutoWeb's common stock. At the
same time, we entered into a four year strategic alliance to build and jointly
operate a new on-line automotive channel and deliver marketing and e-commerce
opportunities to the auto industry. Based on AutoWeb's closing traded market
price of $1.94 on July 31, 2000, our investment in AutoWeb was valued at $5.9
million, and accordingly, we recorded a $9.5 million unrecognized loss, net of
tax, as a component of other comprehensive income.
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 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 and Other Revenues. Electronic commerce 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 and other revenues were $14.3 million, representing
25% of total revenues. For the year ended July 31, 1999, the increase in
electronic commerce and other revenues was attributable primarily to the
addition of
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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 increases.
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.
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 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 July 31, 1998, 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
June 1999 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
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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 obstacles to launching the products were:
- completing software development;
- integrating the various components into a functional online system;
- completing the Application Programming Interface (API); and
- developing 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 "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.
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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.
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
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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
earnings 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.
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 $44.1 million,
or 125%, to $79.3 million for the year ended July 31, 1999, representing 57% of
total revenues. 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 following:
- the addition of sales and marketing personnel;
- increased commissions associated with higher sales; and
- increased 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 and $4.3
million in the fiscal years ended July 31, 1999 and 1998, respectively.
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%
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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 Networks 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 U.S.
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.
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.
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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. 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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PART SEVEN
LEGAL INFORMATION
COMPARISON OF RIGHTS OF SHAREHOLDERS OF TERRA NETWORKS AND STOCKHOLDERS OF LYCOS
Terra Networks is a company organized under the laws of the Kingdom of
Spain and is governed by the Spanish Corporation Law of 1989 (Texto Refundido de
la Ley de Sociedades Anonimas). Lycos is a Delaware corporation and is governed
by the Delaware General Corporation Law. In addition, the rights of Terra Lycos
shareholders will be governed by the Terra Lycos by-laws (estatutos); and the
rights of Lycos stockholders are governed by the Lycos restated certificate of
incorporation and the Lycos amended and restated by-laws. Upon completion of the
combination, Lycos stockholders will become shareholders of Terra Lycos. As a
result, they will be governed by the Terra Lycos by-laws, as well as the Spanish
Corporation Law of 1989. The following discussion of the material differences
between the rights of Terra Networks shareholders and Lycos stockholders is only
a summary and does not purport to be a complete description of these
differences. The identification of specific differences is not intended to
indicate that other equally or more significant differences do not exist. The
following discussion is qualified in its entirety by reference to the Spanish
Corporation Law of 1989 and the Delaware General Corporation Law, as well as the
full text of the Terra Lycos by-laws, which are filed as exhibits to the
registration statement in which this proxy statement/prospectus is included, and
the Lycos restated certificate of incorporation and the Lycos amended and
restated by-laws, copies of which are on file with the SEC. For information on
how you can obtain copies of these documents, see "Part Eight -- Additional
Information for Stockholders -- Where You Can Find More Information."
SUMMARY OF YOUR RIGHTS AS HOLDERS OF LYCOS SHARES AND YOUR RIGHTS AS POTENTIAL
HOLDERS OF TERRA NETWORKS SHARES OR ADSS
CORPORATE GOVERNANCE
Lycos
Currently. The Delaware General Corporation Law, the restated certificate
of incorporation of Lycos and amended and restated by-laws of Lycos govern the
rights of holders of Lycos common stock.
Upon Completion of the Combination. You will become a Terra Lycos
shareholder or ADS holder and the by-laws of Terra Networks, the Spanish
Corporation Law of 1989 and the deposit agreement, if applicable, will govern
your rights.
Terra Networks
Currently. The Terra Networks by-laws and the Spanish Corporation Law of
1989 govern the rights of holders of Terra Networks shares and such by-laws and
Law and the deposit agreement govern the rights of holders of ADSs.
Upon Completion of the Combination. Same as above.
AUTHORIZED CAPITAL STOCK
Lycos
At September 19, 2000, the total number of authorized shares of Lycos
capital stock was 305 million shares, par value $.01 per share, consisting of
300 million shares of Lycos common stock and 5 million shares of Lycos preferred
stock.
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Terra Networks
At September 1, 2000, the capital stock of Terra Networks consisted of
283,750,000 ordinary shares (319,233,871 ordinary shares giving effect to the
rights offering), nominal value of E2.00 per share.
Upon Completion of the Combination. The capital stock of Terra Lycos is
expected to consist of between 510,607,642 and 660,156,582 ordinary shares,
nominal value of E2.00 per share.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Lycos
The Lycos restated certificate of incorporation provides that the number of
directors comprising the Lycos Board of Directors will be determined from time
to time exclusively by resolution of the Lycos Board of Directors. The Lycos
certificate of incorporation also provides that the number of directors may be
decreased by a majority of the Lycos Board of Directors then in office, but only
to eliminate vacancies. The Lycos Board of Directors currently consists of five
directors divided into three classes, with each class being as nearly equal in
size as possible. Directors are elected to serve staggered three-year terms.
Terra Networks
Currently. The Terra Networks board currently consists of 12 directors
elected by the ordinary shareholders.
Upon Completion of the Combination. The Terra Lycos board will include 3
directors designated by Lycos.
ELECTION OF DIRECTORS
Lycos
Each share carries one vote per director to be elected.
Terra Networks
Each share carries one vote per director to be elected.
DUTIES OF DIRECTORS
Lycos
The Delaware General Corporation Law provides that the board of directors
has the ultimate responsibility for managing the business and affairs of a
corporation. In discharging this function, directors of Delaware corporations
owe fiduciary duties of care and loyalty to the corporations for which they
serve as directors and to such corporation's shareholders.
Delaware courts have held that the directors of a Delaware corporation are
required to exercise an informed business judgment in the performance of their
duties. An informed business judgment means that the directors have informed
themselves of all material information reasonably available to them.
Delaware courts have imposed a heightened standard of conduct upon
directors of a Delaware corporation who take any action designed to defeat a
threatened change in control of the corporation. The heightened standard has two
elements. First, it must be demonstrated that there is a threat to corporate
policy or effectiveness, and, second, the action taken must be found to be
reasonable in relation to the perceived threat posed. In addition, under
Delaware law, when the board of directors of a Delaware corporation approves the
sale or break-up of the corporation, the
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board of directors may, in certain circumstances, have a duty to obtain the
highest value reasonably available to the stockholders.
A director of a Delaware corporation, in the performance of such director's
duties, is fully protected in relying, in good faith, upon the records of the
corporation and upon such information, opinions, reports or statements presented
to the corporation by any of the corporation's officers or employees, or
committees of the board of directors, or by any other person as to matters the
director reasonably believes are within such other person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the corporation.
The Delaware General Corporation Law does not contain any statutory
provision permitting the board of directors, committees of the board and
individual directors, when discharging the duties of their respective positions,
to consider the interests of any constituencies other than the corporation or
its stockholders.
The duty of the board of directors, committees of the board and individual
directors of a Delaware corporation may be enforced directly by the corporation
or may be enforced by a stockholder, as such, by an action in the right of the
corporation, or may, in certain circumstances, be enforced directly by a
stockholder or by any other person or group.
Under the Delaware General Corporation Law, it is presumed that the
directors of a Delaware corporation acted on an informed basis, in good faith
and in the honest belief that the action taken was in the best interest of the
corporation. This presumption may be overcome, however, if it is shown by a
preponderance of the evidence that the directors' decision involved
self-interest or a breach of fiduciary duty such as fraud, overreaching, lack of
good faith, failure of the board to inform itself properly or actions by the
board to entrench itself in office.
Terra Networks
The Spanish Corporation Law of 1989 requires directors to perform their
duties with the diligence of a responsible businessman and a loyal
representative. In addition, directors are required to represent the company in
accordance with its by-laws.
Terra Networks has also approved internal regulations providing additional
duties of directors, including duties of confidentiality and non-competition,
and duties in connection with related-party transactions and conflicts of
interest, prohibiting directors from engaging in insider trading and requiring
directors to comply with reporting obligations.
STOCKHOLDER NOMINATIONS
Lycos
Under the Lycos by-laws there is no advance notice requirements with
respect to stockholder nominations for the election of directors.
Terra Networks
Stockholders do not nominate directors under the Spanish Corporation Law of
1989.
CONFLICT-OF-INTEREST TRANSACTIONS
Lycos
The Delaware General Corporation Law generally permits transactions
involving a Delaware corporation and an interested director of that corporation
if (a) the material facts as to his relationship or interest are disclosed and a
majority of disinterested directors approve the transaction, (b) the material
facts are disclosed as to his relationship or interest and the stockholders
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approve the transaction, or (c) the transaction is fair to the corporation at
the time it is authorized by the board of directors, a committee of the board of
directors or the shareholders.
Terra Networks
Pursuant to Terra Networks' Board of Directors' regulations, an interested
director shall not participate in the deliberations of the Board of Directors
relating to a transaction in which such director has an interest.
In addition, an interested director shall not transact business with any of
the companies belonging to the Terra Networks group, unless the interested
director gives prior notice to the Board of Directors and at least 80% of the
non-interested directors approve the transaction after receiving a report from
the Nominating and Compensation Committee.
RIGHT TO ATTEND AND VOTE AT SHAREHOLDERS' MEETINGS
Lycos
Holders of Shares. Every stockholder of record as of the applicable record
date has the right to notice of and to vote, in person or by proxy, at any
stockholders' meetings.
Terra Networks
Holders of Shares. Shareholders have the right to attend and vote at
shareholders' meetings if they:
- own 25 shares;
- have duly registered their shares in the legal account registry five
business days prior to the date set for a general shareholders' meeting;
and
- can demonstrate their ownership with the appropriate attendance card,
certificate from any member entity of the Spanish clearing institution
or by any other legal means.
Holders of ADSs. Holders of ADSs are not entitled to attend Terra
Networks' shareholders' meetings. If an ADS holder wishes to attend a
shareholders' meeting, the holder must cancel his or her ADSs and obtain
delivery of the underlying Terra Networks shares prior to the record date for
attendance at the meeting.
REMOVAL OF DIRECTORS
Lycos
The Lycos restated certificate of incorporation provides for the removal of
directors by a majority vote of Lycos stockholders entitled to vote at an
election of directors, but only for cause.
Terra Networks
Directors may be removed by the general shareholders' meeting at any time.
SHAREHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS
Lycos
Under the Delaware General Corporation Law, unless the certificate of
incorporation requires the vote of a greater percentage, amendment of the
certificate of incorporation requires the approval of the holders of a majority
of the outstanding shares entitled to vote and, under certain circumstances, the
approval of a majority of the outstanding shares of each affected class voting
separately as a class. Under the Delaware General Corporation Law, unless the
certificate of incorporation or by-laws require a greater vote, a corporation's
by-laws may be amended by
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the stockholders by the affirmative vote of a majority of the shares entitled to
vote thereon present in person or by proxy at a meeting of stockholders at which
a quorum is present.
Under the Lycos restated certificate of incorporation, amendments to the
provisions addressing the number, election, tenure classification, removal and
nomination of directors, the calling of special meetings of stockholders and
actions by written consent of stockholders in lieu of a meeting require the
affirmative vote of 80% of the outstanding voting stock. Other amendments to the
Lycos restated certificate of incorporation require the affirmative vote of a
majority of the outstanding voting stock.
The Lycos amended and restated by-laws may be altered or amended by the
Lycos Board of Directors or Lycos stockholders; however, either the approval of
at least 80% of the voting power of the outstanding stock or the approval of a
majority of the entire Lycos Board of Directors is required to alter, amend,
repeal or adopt the provisions of the by-laws regarding stockholder meetings,
the number, election, classification and removal of directors and amendments to
the Lycos amended and restated by-laws.
Terra Networks
In order for a shareholders' meeting to approve any of the following
actions, the affirmative vote of shareholders representing a majority of Terra
Networks' subscribed voting capital is required and the affirmative vote of 2/3
of Terra Networks' present subscribed voting capital is required when the
shareholder meeting is held on a second call and less than 50% of the subscribed
voting capital is present:
- amendment of corporate purpose;
- any other amendment of Terra Networks' by-laws;
- increase or reduction of share capital;
- merger, split or spin-off of Terra Networks; and
- issuance of bonds.
SPECIAL MEETINGS OF STOCKHOLDERS AND NOTICE OF STOCKHOLDER PROPOSALS
Lycos
The Lycos restated certificate of incorporation provides that special
meetings of Lycos stockholders may be called only by the Chairman of the Lycos
Board of Directors, the President of Lycos or the Lycos Board of Directors.
Lycos stockholders may bring proposals at annual or special meetings if they
provide Lycos with written notice that complies with the time and content
requirements of the Lycos amended and restated by-laws and other applicable
regulatory requirements.
Terra Networks
As a general rule, extraordinary general meetings may be called from time
to time by the Terra Networks Board of Directors at its discretion or at the
request of shareholders representing at least 5% of Terra Networks' share
capital. A shareholders' meeting at which 100% of the capital stock is present
or represented is validly constituted even if no notice of such meeting was
given, and, upon unanimous agreement, shareholders may consider any matter at
such meeting.
STOCKHOLDER PROPOSALS
Lycos
The Lycos amended and restated by-laws provide that for business to be
properly brought before an annual meeting, the business must be of a nature that
is appropriate for consideration at
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an annual meeting and must be (i) specified in the notice of meeting, (ii)
otherwise properly brought before the meeting by or at the direction of the
Board or (iii) otherwise properly brought before the meeting by a stockholder.
The Lycos amended and restated by-laws further provide that in order for a
stockholder to properly bring business before an annual meeting, the stockholder
must give timely notice thereof in writing to the Secretary of the Company,
setting forth specified information.
Terra Networks
Stockholders are not able to bring business before an annual or
extraordinary meeting under the Spanish Corporation Law of 1989.
ACTION BY WRITTEN CONSENT
Lycos
The Lycos restated certificate of incorporation permits stockholder action
without a meeting only by unanimous written consent of all of the Lycos
stockholders.
Terra Networks
The Terra Networks by-laws do not permit stockholder action without a
meeting.
VOTING RIGHTS
Lycos
Each share of Lycos common stock is entitled to one vote.
Terra Networks
Each ordinary voting share and ADS is entitled to one vote.
CUMULATIVE VOTING
Lycos
None.
Terra Networks
Yes.
PREEMPTIVE RIGHTS
Lycos
None.
Terra Networks
Each shareholder has a general preemptive right to subscribe to new shares
in any capital increase in proportion to its shareholding.
Our shareholders may vote to exclude preemptive rights in certain cases,
including when shares or convertible debentures are offered to the public or on
the stock exchange.
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DIVIDENDS
Lycos
The Lycos restated certificate of incorporation provides that dividends may
be declared and paid on the common stock from funds lawfully available as and
when determined by the Lycos Board of Directors and subject to any preferential
dividend rights of any then outstanding preferred stock.
Terra Networks
The annual general shareholders' meeting shall approve the annual accounts
and the allocation of the profits (if any). Once legal and statutory provisions
are complied with, Terra Networks is entitled to distribute dividends from net
profits or distributable reserves provided that the company's net asset value
after the distribution of dividends is greater than the nominal share capital.
RIGHT TO DIVIDENDS
Lycos
Lycos shareholders have the right to participate in any dividend in
proportion to their stock ownership, subject to any preferential dividend rights
of outstanding preferred stock.
Terra Networks
Our shareholders have the right to participate in any dividend payment in
proportion to the paid-in capital corresponding to their shares.
APPRAISAL RIGHTS
Lycos
The Delaware General Corporation Law generally affords stockholders the
right to demand payment in cash of the judicially-determined fair value of their
shares (i.e., appraisal rights) in connection with a merger or consolidation
involving their corporation, except that appraisal rights are not afforded to
holders of shares which are either
- listed on a national securities exchange,
- quoted on The Nasdaq National Market or
- held of record by more than 2,000 stockholders
if the plan of merger or consolidation converts such shares into stock of the
surviving corporation or stock of another corporation which is either listed on
a national securities exchange, quoted on The Nasdaq National Market or held of
record by more than 2,000 stockholders.
In addition, Delaware law denies appraisal rights to the stockholders of
the surviving corporation in a merger if such merger did not require for its
approval the vote of the stockholders of such surviving corporation.
Terra Networks
The Spanish Corporation Law of 1989 does not afford appraisal rights to the
shareholders of a company in connection with a merger or consolidation.
ANTI-TAKEOVER STATUTES
Lycos
Lycos is governed by the Delaware Corporation Law anti-takeover provision,
which generally precludes a corporation from engaging in any "business
combination" (i.e. mergers, consolidations,
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sales of significant assets, etc.) with any person that owns 15% or more of the
outstanding voting stock of the corporation for a period of three years
following the time that such shareholder obtained ownership of 15% or more of
the outstanding voting stock of the corporation.
The three-year waiting period does not apply, however, if
- prior to the time such person obtained ownership of 15% or more of the
outstanding voting stock of the corporation, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in such shareholder owning 15% or more of such
stock,
- upon consummation of the transaction which resulted in the shareholder
owning 15% or more of the outstanding voting stock of the corporation,
such shareholder owned at least 85% of the voting stock of the
corporation (with certain exceptions) or
- at or subsequent to such time as the shareholder obtained 15% or more of
the outstanding voting stock of the corporation, the business combination
is approved by the board of directors and authorized at an annual or
special meeting of shareholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that
is not owned by the interested shareholder.
Terra Networks
There is no limitation upon the acquisition of shares of Terra Networks. If
the acquisition exceeds legally established thresholds, a take-over bid must be
filed with the CNMV.
LIMITATION ON DIRECTORS LIABILITY
Lycos
The Lycos restated certificate of incorporation provides that no director
of Lycos will be personally liable to Lycos or its shareholders for monetary
damages for breach of fiduciary duty as a director provided that, to the extent
provided by applicable law, the foregoing provision does not eliminate the
liability of a director:
- for any breach of the directors' duty of loyalty to Lycos or its
shareholders,
- for acts or omissions not in good faith or which involve intentional
misconduct of a knowing violation of law,
- under section 174 of the Delaware General Corporation Law, or
- for any transaction from which the director derived an improper personal
benefit.
The Lycos restated certificate of incorporation further provides that no
amendment to or repeal of the foregoing provision in the Lycos restated
certificate of incorporation will apply to or have any effect on the liability
or alleged liability of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
Terra Networks
The directors shall be liable to the company, the shareholders and the
creditors of the company for any damages they cause through acts contrary to the
law or the by-laws, or acts done without the diligence with which they are
required to perform their duties. Each of the directors shall be jointly and
severally liable for those acts or resolutions causing damages, except for those
directors who prove that they did not take part in the approval or
implementation of the resolution, they were unaware of its existence or, if they
were aware of it, that they took appropriate action to avoid causing damages or
expressly opposed the resolution.
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Directors are liable even if the act or resolution has been approved,
authorized or ratified by the general shareholders' meeting of the company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Lycos
The Lycos amended and restated by-laws provide that Lycos will indemnify
any person who is, or is threatened to be made, a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative), by reason of the fact that such person (a) is
or was a director, officer, employee or agent of Lycos or (b) is or was serving
at the request of Lycos as a director, officer, employee or agent of another
entity, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceedings (including appeals) if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of Lycos (and with respect to any
criminal action or proceeding, if such person had no reasonable cause to believe
his or her conduct was unlawful); provided that in stockholder derivative suits
such indemnification is limited to expenses (including attorneys' fees), and
under the Delaware General Corporation Law, no indemnification for such expenses
in derivative actions is permitted where the person has been adjudged liable to
the corporation, unless a court finds him entitled to such indemnification. If,
however, the person has been successful in defending a third party or derivative
action, indemnification for expenses incurred by a present or former director or
officer is mandatory under the Delaware General Corporation Law.
Terra Networks
The Terra Networks' by-laws do not provide for indemnification of officers
and directors. However, for so long as Telefonica controls Terra Networks,
Telefonica provides officers' and directors' liability insurance against any
civil action that may be brought by reason of the fact that a person is or was
director or senior executive of Terra Networks. If Telefonica no longer controls
Terra Networks, only the representatives of Telefonica will benefit from the
liability insurance.
STOCKHOLDER SUITS
Lycos
Under the Delaware General Corporation Law, subject to certain requirements
for making prior demand on the board of directors or excuse thereof, a
stockholder may bring a derivative action on behalf of the corporation to
enforce the rights of the corporation against officers, directors and third
parties. An individual may also commence a class action suit on behalf of
himself and other similarly situated stockholders where the requirements for
maintaining a class action under the Delaware General Corporation Law have been
met. Subject to equitable principles, generally a three-year period of
limitations applies to such stockholder suits against officers and directors.
Terra Networks
Stockholders may bring suit against the corporation challenging resolutions
approved by the general shareholders' meeting when they are contrary to the law,
contrary to the provisions of the by-laws, harm the interests of the company or
are to the benefit of one or more shareholders or third parties. Resolutions
contrary to the law shall be void; the other resolutions referred to above shall
be voidable. The limitation period for actions for challenging void resolutions
is one year, and the limitation period for actions for challenging voidable
resolutions is forty days.
Shareholders representing 5% of the share capital may, within thirty days
of becoming aware of the same, bring suit against the corporation challenging
resolutions approved by the board of directors, provided that a year has not
elapsed since their passing. In addition, directors may
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challenge void and voidable resolutions of the board of directors or any other
governing body within thirty days of the passing thereof.
STOCK REPURCHASES
Lycos
Under the Delaware General Corporation Law, a corporation may purchase or
redeem its own shares unless the capital of the corporation is impaired or when
such purchase or redemption would cause an impairment of the capital of the
corporation. A Delaware corporation may, however, purchase or redeem out of
capital any of its preferred shares or, if no preferred shares are outstanding,
any of its own shares if such shares will be retired upon acquisition and the
capital of the corporation will be reduced in accordance with specified
limitations.
Terra Networks
Subject to certain exceptions, Terra Networks may purchase its own shares
if:
- the purchase has been authorized by the general shareholders' meeting by
means of a resolution establishing the terms of the purchase, including
the maximum number of shares to be purchased, the minimum and maximum
purchase price and the duration of the authorization, which
authorization shall not exceed 18 months;
- the aggregate nominal value of the shares purchased, together with that
of those shares already held by the company and its affiliates, does not
exceed 5% of the share capital of the company;
- the purchase enables the company to meet the special reserve required by
the provisions of Article 79.3 of the Spanish Corporation Law of 1989,
without decreasing its share capital and reserves; and
- the shares to be purchased are fully paid.
Generally, shares that are not purchased in accordance with the above must
be disposed of within 1 year from the date of the first purchase, canceled,
and/or declared void.
ADR PRE-RELEASE
Lycos
Not applicable.
Terra Networks
In some circumstances, the depositary may issue Terra Networks ADSs before
the deposit of our shares.
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VOTING OF ADSS
Lycos
Not applicable.
Terra Networks
If the ADS holders do not instruct the depositary to vote the underlying
shares, a proxy will be given to a board designee unless the board informs the
depositary that:
- the board does not want that proxy to be given;
- substantial opposition exists to the matter at hand; or
- the matter at hand materially affects the rights of our shareholders.
A discretionary proxy will be given only if the notice to the ADS holders
states the manner in which the designee intends to vote the shares.
AMENDMENT OF THE ADR DEPOSIT AGREEMENT
Lycos
Not applicable.
Terra Networks
An amendment that increases certain fees or otherwise prejudices
substantial existing rights of holders, will not become effective until three
months after notice of the amendment.
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DESCRIPTION OF TERRA NETWORKS ORDINARY SHARES
The following summary describes all material considerations concerning the
capital stock of Terra Networks and briefly describes all material provisions of
Terra Networks' by-laws (estatutos) and Spanish law. You should read our by-laws
carefully before you decide how to vote. Copies of our by-laws are incorporated
by reference and will be furnished to Lycos stockholders upon request.
GENERAL
The issued share capital of Terra Networks as of September 1, 2000 was
E567.5 million represented by 283,750,000 ordinary shares (E638.5 million
represented by 319,233,871 ordinary shares giving effect to the rights
offering), with a nominal value per ordinary share of E2. Non-residents of Spain
may hold and vote ordinary shares subject to the restrictions set forth below.
ATTENDANCE AND VOTING AT SHAREHOLDERS' MEETINGS
Each ordinary share entitles the shareholder to one vote. Any share may be
voted by written proxy, and proxies may be given to any individual. Proxies are
valid only for a single meeting.
Pursuant to the by-laws of Terra Networks and to the Spanish Corporation
Law, general meetings of shareholders may be either ordinary or extraordinary.
Ordinary general meetings must be convened within the first six months of each
fiscal year on a date fixed by the Board of Directors. As a general rule,
extraordinary general meetings may be called from time to time by Terra
Networks' Board of Directors at its discretion or at the request of shareholders
representing at least 5% of Terra Networks' share capital. Notices of all
shareholders' meetings must be published in the Commercial Registry Official
Gazette (Boletin Official del Registro Mercantil) and in a local newspaper
within the province of Madrid at least 15 days prior to the date fixed for the
meeting.
At ordinary general meetings, shareholders are asked to approve Terra
Networks' management, the financial statements for its previous fiscal year and
the application of our net income or loss. All other matters may be addressed at
extraordinary general meetings called for such purpose. Shareholders can vote on
these matters at an ordinary general meeting if such items are included on the
meeting's agenda.
Only holders of more than 25 ordinary shares duly registered in the
book-entry record maintained by the SCLV at least five days prior to the day on
which a meeting is scheduled to be held are entitled to attend shareholders'
meetings.
Terra Networks' by-laws provide that, on the first call of a general
shareholders' meeting, a duly constituted general meeting of shareholders
requires a quorum of at least one-quarter of our issued share capital. On the
second call, there is no quorum requirement. Consideration of extraordinary
matters such as modification of our by-laws, changes in our share capital
structure, change in the corporate form, mergers, spin-offs, issues of bonds,
dissolution and liquidation require on first call a quorum of at least one-half
of our issued share capital, and on second call the presence of shareholders
representing at least one-quarter of our issued share capital. If, after the
second call, the shareholders present or represented constitute less than
one-half of our issued share capital, resolutions relating to extraordinary
matters may be adopted only with the approval of two-thirds of the share capital
present or represented at such meeting. A shareholders' meeting at which 100% of
the capital stock is present or represented is validly constituted even if no
notice of such meeting was given, and, upon unanimous agreement, shareholders
may consider any matter at such meeting.
A resolution passed in a general meeting of shareholders is binding on all
shareholders, subject to Spanish law. In certain circumstances, such as change
of corporate purpose or corporate form, Spanish law allows dissenting or absent
shareholders to contest resolutions. In the case of resolutions contrary to law,
the right to contest is extended to all shareholders.
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Under the Spanish Corporation Law, shareholders who voluntarily aggregate
their shares so that they are equal to or greater than the result of dividing
the total capital stock by the number of directors have the right to appoint a
corresponding proportion of the members of the Board of Directors. Shareholders
who exercise this right may not vote on the appointment of other directors.
PREEMPTIVE RIGHTS
Pursuant to the Spanish Corporation Law, shareholders and holders of
convertible bonds have preemptive rights to subscribe for any new shares issued
by Terra Networks, including ordinary shares, and for bonds issued which are
convertible into ordinary shares. These preemptive rights may be abolished in
certain circumstances if shareholders of Terra Networks pass a resolution at a
shareholders' meeting in accordance with Article 159 of the Spanish Corporation
Law.
FORM AND TRANSFER
The ordinary shares are in book-entry form and are indivisible. Joint
holders must nominate one person to exercise the shareholders' rights, though
joint holders are jointly and severally liable for all obligations arising from
their status as shareholders. The SCLV, which manages the clearance and
settlement system of the Spanish stock exchanges, maintains the central registry
of shares reflecting the number of shares held by each of its member entities
(entidades adheridas) as well as the amount of such shares held by beneficial
owners. Each member entity in turn maintains a register of the owners of such
shares.
Transfers of ordinary shares quoted on a Spanish stock exchange must be
made through or with the participation of a member of a Spanish stock exchange
that is an authorized broker or dealer by book-entry registry or delivery of
evidence of title to the buyer. The transfer of shares may be subject to certain
fees and expenses.
REPORTING REQUIREMENTS
Because Terra Networks ordinary shares are listed on a Spanish stock
exchange, agreements with respect to the acquisition or disposition of our
ordinary shares must be reported within seven business days of the acquisition
or disposal to us, the CNMV, the relevant Spanish Stock Exchanges and, where the
person or group effecting the transaction is a non-Spanish resident, the Spanish
Registry of Foreign Investment, where:
- in the case of an acquisition, the acquisition results in that person or
group holding 5% (or successive multiples thereof) of our share capital;
or
- in the case of a disposal, the disposal takes any existing holding of
that person or group below a threshold of 5% (or successive multiples
thereof) of our share capital.
Any member of the Board of Directors must report to Terra Networks, to the
CNMV and to the relevant Spanish stock exchanges, any percentage or number of
shares and stock options held at the time of becoming a member of the Board of
Directors.
Furthermore, any member of the Board of Directors of Terra Networks must
similarly report any acquisition or disposal, regardless of size, of our
ordinary shares or stock options. Additional disclosure obligations apply to
purchasers in jurisdictions designated as tax havens or lacking adequate
supervision and also to voting agreements.
FOREIGN INVESTMENT AND EXCHANGE CONTROL REGULATIONS
In 1991, Spain adopted the European Union standards for free movement of
capital and services. As a result, exchange controls and restrictions on foreign
investments have generally been abolished.
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Pursuant to Spanish Law 18/1992 on Foreign Investments (Ley 18 /1992, de 1
de Julio) and Royal Decree 664/1999 (Real Decreto 664/1999, de 23 de abril),
foreign investors may freely invest in shares of Spanish companies, except in
the case of certain strategic industries.
Shares in Spanish companies held by foreign investors must be reported to
the Spanish Registry of Foreign Investments by the depositary bank or relevant
SCLV member. When a foreign investor acquires shares that are subject to the
reporting requirements of the CNMV, notice must be given by the foreign investor
directly to the Registry of Foreign Investment in addition to the notices of
majority interests that must be sent to the company, the CNMV and the applicable
Spanish stock exchanges. This notice must be given through a bank or other
financial institution duly registered with the Bank of Spain and the CNMV or
through bank accounts opened with any branch of such registered entities.
Investment by foreigners domiciled in tax haven jurisdictions (countries
identified in Royal Decree 1980/1997 (Real Decreto 1980/1997, de 5 de julio)) is
subject to special reporting requirements.
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DESCRIPTION OF TERRA NETWORKS AMERICAN DEPOSITARY SHARES
The following is a summary of the material provisions of the deposit
agreement dated as of November 15, 1999.
Citibank, N.A. acts as the depositary bank for the Terra Networks ADSs.
Citibank's depositary offices are located at 111 Wall Street, New York, New York
10043. ADSs represent ownership interests in securities that are on deposit with
the depositary bank. ADSs are normally represented by certificates that are
commonly known as "American Depositary Receipts" or "ADRs". The depositary bank
typically appoints a custodian to safekeep the securities on deposit. In this
case, the custodians are (1) Banco Bilbao Vizcaya (BBV) located at Plaza San
Nicolas, 4 Bilbao, (2) Argentaria, Caja Postal y Banco Hipotecario, S.A.
(Argentaria) located at Carrera de San Jeronimo, 36, 28014 Madrid, (3) Caja de
Ahorros y Pensiones de Barcelona located at Av. Diagonal, 621 629, 08028
Barcelona and (4) Citibank Espana S.A. located at Parque Empresarial La
Moraleja, Avenida Europa 19, Alcobendas-Madrid.
Citibank has been appointed as depositary bank pursuant to a deposit
agreement. A copy of the deposit agreement is on file with the SEC under cover
of a Registration Statement on Form F-6. You may obtain a copy of the deposit
agreement from the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please refer to Registration Number 333-11078 when
retrieving such copy.
Below is a summary description of the Terra Networks ADSs and your rights
as an owner of Terra Networks ADSs. Please remember that summaries by their
nature lack the precision of the information summarized and that a holder's
rights and obligations as an owner of ADSs will be determined by the deposit
agreement and not by this summary. We urge you to review the deposit agreement
in its entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents one ordinary share on deposit with the custodian banks.
An ADS will also represent any other property received by the depositary bank or
the custodians on behalf of the owner of the ADS but that has not been
distributed to the owners of ADSs because of legal restrictions or practical
considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADRs
that represent your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as owner of ADSs and
those of the depositary bank. The deposit agreement is governed by New York law.
However, our obligations to the holders of ordinary shares will continue to be
governed by the laws of Spain, which may be different from the laws in the
United States.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you must
rely on the procedures of your broker or bank to assert your rights as ADS
owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own the ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder".
DIVIDENDS AND DISTRIBUTIONS
As a holder, you generally have the right to receive the distributions we
make on the securities deposited with the custodian bank(s). Your receipt of
these distributions may be limited, however, by practical considerations or
legal limitations. Holder(s) will receive such distributions under the terms of
the deposit agreement in proportion to the number of ADSs held as of a specified
record date.
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DISTRIBUTIONS OF CASH
Whenever we make a cash distribution for the securities on deposit with the
custodian bank(s), Terra Networks will notify the depositary bank. Upon receipt
of such notice the depositary bank will arrange for the funds to be converted
into U.S. dollars and for the distribution of the U.S. dollars to the holders.
The conversion into U.S. dollars will take place only if practicable and if
the U.S. dollars are transferable to the United States. The amounts distributed
to holders will be net of the fees, expenses, taxes and governmental charges
payable by holders under the terms of the deposit agreement. The depositary will
apply the same method for distributing the proceeds of the sale of any property
(such as undistributed rights) held by the custodian bank(s) in respect of
securities on deposit.
DISTRIBUTIONS OF ORDINARY SHARES
Whenever Terra Networks makes a free distribution of ordinary shares for
the securities on deposit with the custodian bank(s), it will notify the
depositary bank. Upon receipt of such notice, the depositary bank will either
distribute to holders new ADSs representing the ordinary shares deposited or
modify the ADS-to-share ratio, in which case each ADS you hold will represent
rights and interests in the additional ordinary shares so deposited. Only whole
new ADSs will be distributed. Fractional entitlements will be sold and the
proceeds of such sale will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-share ratio
upon a distribution of ordinary shares will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the terms of the deposit
agreement.
No such distribution of new ADSs will be made if it would violate a law
(i.e., the U.S. securities laws) or if it is not operationally practicable. If
the depositary bank does not distribute new ADSs as described above, it will use
its best efforts to sell the ordinary shares received and will distribute the
proceeds of the sale as in the case of a distribution of cash.
DISTRIBUTIONS OF RIGHTS
Whenever Terra Networks intends to distribute rights to purchase additional
ordinary shares, the depositary bank will determine whether it is lawful and
reasonably practicable to distribute rights to purchase additional ADSs to
holders.
The depositary bank will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable such holders to exercise such
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if Terra Networks provides all of the documentation
contemplated in the deposit agreement (such as opinions to address the
lawfulness of the transaction). You may have to pay fees, expenses, taxes and
other governmental charges to subscribe for the new ADSs upon the exercise of
your rights. The depositary bank is not obligated to establish procedures to
facilitate the distribution and exercise by holders of rights to purchase new
ordinary shares directly rather than new ADSs.
The depositary bank will not distribute the rights to you if:
- Terra Networks does not request that the rights be distributed to you or
Terra Networks asks that the rights not be distributed to you;
- Terra Networks fails to deliver satisfactory documents to the depositary
bank; or
- It is not reasonably practicable to distribute the rights.
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The depositary bank will sell the rights that are not exercised or not
distributed if such sale is commercially reasonable. The proceeds of such sale
will be distributed to holders as in the case of a cash distribution. If the
depositary bank is unable to sell the rights, it will allow the rights to lapse.
ELECTIVE DISTRIBUTIONS
Whenever Terra Networks intends to distribute a dividend payable at the
election of shareholders either in cash or in additional shares, it will give 30
days prior notice thereof to the depositary bank and will indicate whether it
wishes the elective distribution to be made available to you. In such case,
Terra Networks will assist the depositary bank in determining whether such
distribution is lawful and reasonably practical.
The depositary bank will make the election available to you only if it is
reasonably practical and if Terra Networks has provided all of the documentation
contemplated in the deposit agreement. In such case, the depositary bank will
establish procedures to enable you to elect to receive either cash or additional
ADSs, in each case as described in the deposit agreement.
If the election is not made available to you, you will receive either cash
or additional ADSs, depending on what a shareholder in Spain would receive for
failing to make an election, as more fully described in the deposit agreement.
OTHER DISTRIBUTIONS
Whenever Terra Networks intends to distribute property other than cash,
ordinary shares or rights to purchase additional ordinary shares, it will notify
the depositary bank in advance and will indicate whether it wishes such
distribution to be made to you. If so, the depositary bank will determine
whether such distribution to holders is lawful and feasible.
If it is lawful and feasible to distribute such property to you and if
Terra Networks provides all of the documentation contemplated in the deposit
agreement, the depositary bank will distribute the property to the holders in a
manner it deems practicable.
The distribution will be made net of fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement.
The depositary bank will not distribute the property to you and will sell
the property if:
- Terra Networks does not request that the property be distributed to you
or if it asks that the property not be distributed to you;
- Terra Networks does not deliver satisfactory documents to the depositary
bank; or
- The depositary bank determines that all or a portion of the distribution
to you is not feasible.
The proceeds of such a sale will be distributed to holders as in the case
of a cash distribution.
REDEMPTION
Whenever Terra Networks decides to redeem any of the securities on deposit
with the custodian, it will notify the depositary bank 30 days prior to the
intended date of redemption. If it is reasonably practicable and if it provides
all of the documentation contemplated in the deposit agreement, the depositary
bank will mail notice of the redemption to the holders.
The custodians will be instructed to surrender the shares being redeemed
against payment of the applicable redemption price. The depositary bank will
convert the redemption funds received into U.S. dollars upon the terms of the
deposit agreement and establish procedures to enable holders to receive the net
proceeds from the redemption upon surrender of their ADSs to the depositary
bank. You may have to pay fees, expenses, taxes and other governmental charges
upon the redemption of
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your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will
be selected by lot or on a pro rata basis, as the depositary bank may determine.
CHANGES AFFECTING ORDINARY SHARES
The ordinary shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of such ordinary shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent permitted
by law, represent the right to receive the property received or exchanged in
respect of the ordinary shares held on deposit. The depositary bank may in such
circumstances deliver new ADSs to you or call for the exchange of your existing
ADSs for the new ADSs.
ISSUANCE OF ADSS UPON DEPOSIT OF ORDINARY SHARES
The depositary bank may create ADSs on your behalf if you or your broker
deposit ordinary shares with one of the custodians. The depositary bank will
deliver these ADSs to the person you indicate only after you pay any applicable
issuance fees and any charges and taxes payable for the transfer of the ordinary
shares to the custodians.
The issuance of ADSs may be delayed until the depositary bank or the
custodian receives confirmation that all required approvals have been given and
that the ordinary shares have been duly transferred to the custodian. The
depositary bank will only issue ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be responsible for
transferring good and valid title to the depositary bank. As such, you will be
deemed to represent and warrant that:
- the ordinary shares are validly issued and outstanding, fully paid,
non-assessable and legally obtained;
- all preemptive (and similar) rights, if any, with respect to such
ordinary shares have been validly waived or exercised;
- you are duly authorized to deposit the ordinary shares;
- the ordinary shares are not "restricted securities" as defined in Rule
144 under the Securities Act; and
- the ordinary shares presented for deposit have not been stripped of any
rights or entitlements.
If any of the representations or warranties are incorrect in any way, Terra
Networks and the depositary bank may, at your cost and expense, take any and all
actions necessary to correct the consequences of the misrepresentations.
WITHDRAWAL OF ORDINARY SHARES UPON CANCELLATION OF ADSS
As a holder, you will be entitled to present your ADSs to the depositary
bank for cancellation and then receive the underlying ordinary shares at one of
the custodians' offices. In order to withdraw the ordinary shares represented by
your ADSs, you will be required to pay to the depositary the fees for
cancellation of ADSs and any charges and taxes payable upon the transfer of the
ordinary shares being withdrawn. You assume the risk for delivery of all funds
and securities upon withdrawal. Once canceled, the ADSs will not have any rights
under the deposit agreement.
If you hold an ADR registered in your name, the depositary bank may ask you
to provide proof of identity and genuineness of any signature and other
documents as the depositary bank may deem appropriate before it will cancel your
ADSs. The withdrawal of the ordinary shares represented by your ADSs may be
delayed until the depositary bank receives satisfactory evidence of compliance
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with all applicable laws and regulations. Please keep in mind that the
depositary bank will only accept ADSs for cancellation that represent a whole
number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs
at any time except for:
- temporary delays that may arise because (i) the transfer books for the
ordinary shares or ADSs are closed, or (ii) ordinary shares are
immobilized on account of a shareholders' meeting or a payment of
dividends;
- obligations to pay fees, taxes and similar charges; and
- restrictions imposed because of laws or regulations applicable to ADSs
or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your ADSs except to comply with mandatory
provisions of law.
VOTING RIGHTS
As a holder, you generally have the right under the deposit agreement to
instruct the depositary bank to exercise the voting rights for the ordinary
shares represented by your ADSs. The voting rights of holders of ordinary shares
are described in "-- Description of Terra Networks Ordinary Shares" above.
At the request of Terra Networks, the depositary bank will mail to you any
notice of shareholders' meeting received from Terra Networks together with
information explaining how to instruct the depositary bank to exercise the
voting rights of the securities represented by ADSs.
If the depositary bank receives timely voting instructions from a holder of
ADSs, it will endeavor to vote the securities represented by the holder's ADSs
in accordance with such voting instructions. If the depositary bank does not
timely receive voting instructions from a holder of ADSs and so long as Terra
Networks provides the depositary bank with the documents required under the
deposit agreement, the depositary bank will give a discretionary proxy to a
person designated by Terra Networks to vote the securities represented by those
ADSs. The depositary bank will not itself exercise any voting discretion over
the voting of the ordinary shares.
Please note that the ability of the depositary bank to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. Terra Networks cannot assure you that you will
receive voting materials in time to enable you to return voting instructions to
the depositary bank in a timely manner. Except in the case of the discretionary
proxy described in the preceding paragraph, deposited securities for which no
voting instructions have been received will not be voted.
FEES AND CHARGES
As an ADS holder, you will be required to pay the following service fees to
the depositary bank:
<TABLE>
<CAPTION>
SERVICE FEES
------- ----
<S> <C>
Issuance of ADSs................................. Up to 5c per ADS issued
Cancellation of ADSs............................. Up to 5c per ADS canceled
Exercise of rights to purchase additional ADSs... Up to 5c per ADS issued
Distribution of cash upon sale of rights and
other entitlements............................. Up to 2c per ADS held
</TABLE>
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As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary bank and certain taxes and governmental
charges such as:
- Fees for the transfer and registration of ordinary shares (i.e., upon
deposit and withdrawal of ordinary shares) including any brokerage fees
in Spain;
- Expenses incurred for converting foreign currency into U.S. dollars;
- Expenses for cable, telex and fax transmissions and for delivery of
securities;
- Taxes and duties upon the transfer of securities (i.e., when ordinary
shares are deposited or withdrawn from deposit); and
- Withholding taxes required by applicable law.
Terra Networks has agreed to pay certain other charges and expenses of the
depositary bank. Note that the fees and charges you may be required to pay may
vary over time and may be changed by Terra Networks and by the depositary bank.
You will receive prior notice of such changes.
AMENDMENTS AND TERMINATION
Terra Networks may agree with the depositary bank to modify the deposit
agreement at any time without your consent. Terra Networks has undertaken to
give holders 30 days' prior notice of any modifications that would prejudice any
of their substantial rights under the deposit agreement (except in very limited
circumstances enumerated in the deposit agreement).
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs for 30 days after notice of the modifications to the
deposit agreement are given to you. The deposit agreement cannot be amended to
prevent you from withdrawing the ordinary shares represented by your ADSs
(except as permitted by law).
Terra Networks has the right to direct the depositary bank to terminate the
deposit agreement by giving notice to the holders at least 30 days before
termination. Similarly, the depositary bank may in certain circumstances on its
own initiative terminate the deposit agreement, and it must give notice to the
holders at least 60 days before termination.
Upon termination, the following will occur under the deposit agreement:
- for a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the ordinary
shares represented by your ADSs and the delivery of all other property
held by the depositary bank in respect of those ordinary shares on the
same terms as prior to the termination. During such six months' period
the depositary bank will continue to collect all distributions received
on the ordinary shares on deposit (i.e., dividends) but will not
distribute any such property to you until you request the cancellation
of your ADSs; and
- after the expiration of such six months' period, the depositary bank may
sell the securities held on deposit. The depositary bank will hold the
proceeds from such sale and any other funds then held for the holders of
ADSs in a non-interest bearing account. At that point, the depositary
bank will have no further obligations to holders other than to account
for the funds then held for the holders of ADSs still outstanding. At
that point, the Company is also discharged from obligations under the
deposit agreement.
BOOKS OF DEPOSITARY
The depositary bank will maintain ADS holder records at its depositary
office. You may inspect such records at such office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to the ADSs and the deposit agreement.
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The depositary bank will maintain in New York facilities to record and
process the issuance, cancellation, combination, split-up and transfer of ADSs.
These facilities may be closed from time to time, to the extent not prohibited
by law.
LIMITATIONS ON OBLIGATIONS AND LIABILITIES
The deposit agreement limits the obligations of Terra Networks and the
depositary bank to you. Please note the following:
- Terra Networks and the depositary bank are obligated only to take the
actions specifically stated in the deposit agreement without negligence
or bad faith;
- the depositary bank disclaims any liability for any failure to carry out
voting instructions, for any manner in which a vote is cast or for the
effect of any vote, provided it acts in good faith and in accordance
with the terms of the deposit agreement;
- the depositary bank disclaims any liability for any failure to determine
the lawfulness or practicality of any action, for the content of any
document forwarded to you on our behalf or for the accuracy of any
translation of such a document, for the investment risks associated with
investing in ordinary shares or ADSs, for the validity or worth of the
ordinary shares, for any tax consequences that result from the ownership
of ADSs, for the credit worthiness of any third party, for allowing any
rights to lapse under the terms of the deposit agreement, for the
timeliness of any of Terra Networks' notices or for Terra Networks'
failure to give notice;
- Terra Networks and the depositary bank further disclaim any liability
for any action or inaction in reliance on the advice or information
received from legal counsel, accountants, any person presenting ordinary
shares for deposit, any holder of ADSs or authorized representative
thereof, or any other person believed by either of Terra Networks or the
depositary bank in good faith to be competent to give such advice or
information; and
- Terra Networks and the depositary bank may rely without any liability
upon any written notice, request or other document believed to be
genuine and to have been signed or presented by the proper parties.
PRE-RELEASE TRANSACTIONS
The depositary bank may, in certain circumstances, issue ADSs before
receiving a deposit of ordinary shares or they may deliver ordinary shares prior
to the delivery of ADSs. This type of transaction is commonly referred to as a
"pre-release transaction". The deposit agreement limits the aggregate size of
pre-release transactions and imposes a number of conditions on such transactions
(i.e., the need to receive collateral, the type of collateral required, the
representations required from brokers, etc.). The depositary bank may retain the
compensation received from the pre-release transactions.
TAXES
You will be responsible for the taxes and other governmental charges
payable on the ADSs and the securities represented by the ADSs. Terra Networks,
the depositary bank and the custodian may deduct from any distribution the taxes
and governmental charges payable by holders and may sell any and all property on
deposit to pay the taxes and governmental charges payable by holders. You will
be liable for any deficiency if the sale proceeds do not cover the taxes that
are due.
The depositary bank may refuse to issue ADSs, to deliver, transfer, split
or combine ADRs and to release securities on deposit until all taxes and charges
are paid by the applicable holder. However, you may be required to provide to
the depositary bank and to the custodian proof of taxpayer status, and residence
and such other information as the depositary bank and the custodian may require
to fulfill legal obligations. You are required to indemnify Terra Networks, the
depositary
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bank and the custodian for any claims with respect to taxes based on any tax
benefit obtained for you.
FOREIGN CURRENCY CONVERSION
The depositary bank will arrange for the conversion of all foreign currency
received into U.S. dollars if such conversion can be made on a reasonable basis,
and it will distribute the U.S. dollars in accordance with the terms of the
deposit agreement. You may have to pay fees and expenses incurred in converting
foreign currency, such as fees and expenses incurred in complying with currency
exchange controls and other governmental requirements.
If the conversion of foreign currency is not convertible on a reasonable
basis or is not lawful, or if any required approvals are denied or not
obtainable at a reasonable cost or within a reasonable period, the depositary
bank may take the following actions in its discretion:
- convert the foreign currency to the extent practical and lawful and
distribute the U.S. dollars to the holders for whom the conversion and
distribution is lawful and practical;
- distribute the foreign currency to holders for whom the distribution is
lawful and practical; and
- hold the foreign currency (without liability, for interest) for the
applicable holders.
LEGAL MATTERS
We will receive opinions from:
- Uria & Menendez, with respect to:
- the validity of the new Terra Networks shares to be issued in
connection with the share exchange; and
- taxes imposed by the Kingdom of Spain.
- Davis Polk & Wardwell, with respect to:
- the validity of the new Terra Networks ADSs to be issued in
connection with the share exchange; and
- U.S. federal income taxes.
In addition, Lycos will receive an opinion from Cravath, Swaine & Moore
with respect to U.S. federal income taxes.
EXPERTS
The audited consolidated financial statements of Terra Networks and its
consolidated subsidiaries as of December 31, 1998 and 1999 and for each of the
three years in the period ended December 31, 1999, appearing in this proxy
statement/prospectus have been audited by Arthur Andersen, independent public
accountants, as described in its reports thereon included in this proxy
statement/prospectus. The audited consolidated financial statements of Terra
Networks are included in this proxy statement/prospectus in reliance upon that
report given on the authority of Arthur Andersen as experts in accounting and
auditing. In its report with respect to the audited consolidated financial
statements of Terra Networks, Arthur Andersen states that with respect to
certain subsidiaries its opinion is based on the reports of other independent
public accountants, namely Price Waterhouse Auditores, S.A. and BDO Audiberia.
The audited financial statements and
VII-22
<PAGE> 210
schedules referred to above are included in this prospectus in reliance upon the
authority of these firms as experts in giving the reports.
The audited consolidated financial statements of Lycos as of July 31, 2000
and 1999 and for each of the three years in the period ended July 31, 2000
appearing in this proxy statement/prospectus have been audited by KPMG LLP,
independent auditors, as set forth in their report included in this proxy
statement/prospectus in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
<TABLE>
<CAPTION>
INDEPENDENT PUBLIC
COMPANY AUDITED FINANCIAL STATEMENTS ACCOUNTANTS
------- ---------------------------------------- ------------------
<S> <C> <C>
Terra Networks Audited consolidated financial Arthur Andersen y
statements as of December 31, 1998 and Cia., S. Com
1999 and for the three years in the
period ended December 31, 1999.
Telefonica Servicios y Contenidos por Financial Statements as of and for the BDO Audiberia
la Red, S.A. (reflected in the years ended December 31, 1998 and 1999.
consolidated financial statements
of Terra Networks) Financial Statements as of and for the Price Waterhouse
year ended December 31, 1997. Auditores, S.A.
Lycos, Inc. Audited consolidated financial KPMG LLP
statements
as of July 31, 2000 and 1999 and for
the three years in the period ended
July 31, 2000.
</TABLE>
VII-23
<PAGE> 211
PART EIGHT
ADDITIONAL INFORMATION FOR STOCKHOLDERS
WHERE YOU CAN FIND MORE INFORMATION
GENERAL
Each of Terra Networks and Lycos file annual reports and furnish periodic
reports to the SEC. You may read and copy any of these reports at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. In addition, you may read copies of Terra Networks'
annual and quarterly reports, accounts and other financial information and
offering documents at the offices of the CNMV, Paseo de la Castellana, 19,
Madrid. Information regarding Terra Networks is also available at the Commercial
Registry of Madrid.
Terra Networks' and Lycos' SEC filings are also available to the public
from commercial document retrieval services. Some SEC filings of Terra Networks
and Lycos are also available at the website maintained by the SEC at
"http://www.sec.gov".
Each of the Terra Networks ADSs and the Lycos shares are listed on the
Nasdaq under the symbols "TRRA" and "LCOS", respectively. Terra Networks' shares
are also listed on the New Market segment of the Spanish stock exchanges under
the symbol "TRR". You may inspect any periodic reports and other information
filed with the SEC by Terra Networks and Lycos at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
Terra Networks, as a foreign private issuer, is exempt from the rules under
the Exchange Act which prescribe the furnishing and content of proxy statements,
and its officers, directors and principal shareholders are exempt from the
reporting and "short-swing" profit recovery provisions contained in Section 16
of the Exchange Act.
TERRA NETWORKS
We are subject to the informational requirements of the Spanish securities
commission and the Spanish stock exchanges and file reports and other
information relating to our business, financial condition and other matters with
the Spanish securities commission and the Spanish stock exchanges. You may read
such reports, statements and other information, including the annual and
biannual financial statements, at the public reference facilities maintained in
Madrid and Barcelona. Some Terra Networks Spanish securities commission filings
are also available at the website maintained by the Spanish securities
commission at "http://www.cnmv.es".
Citibank, as provided in the deposit agreement, arranges for the mailing of
summaries in English of
- our annual reports; and
- summaries of all notices of general meetings of shareholders and other
reports and communications that are made generally available to our
shareholders.
to all record holders of the ADSs of Terra Networks. Any record holder of the
Terra Networks ADSs may read such reports, notices or summaries thereof, and
communications at Citibank's office located at 111 Wall Street, New York, New
York 10043.
We have filed a registration statement on Form F-4 to register with the SEC
our ordinary shares to be issued in exchange for shares of Lycos. This document
is part of the registration statement on Form F-4 and constitutes a proxy
statement/prospectus of Terra Networks. As allowed by the SEC rules, this
document does not contain all the information you can find in the registration
statement or the exhibits to the registration statement.
VIII-1
<PAGE> 212
LYCOS
Lycos is subject to the informational requirements of the SEC and the
Nasdaq and files reports and other information relating to its business,
financial condition and other matters. You may read such reports, statements and
other information, including the annual and quarterly financial statements of
Lycos, at the offices of the Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This proxy
statement/prospectus incorporates by reference the following documents listed
below that Lycos has previously filed with the SEC:
<TABLE>
<CAPTION>
LYCOS SEC FILINGS
(FILE NO. 0-27830) PERIOD/FILING DATE
------------------ ------------------
<S> <C>
Annual Report on Form 10-K................... For the year ended July 31, 1999 (Filing date
October 9, 1999)
Quarterly Report on Form 10-Q................ For the quarterly period ended October 31,
1999 (filing date December 15, 1999)
Quarterly Report on Form 10-Q................ For the quarterly period ended January 31,
2000 (filing date March 16, 2000)
Amended Current Report on Form 8-K/A......... Dated July 27, 1999 (filing date October 7,
1999)
Current Report on Form 8-K................... Dated September 2, 1999 (filing date
September 16, 1999)
Current Report on Form 8-K................... Dated December 3, 1999 (filing date December
21, 1999)
Amended Current Report on Form 8-K/A......... Dated December 3, 1999 (filing date January
4, 2000)
Amended Current Report on Form 8-K/A......... Dated December 6, 1999 (filing date December
22, 1999)
Current Report on Form 8-K................... Dated May 16, 1999 (filing date May 18, 1999)
Quarterly Report on Form 10-Q................ For the quarterly period ended April 30, 2000
(filing date June 14, 2000)
</TABLE>
All documents filed by Lycos pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this proxy statement/prospectus and prior
to the effectiveness of the combination shall be incorporated by reference in
this proxy statement/prospectus from the date of filing of these documents. Any
statement contained in this proxy statement/prospectus, or in a document
incorporated by reference in this proxy statement/prospectus, shall be deemed to
be modified or superseded for purposes of this proxy statement/prospectus to the
extent it is modified or superseded by a statement contained in this proxy
statement/prospectus or in any subsequently filed document incorporated by
reference in this proxy statement/prospectus. When that happens, the modified or
superseded part of the original statement is not a part of this proxy
statement/prospectus.
YOU CAN OBTAIN DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS THROUGH US OR THE SEC. DOCUMENTS INCORPORATED BY REFERENCE
ARE AVAILABLE FROM US WITHOUT CHARGE, EXCLUDING ALL EXHIBITS UNLESS WE HAVE
SPECIFICALLY INCORPORATED BY REFERENCE AN EXHIBIT
VIII-2
<PAGE> 213
IN THIS PROXY STATEMENT/PROSPECTUS. YOU MAY OBTAIN DOCUMENTS INCORPORATED BY
REFERENCE IN THIS DOCUMENT BY REQUESTING THEM IN WRITING OR BY TELEPHONE.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither the
delivery of this proxy statement/prospectus nor any distribution of securities
pursuant to this proxy statement/prospectus shall, under any circumstances,
create any implication that there has been no change in the information set
forth or incorporated into this proxy statement/prospectus by reference or in
our affairs since the date of this proxy statement/prospectus. The information
contained in this proxy statement/prospectus with respect to Terra Networks was
provided by Terra Networks and the information contained in this proxy
statement/prospectus with respect to Lycos was provided by Lycos.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This proxy
statement/prospectus contains such "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
CURRENCY PRESENTATION AND EXCHANGE RATES
In this proxy statement/prospectus, all references to U.S. dollars, U.S.$,
USD or dollars are to U.S. currency; and references to Spanish pesetas, pesetas
or Ptas. are to Spanish currency. References in this proxy statement/prospectus
to euro or E are to euro. As of January 1, 1999, the Spanish peseta has been
irrevocably fixed against the euro at an exchange rate of Ptas.166.386 = E1.00.
The following tables set out, for the periods and dates indicated, certain
information concerning the rates of exchange for the:
- Spanish peseta, expressed in Spanish pesetas per U.S. dollar;
- euro, expressed in U.S. dollars per euro.
<TABLE>
<CAPTION>
SPANISH PESETAS (1) EURO (1)
------------------------------------- -------------------------------------
PERIOD PERIOD
YEAR ENDED DECEMBER 31, END AVERAGE(2) HIGH LOW END AVERAGE(2) HIGH LOW
----------------------- ------ ---------- ------ ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995............................. 121.32 124.61 133.95 118.32 -- -- -- --
1996............................. 130.08 126.63 131.82 120.85 -- -- -- --
1997............................. 152.42 146.40 158.84 129.93 -- -- -- --
1998............................. 141.70 149.32 157.01 136.66 -- -- -- --
1999............................. 1.0070 1.0588 1.1812 1.0016
2000 (through September 15)...... 0.8572 0.9385 1.0335 0.8572
</TABLE>
---------------
(1) Source: Factset.
(2) Average rates reflect the average of the rates on the last day of the month
of the relevant period.
VIII-3
<PAGE> 214
ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. SECURITIES LAWS
SPAIN
Terra Networks is a Spanish corporation. Most of our directors and
executive officers are not residents of the United States and a substantial
portion of our assets and these individuals are located outside of the United
States. As a result, it may be difficult for you to file a lawsuit against us or
our directors and executive officers in the United States with respect to
matters arising under the federal securities laws of the United States.
Terra Networks has been informed by its Spanish legal counsel, Uria y
Menendez, that enforcement in Spain of judgments obtained in U.S. courts against
us or our directors and executive officers based on the civil liability
provisions of the federal securities laws hinges on the fulfillment of certain
procedural requirements established by Spanish law.
If a U.S. court grants a final judgment in an action based on the civil
liability provisions of the federal securities laws of the United States,
enforceability of this judgment in Spain will be subject to the obtaining of the
relevant exequatur, that is recognition and enforcement of a foreign judgment,
according to the Spanish civil procedure law currently in force, and
consequently, subject to satisfaction of certain factors. These factors include,
but are not limited to:
- the existence of reciprocity, as there is no treaty between Spain and the
United States regarding the enforcement of civil judgments;
- the absence of a conflicting judgment by a Spanish court relating to the
same parties and arising from the same facts and circumstances; and
- the Spanish courts' determination that:
- the U.S. courts had jurisdiction;
- process was appropriately served on the defendant; and
- enforcement would not violate Spanish public policy.
In general, the enforceability in Spain of final judgments of U.S. courts
does not require retrial in Spain. If an action is started before Spanish
courts, enforcement of liabilities based on the U.S. federal securities laws
would require that certain procedural burdens be satisfied, such as proving U.S.
law before Spanish courts and providing relevant translations of U.S. law.
Spanish courts may enter and enforce judgments in foreign currencies.
In several cases of which Terra Networks is aware, Spanish courts have
determined that U.S. courts grant reciprocity to Spanish judgments. However,
these determinations are not binding on other Spanish courts or with respect to
other cases. Accordingly, there can be no assurance that reciprocity would be
found to exist in any particular case.
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE COMBINATION OTHER THAN THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS AND,
IF ANY PERSON GIVES OTHER INFORMATION OR MAKES A REPRESENTATION IN CONNECTION
WITH THE COMBINATION, THAT INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON
AS HAVING BEEN AUTHORIZED BY TERRA NETWORKS.
THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS WILL NOT, UNDER ANY
CIRCUMSTANCE, CREATE AN IMPLICATION THAT TERRA NETWORKS' OR LYCOS' AFFAIRS HAVE
NOT CHANGED SINCE THE DATE AS OF WHICH INFORMATION IS FURNISHED OR SINCE THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS.
VIII-4
<PAGE> 215
PART NINE
REGULATORY MATTERS
GENERAL
Except as set forth herein, we are not aware of any licenses or regulatory
permits that appear to be material to the business of Lycos and its
subsidiaries, taken as a whole, and that might be adversely affected by the
combination. In addition, except as set forth herein, we are not aware of any
filings, approvals or other actions by or with any governmental authority or
administrative or regulatory agency that would be required for our acquisition
or ownership of Lycos shares. Should any such approval or other action be
required, we expect to seek such approval or action, except as described under
"State Takeover Laws." Should any such approval or other action be required, we
cannot be certain that we would be able to obtain any such approval or action
without substantial conditions or that adverse consequences might not result to
Lycos' or its subsidiaries' businesses, or that certain parts of Lycos', Terra
Networks' or any of their respective subsidiaries, businesses might not have to
be disposed of or held separate in order to obtain such approval or action.
STATE TAKEOVER LAWS
A number of states have adopted takeover laws and regulations that purport
to be applicable to attempts to acquire securities of corporations that are
incorporated in those states or that have substantial assets, stockholders,
principal executive offices or principal places of business in those states. To
the extent that these state takeover statutes purport to apply to the
combination, we believe that those laws conflict with U.S. federal law and are
an unconstitutional burden on interstate commerce. In 1982, the Supreme Court of
the United States, in Edgar v. Mite Corp., invalidated on constitutional grounds
the Illinois Business Takeovers Statute, which, as a matter of state securities
law, made takeovers of corporations meeting certain requirements more difficult.
The reasoning in that decision is likely to apply to certain other state
takeover statutes. In 1987, however, in CTS Corp. v. Dynamics Corp. Of America,
the Supreme Court of the United States held that the State of Indiana could as a
matter of corporate law and, in particular, those aspects of corporate law
concerning corporate governance, constitutionally disqualify a potential
acquiror from voting on the affairs of a target corporation without the prior
approval of the remaining stockholders, as long as those laws were applicable
only under certain conditions. Subsequently, in TLX Acquisition Corp. v. Telex
Corp., a federal district court in Oklahoma ruled that the Oklahoma statutes
were unconstitutional insofar as they apply to corporations incorporated outside
Oklahoma, because they would subject those corporations to inconsistent
regulations. Similarly, in Tyson Foods, Inc. v. McReynolds, a federal district
court in Tennessee ruled that four Tennessee takeover statutes were
unconstitutional as applied to corporations incorporated outside Tennessee. This
decision was affirmed by the United States Court of Appeals for the Sixth
Circuit. In December 1988, a federal district court in Florida held, in Grand
Metropolitan Plc v. Butterworth, that the provisions of the Florida Affiliated
Transactions Act and Florida Control Share Acquisition Act were unconstitutional
as applied to corporations incorporated outside of Florida.
A number of other states have adopted laws and regulations applicable to
attempts to acquire securities of corporations that are incorporated, or have
substantial assets, shareholders, or whose business operations otherwise have
substantial economic effects in such states. Lycos, directly or through
subsidiaries, conducts business in a number of states throughout the United
States, some of which may have enacted takeover laws as described above. Except
for those provisions of the VSCA, set forth below, Terra Networks does not
believe that any such takeover statutes are applicable to the combination and
have not attempted to comply with any such state takeover statutes in connection
therewith.
Terra Networks and Lycos have taken all actions necessary to make the
Virginia Affiliated Transactions Statute and Control Share Acquisitions Statute
not apply to the combination. We reserve the right to challenge the validity or
applicability of any state law allegedly applicable to the
IX-1
<PAGE> 216
combination, and nothing herein nor any action that we take in connection with
the combination is intended as a waiver of that right. In the event that it is
asserted that one or more takeover statutes apply to the combination, and it not
determined by an appropriate court that the statutes in question do not apply or
are invalid as applied to the combination, as applicable, we may be required to
file certain documents with, or receive approvals from, the relevant state
authorities, and we might be unable to issue Terra Networks ordinary shares or
ADS in connection with the combination.
ANTITRUST
UNITED STATES
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the rules promulgated thereunder by the Federal Trade
Commission ("FTC"), certain acquisitions of assets or voting securities may not
be consummated unless "a premerger notification form" has been furnished to both
the Antitrust Division of the Department of Justice and the FTC and the
applicable waiting period requirements have been satisfied. The combination is
subject to such requirements.
On July 26, 2000, we submitted the premerger notification required in
connection with the combination. On August 4, 2000, the FTC granted early
termination of the waiting period applicable to the combination. On August 31,
2000, two additional HSR filings were submitted on behalf of certain Lycos
executives who are to receive Terra Networks shares as consideration for their
shares of Lycos. These acquisitions are covered by the HSR Act. On September 15,
2000, the FTC granted early termination of the waiting period applicable to the
acquisition by these executives of Terra Networks shares.
Private parties (including individual states) may bring legal actions under
the antitrust laws. We do not believe that the consummation of the combination
will result in a violation of any applicable antitrust laws. However, there can
be no assurance that a challenge to the combination on antitrust grounds will
not be made, or if such a challenge is made, what the result will be. For a
description of certain conditions to the combination, including conditions with
respect to litigation and certain governmental actions and for certain
termination rights in connection with antitrust suits, see "Part Four -- The
Combination -- Conditions to Completion of this Combination."
EUROPEAN UNION
On July 27, 2000, the EU Commission confirmed that Council Regulation (EEC)
NO. 4064/89 of the Council of the European Union is not applicable to the
combination. Therefore Terra Networks and Lycos are not required to file
notification of the combination with the EU Commission.
GERMANY
Under the German Act Against Restrictions of Competition of 1958 (Gesetz
gegen Wettbewerbsbechrankungen), the combination may not be consummated until
the Federal Cartel Office (Bundeskartellamt), or FCO, has cleared the
combination or the relevant waiting periods have expired without the FCO
prohibiting the transaction.
On August 23, 2000, the requisite notification was filed with respect to
the combination with the FCO. On September 12, 2000, the FCO informed us that
the conditions for prohibiting the merger under German law are not fulfilled and
that the transaction may now be consummated.
We cannot assure you that a challenge to the decision of the FCO will not
be made by private parties, or if such challenge were to be made, what the
outcome would be.
IX-2
<PAGE> 217
ARGENTINA
Under Law No. 25156, of September 20, 1999, notification of the combination
must be filed with the CNDC (Comision Nacional de Defensa de la Competencia). On
July 27, 2000, the requisite notification was filed with respect to the
combination with the CNDC. Subsequent to such notification, the CNDC requested
additional information from Terra Networks and Lycos, which was submitted to the
CNDC, accordingly. On August 23, 2000, the CNDC declared the filing of the
requisite notification complete and announced the commencement of the 45 working
day period for its approval of the transaction. This approval may be postponed
for up to an additional 30 calendar days due to the referral of the case to the
Communications Commission. Argentine law does not prohibit the consummation of
the combination before the CNDC has approved the combination.
We cannot assure you that a challenge to the decision of the CNDC will not
be made by private parties or, if such a challenge were to be made, what the
outcome would be.
BRAZIL
Pursuant to the requirements of law No. 8884/1994, on June 6, 2000, the
notification was filed with respect to the combination with CADE (the Brazilian
Administrative Council for Economic Defence). Brazilian law does not prohibit
the consummation of the combination before the CADE has approved the
combination.
We cannot assure you that a challenge to the decision of the CADE will not
be made by private parties or, if such a challenge were to be made, what the
outcome would be.
OTHER FOREIGN APPROVALS
Lycos owns property and conducts business in a number of other foreign
countries and jurisdictions. In connection with the acquisition of the Lycos
shares in the share exchange, the laws of certain of those foreign countries and
jurisdictions may require the filing of information with, or the obtaining of
the approval or consent of, governmental authorities in such countries and
jurisdictions. The governments in those countries and jurisdictions might
attempt to impose additional conditions on Lycos operations conducted in those
countries and jurisdictions as a result of the acquisition of the Lycos shares
in the share exchange. If such approvals or consents are found to be required,
we intend to make the appropriate filings and applications. In the event such a
filing or application is made for the requisite foreign approvals or consents,
we cannot be certain that such approvals or consents will be granted and, if
such approvals or consents are received, we cannot be certain as to the date of
those approvals or consents. In addition, we cannot be certain that we will be
able to cause Lycos or its subsidiaries to satisfy or comply with those laws or
that compliance or noncompliance will not have adverse consequences for Lycos or
any subsidiary of Lycos after receipt of the Lycos shares pursuant to the share
exchange.
IX-3
<PAGE> 218
PART TEN
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Index to Terra Networks Consolidated Financial Statements... X-2
Index to Lycos, Inc. Consolidated Financial Statements...... X-81
</TABLE>
X-1
<PAGE> 219
INDEX TO TERRA NETWORKS CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors.............................. X-3
Reports of BDO Audiberia relating to Telefonica Servicios y
Contenidos por la Red, S.A. .............................. X-4
Report of Price Waterhouse Auditores, S.A. relating to
Teleonica Servicios y Contenidos por la Red, S.A. ........ X-6
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... X-7
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... X-8
Notes to Consolidated Financial Statements.................. X-9
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 2000.............. X-59
Consolidated Statements of Operations for the Six Months
Ended June 30, 1999 and 2000.............................. X-61
Notes to Consolidated Financial Statements.................. X-62
</TABLE>
X-2
<PAGE> 220
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Terra Networks, S.A.:
We have audited the consolidated financial statements of TERRA NETWORKS,
S.A. (named TELEFONICA INTERACTIVA, S.A., until September 7, 1999) and
SUBSIDIARIES, as described in Note 1 (the Terra Networks Group), comprising the
consolidated balance sheets as of December 31, 1999 and 1998, and the related
consolidated statements of operations, for each of the three years ended
December 31, 1999. These financial statements are the responsibility of the
Group's directors. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Telefonica Servicios y Contenidos por la Red (TSCR), S.A., for
each of the three years ended December 31, 1999, the investment in which is
reflected in the accompanying consolidated financial statements using the global
consolidation method. The Group's proportionate share in the assets of TSCR
represents, as of December 31 1999 and 1998 is 18.46 percent and 40.03 percent
of the Group's total assets, respectively, and its proportionate share in TSCR's
revenues for the years ended December 31, 1999, 1998 and 1997 is 22.29 percent,
36.95 percent and 39.85 percent of the Group's total revenues, respectively. The
financial statements of TSCR were audited by other auditors whose report has
been furnished to us, and our opinion insofar as it relates to the amounts
included for TSCR is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Terra Networks, S.A. and Subsidiaries as of December
31, 1999 and 1998, and the results of their operations and changes in financial
position for each of the three years ended December 31, 1999, in conformity with
accounting principles generally accepted in Spain.
Accounting practices used by the Group in preparing the accompanying
financial statements conform with generally accepted accounting principles in
Spain, but do not conform with accounting principles in the United States. A
description of these differences and a reconciliation of consolidated net loss
and shareholders' equity to United States generally accepted accounting
principles is set forth in Note 20.
ARTHUR ANDERSEN
Madrid, Spain
February 23, 2000 (except with respect to the note 18 as to which the date is
June 8, 2000)
X-3
<PAGE> 221
AUDITORS' REPORT ON THE ANNUAL FINANCIAL STATEMENTS
To the sole shareholder of TELEFONICA SERVICIOS Y CONTENIDOS POR LA RED,
S.A., (Company with a sole shareholder)
1. We have audited the annual financial statements of TELEFONICA SERVICIOS Y
CONTENIDOS POR LA RED, S.A., (Company with a sole shareholder), which
comprise the balance sheet as of December 31, 1999, the profit and loss
account and the notes to the financial statements for the year then ended,
the preparation of which is the responsibility of the Sole Administrator.
Our responsibility is to express an opinion on the financial statements
taken as a whole, based on our audit. We conducted our audit in accordance
with generally accepted auditing standards in the United States. These
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 audit provides a reasonable
basis for our opinion.
2. As required by Spanish corporate law for comparison purposes, the Sole
Administrator presents, in addition to the figures for 1999, comparative
figures for the previous year, for each of the items in the balance sheet,
in the profit and loss account and in the statement of source and
application of funds. Our opinion refers exclusively to the annual financial
statements for 1999. Our auditor's report dated February 19, 1999 on the
1998 annual financial statements, contained an unqualified opinion.
3. During 1999 the share capital was converted into Euros and a reduction and
increase operation was carried out, compensating accumulated losses at
December 31, 1998 and subsequently increasing the share capital. At the date
of issue of this report, these operations were pending of inscription into
the Mercantile Register.
4. The company maintained balances and carried out transactions with companies
of the Telefonica Group during 1999.
5. In our opinion, the annual 1999 financial statements present, in all
material respects, a true and fair view of the net equity and of the
financial situation of TELEFONICA SERVICIOS Y CONTENIDOS POR LA RED, S.A.,
(Company with a sole shareholder) at December 31, 1999 and of the results of
its operations and of the sources and applications of funds during the year
then ended, and contain the necessary and sufficient information for their
adequate interpretation and understanding, in accordance with generally
accepted accounting principles in Spain applied on a consistent basis with
that of the preceding year.
BDO Audiberia
Alfonso Osorio Iturmendi
Partner Registered Auditor
Madrid, Spain, February 17, 2000
X-4
<PAGE> 222
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the shareholders and the Board of Directors of
Telefonica Servicios y Contendos por la Red, S.A.
We have audited the balance sheet of Telefonica Servicios y Contenidos por
la Red, S.A. (the "Company") as of December 31, 1998 and the profit and loss
statement for the year then ended. These financial statements are the
responsibility of the Company's directors. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. These 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 audit provides a reasonable basis
for our opinion.
The financial statements as of and for the year ended December 31, 1998 are
based on the Spanish statutorily approved financial statements of the Company
prepared by the Company's directors. Our auditors' report dated February 19,
1999 on the Spanish statutorily approved financial statements was qualified with
respect to an underprovision for obsolete stocks and doubtful accounts
receivable of Ptas. 31.5 million and Ptas. 7.9 million respectively, as well as
a scope limitation regarding a participating loan of Ptas. 88.4 million granted
to a subsidiary, the financial statements of which were not available. Lastly,
we expressed uncertainty as to the application of the going concern principle,
given the Company's losses and insufficient net equity (per Spanish statutory
requirements).
United States securities regulations do not currently allow the use of
financial statements in filings with the Securities and Exchange Commission (the
"SEC") on which the Auditors' Report is qualified with respect to a material
departure from generally accepted accounting principles. The accompanying
financial statements for the year ended December 31, 1998 reflect an adjustment
of the Spanish statutorily approved financial statements of the Company solely
for the purpose of complying with the United States securities regulations.
The adjustment to the Spanish statutorily approved financial statements
consists in creating the above mentioned provisions for Ptas. 31.5 million and
Ptas. 7.9 million respectively, by way of a charge to the 1998 income statement
for the combined amount. Our scope limitation has been lifted by way of a letter
of comfort from Telefonica Interactiva, S.A. (currently sole shareholder of the
Company) in relation to the subsidiary to which the participating loan was
granted, together with unaudited accounts relating to the year ended December
31, 1998 and the eight month period ended August 31, 1999. Notwithstanding the
above, our uncertainty as regards the application of the going concern principle
is still applicable to the attached adjusted financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telefonica Servicios y
Contenidos por la Red, S.A. as of December 31, 1998, and the results of their
operations for the year ended December 31, 1998, in conformity with generally
accepted accounting principles accepted in Spain.
BDO Audiberia
Alfonso Osorio Iturmendi
Socio Auditor de Cuentas
Madrid, Spain, February 19, 1999*
---------------
* (except with respect to the letter of comfort referred to above, which is
dated September 6, 1999).
X-5
<PAGE> 223
INDEPENDENT AUDITORS' REPORT
To the Shareholder of
Servicios y Contenidos por la Red, S.A. Unipersonal
1. We have audited the financial statements of Servicios y Contenidos por la
Red S.A.U. comprising the balance sheet as of December 31, 1997 and 1996 and
the related profit and loss accounts and the related notes, for each of the
years then ended, all expressed in Spanish pesetas. These financial
statements are the responsibility of the Company's Directors. Our
responsibility is to express an opinion on these financial statements based
on our audits.
2. We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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. We have not audited the
financial statements of Servicios y Contenidos por la Red, S.A.U., for any
period subsequent to December 31, 1997.
3. In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Servicios y Contenidos
por la Red S.A.U. as of December 31, 1997 and 1996, and the results of its
operations and the changes in its financial position for the years then
ended, and contain the required information, sufficient for their proper
interpretation and comprehension, in conformity with generally accepted
accounting principles and standards in Spain consistently applied.
4. As indicated in note 11, the Company has significant transactions with
Telefonica Group companies.
Price Waterhouse Auditores, S.A.
February 23, 1998
X-6
<PAGE> 224
TERRA NETWORKS, S.A.
(NAMED TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
12/31/98 12/31/99
-------- ---------
THOUSANDS OF EUROS
<S> <C> <C>
ASSETS
Start-up costs (Note 5)..................................... 22 51,130
Intangible assets (net) (Note 6)............................ 527 92,807
Property, plant and equipment (net) (Note 7)................ 3,478 37,256
Financial assets:
Holdings in companies carried by the equity method........ -- 2,013
Other long-term assets (Note 8)........................... 1,230 4,345
Long-term tax receivable (Note 13)........................ 55 52,489
------ ---------
Total financial assets............................ 1,285 58,847
Goodwill.................................................... 2,288 508,705
Current assets:
Inventories............................................... 522 2,628
Accounts receivable from third parties, net (Note 9)...... 5,555 20,298
Accounts receivable from related companies (Note 14)...... 1,274 3,497
Prepayments............................................... -- 17,139
Tax receivables (Note 13)................................. 675 23,172
Short-term financial investments (Note 10)................ 2,843 569,547
Cash...................................................... 148 20,439
------ ---------
Total current assets.............................. 11,017 656,720
------ ---------
Total assets...................................... 18,617 1,405,465
====== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity (Note 11).............................. 3,593 1,233,527
Minority interests (Note 12)................................ 85 1,301
Long-term liabilities:
Long-term deferred tax liability (Note 13)................ -- 9,809
Other long-term liabilities............................... 221 5,374
------ ---------
Total long-term liabilities....................... 221 15,183
Current liabilities:
Accounts payable to trade creditors....................... 5,501 70,434
Accounts payable to non-trade creditors................... 647 58,976
Accounts payable to related companies (Note 14)........... 7,790 16,639
Accrued taxes payable (Note 13)........................... 416 8,036
Other liabilities......................................... 364 1,369
------ ---------
Total current liabilities......................... 14,718 155,454
------ ---------
Total liabilities and shareholders' equity........ 18,617 1,405,465
====== =========
</TABLE>
The accompanying Notes 1 to 20 and Exhibits I and II are an integral part
of these Consolidated Financial Statements.
Amounts as of December 31, 1998 have been restated from Spanish pesetas into
Euro
using the exchange rate as of January 1, 1999.
X-7
<PAGE> 225
TERRA NETWORKS, S.A.
(NAMED TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997,
1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Revenues:
Revenues from access...................................... 2,390 9,646 24,817
Revenues from advertising................................. 72 1,115 5,123
Other Revenues............................................ 88 1,384 20,291
------ ------- --------
Total revenues (Note 15).................................... 2,550 12,145 50,231
Operating expenses:
Goods purchased........................................... (1,054) (8,475) (31,044)
Personnel expenses (Note 15).............................. (928) (3,175) (19,942)
Depreciation and amortization............................. (464) (701) (6,272)
Other operating expenses (Note 15)........................ (2,144) (5,555) (83,904)
------ ------- --------
Total operating expenses before financial expenses and
goodwill amortization..................................... (4,590) (17,906) (141,162)
------ ------- --------
Operating loss.............................................. (2,040) (5,761) (90,931)
Amortization of goodwill.................................... (310) (339) (28,654)
Financial income (expense), net............................. (81) (90) (1,839)
------ ------- --------
Loss from ordinary activities............................... (2,431) (6,190) (117,746)
Extraordinary income (expense), net......................... 97 (562) (1,485)
------ ------- --------
Loss before tax and minority interest....................... (2,334) (6,752) (119,231)
Corporate income tax credit (Note 13)....................... 363 1,334 35,899
Minority interest........................................... 465 1,673 1,928
------ ------- --------
Net loss.................................................... (1,506) (3,745) (81,404)
====== ======= ========
</TABLE>
The accompanying Notes 1 to 20 and Exhibits I and II are an integral part
of these Consolidated Financial Statements.
Amounts for the years ended December 31, 1997 and 1998 have been restated from
Spanish pesetas into Euro using the exchange rate as of January 1, 1999.
X-8
<PAGE> 226
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 and 1998 and for the Years Ended December 31, 1999, 1998
and 1997
(in thousands of euros unless otherwise stated)
(1) INTRODUCTION AND GENERAL INFORMATION
DESCRIPTION OF THE TERRA NETWORKS GROUP --
Terra Networks, S.A. and its subsidiaries and investees are an integrated
group of companies (the Terra Networks Group) that do business through the use
of the Internet (access ("ISP"), advertising, e-commerce, interactive services,
etc.).
Terra Networks (formerly named Telefonica Interactiva, S.A.), was formed on
December 4, 1998, as a Spanish corporation for an unlimited duration. Its
registered office is in Madrid (Spain). Subsequent to the formation of Terra
Networks, S.A. by its parent company Telefonica, S.A., Telefonica contributed
certain investments it held in Internet businesses to Terra Networks, S.A.
The transfer of these investments from Telefonica, S.A. to Terra Networks
S.A. represents a reorganization of entities under common control. Accordingly,
although, Terra Networks, S.A. was legally formed on December 4, 1998, we have
prepared the accompanying consolidated financial statements as if we had owned
these investments from the dates that they were acquired by our parent company
Telefonica, S.A. For purposes of the accompanying consolidated financial
statements, we have recorded these transfers of investments among entities under
common control using the historical cost as if they occurred as of January 1,
1996.
On September 7, 1999, we changed our legal name from Telefonica
Interactiva, S.A. to Terra Networks, S.A.
As of December 31, 1998, all the shares of Terra Networks, S.A. were owned
by Telefonica, S.A. (formerly Telefonica de Espana, S.A.). In 1999, as a result
of our initial public offering, Telefonica, S.A. had its interest in us declined
to 69.64% as of December 31, 1999.
Terra Networks, S.A. is listed on the Madrid, Barcelona, Bilbao and
Valencia Stock Exchanges and on the Nasdaq National Market. As of December 31,
1999, its shareholders were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHAREHOLDER OWNERSHIP
----------- -------------
<S> <C>
Telefonica, S.A............................................. 69.64
Bidasoa B.V................................................. 5.86
Caja de Ahorros y Pensiones de Barcelona (La Caixa)......... 2.50
Banco Zaragozano, S.A....................................... 2.50
Infosearch Holdings, S.A.................................... 1.76
CTC Mundo, S.A.............................................. 1.07
Telefonica de Peru, S.A..................................... 0.80
International Discount Telecom. Corp. (IDT)................. 0.41
Taetel, S.L................................................. 0.27
Other shareholders.......................................... 15.19
------
TOTAL....................................................... 100.00
======
</TABLE>
The purpose of the holdings owned by Banco Zaragozano and Caja de Ahorros y
Pensiones de Barcelona (La Caixa) is to enable these entities to act as agents
in the Stock Option Plan for Terra Networks, S.A.'s executives (see Notes 17-b
and 20).
X-9
<PAGE> 227
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exhibit I to the notes to consolidated financial statements lists the group
companies in which Terra Networks, S.A. has direct or indirect holdings, their
lines of business and their contributions to consolidated reserves and losses.
Since its inception Terra Networks, S.A. has engaged mainly in the
acquisition and management of stockholdings in Internet Service Providers (ISPs)
and web portals in Spain, the United States and Latin America, in order to
convert the Terra Networks Group into the leading Internet Group in the Spanish-
and Portuguese-speaking market. Specifically, as of December 31, 1999, Terra
Networks, S.A. had holdings in Spain, Mexico, Brazil, the United States,
Guatemala, Argentina, Peru and Chile, providing Internet services under the
Terra brand name in each of those locations (see Note 2).
As of December 31, 1999 the Terra Networks Group structure was as follows:
LOGO
As described above, the activity of the Group is focused on the development
of different businesses related to the use of the Internet. This development is
still in an early stage and the Group has incurred losses through December 31,
1999. The Group expects that it will continue to incur such losses in the
immediate future, reducing its shareholders' equity and increasing consequently
the financial resources required to fund its operations. The business plan
prepared by the Group for the next five years contemplates net income before the
end of this period, assuming the accomplishment of certain trends and
hypotheses. It is not possible to evaluate if those trends and hypotheses are
going to be accomplished and, consequently, what is going to be the future
performance and viability in the medium- and long-term of the Group.
X-10
<PAGE> 228
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BASIS OF PRESENTATION FOR THE CONSOLIDATED FINANCIAL STATEMENTS
A) TRUE AND FAIR VIEW --
The accompanying consolidated financial statements of the Group were
prepared from the individual accounts of Terra Networks, S.A. and of those
companies that comprise the access (ISP) and portal activities controlled by
Terra Networks, S.A. or its parent company, Telefonica, S.A. during the period
beginning January 1, 1997 and ending December 31, 1999.
The individual financial statements of the companies integrated in the
Terra Networks Group were prepared in accordance with the accounting principles
and standards regulated in Spain by the Commercial Code as implemented by the
Spanish National Chart of Accounts and with the applicable regulations in the
different countries in which the companies comprising the consolidated Group are
located. The consolidated financial statements are presented in accordance with
the Spanish regulations for the preparation of consolidated financial
statements, as approved by Royal Decree 1815/1991. Accordingly, these
consolidated financial statements give a true and fair view of the net worth and
financial position as of December 31, 1999 and 1998 and of the results of
operations and of funds obtained and applied in each of the three years in the
period ended December 31, 1999, 1998 and 1997.
B) CONSOLIDATION PRINCIPLES --
The companies over which effective control is exercised by Terra Networks,
S.A. by virtue of ownership of a majority of the voting rights in their
representation and decision-making bodies were consolidated by the global
integration method; those in which Terra Networks, S.A. has significant
influence but not ownership of a majority of the voting rights are carried by
the equity method, unless they are not material with respect to giving a true
and fair value of the Group. Significant influence is deemed to exist if the
ownership level exceeds 20% in the case of unlisted companies or 3% in the case
of listed companies.
The companies consolidated by period were as follows:
<TABLE>
<CAPTION>
OWNERSHIP
DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
COMPANIES
Telefonica Servicios y Contenidos por la Red, S.A.
(TSCR).............................................. 100.0% 100.0% 100.00%
Terra Networks Chile (previously known as CTC
Internet)........................................... 43.6% 43.6% 99.00%
Terra Networks Peru (formerly Telefonica Servicios
Internet del Peru SA.C.)............................ 31.5% 35.0% 99.99%
Ordenamiento de Links Especializados, S.L. (OLE)...... N/A N/A 100.00%
Double Click Iberoamerica, S.L........................ 90% 90% N/A
Terra Networks Brasil (formerly Nutec Informatica,
S.A.)............................................... N/A N/A 96.00%(*)
Terra Interactiva de Contenidos S.A................... N/A N/A 100.00%
Terra Networks Argentina, S.A......................... N/A N/A 99.99%
Terra Networks Guatemala, S.A......................... N/A N/A 95.00%
Corporacion Real Time Team, S.L....................... N/A N/A 25.00%(**)
Terra Networks Mexico, S.A............................ N/A N/A 100.00%(***)
Terra Networks Portal Services USA, Llc............... N/A N/A 90.00%(****)
Terra Networks Access Services USA, Llc............... N/A N/A 51.00%(****)
</TABLE>
---------------
N/A: Not applicable.
X-11
<PAGE> 229
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(*) Indirectly through Terra Interactiva Brasil, Ltda. (holding company)
(**) Consolidated by the equity method
(***) 25% indirectly through Telefonica Servicios y Contenidos por la Red, S.A.
(****) Indirectly through Terra Networks USA, Inc. (holding company)
All significant accounts and transactions between the consolidated
companies were eliminated in consolidation. In case of group companies whose
accounting principles differed from those of Terra Networks, S.A., adjustments
were made in consolidation so as to present the consolidated financial
statements on a uniform basis.
The consolidated statements of operations include the results of operations
of the acquired companies from the date each of these companies was acquired.
The equity of the minority interests in the net worth and results of
operations of the companies consolidated by the global integration method is
recorded under the "Minority Interests" caption on the liability side of the
consolidated balance sheet and the "Loss Attributed to Minority Interests"
caption in the consolidated statement of operations, respectively (see Note 12).
The result of carrying the holdings in associated companies in the
consolidated balance sheet by the equity method is reflected under the "Holdings
in Companies Carried by the Equity Method" caption.
In accordance with Spanish GAAP, the accompanying consolidated financial
statements do not include the tax effect, if any, of transferring the reserves
of the consolidated companies to the controlling company's accounts, since it is
considered that these reserves will be used as self-financing resources by the
respective consolidated companies and that those reserves that may be
distributed will not give rise to a material additional tax cost.
C) CHANGES IN THE CONSOLIDATED GROUP --
The main changes in the consolidated Group in 1999 and 1998 were as
follows:
In 1999, Terra Networks, S.A. acquired the following companies, which were
included in the consolidated financial statements for the first time in the year
ended December 31, 1999. The results of operations of these entities have been
included in the consolidated results from the date each of the entities was
acquired.
Ordenamiento de Links Epecializados, S.L. (OLE)
On April 15, 1999 Terra Networks, S.A. acquired 100% of Ordenamiento de
Links Epecializados, S.L. (OLE). The acquisition was accounted for under the
purchase method of accounting. The sole shareholder of OLE was INFOSEARCH
HOLDINGS, S.A. with registered offices in Luxembourg. The purchase price of OLE
was Euro 12.02 million. The goodwill generated amounted to Euro 12.24 million
(see Exhibit II). Subsequently Terra Networks, S.A. subscribed to a capital
increase of Euro 6.01 million aimed at financing the company and increasing the
equity.
On September 13, 1999, in connection with the original agreement,
Telefonica, S.A. undertook to sell to INFOSEARCH HOLDINGS, S.A. 4,928,000 shares
of Terra Networks, S.A. for Euro 20.8 million through a capital increase
approved by the Shareholders' Meeting on October 1, 1999 (see Notes 11-b and
20).
X-12
<PAGE> 230
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Terra Networks Brasil, S.A. (formerly Nutec Informatica, S.A.)
In 1999 Terra Networks, S.A. acquired through the holding company
Telefonica Interactiva Brasil Ltda. 96% of the shares of Terra Networks Brasil,
S.A. (formerly Nutec Informatica, S.A.), an Internet service provider that
operates under the ZAZ brand name, which markets software developed by third
parties, renders services relating to access networks and engages in business
activities such as Internet portals.
The company acquired was ultimately controlled by the Brazilian media group
Rede Brasil Sul (RBS), and the acquisition took place in two stages:
1. On June 15, 1999, Terra Networks Brasil, S.A. increased its capital
by 16.67%, which was fully subscribed and paid by Telefonica Interactiva
Brasil Ltda. for approximately Euro 224.63 million. A shareholder
agreement was entered into whereby the latter became the holder of
50.01% of the voting rights.
2. On August 5, 1999, RBS and certain minority shareholders ceased to be
stockholders of Terra Networks Brasil, S.A. by virtue of a capital
reduction of Euro 185.26 million, and Telefonica Interactiva Brasil,
Ltda. increased its holding to 96%.
Subsequently, Segovia Paticipacoes Ltda. (Segovia) was formed with a
capital of US$ 10 million. This company is owned 99.9% by Taetel, S.L. (a
Telefonica Group company) and 0.1% by minority shareholders owning 4% of Terra
Networks Brasil, S.A., which have an agreement to exchange their Terra Networks
Brasil, S.A. shares for the shares of Terra Networks, S.A. subscribed to by
Segovia for US$ 10 million. On December 30, 1999, Terra Networks, S.A. entered
into an agreement to acquire from Taetel, S.A. the shares of Segovia for the
amount of the capital stock plus the expenses incurred by Taetel, S.L. in
acquiring and financing the shares. Accordingly, upon the closing of the
agreement, Terra Networks, S.A. will own a 96% holding in Terra Networks Brasil
Ltda. directly and the remaining 4% through Segovia.
The goodwill generated by these transactions amounted, in aggregate, to
euro 181,897 thousand (see Exhibit II).
Double Click Iberoamerica, S.L.
On May 31, 1999, Terra Networks, S.A. acquired from Telefonica Publicidad e
Informacion, S.A. a subsidiary of Telefonica, S.A., 90% of the capital of Double
Click Iberoamerica, S.L. representing Telefonica Publicidad e Informacion,
S.A.'s entire interest in Double Click Iberoamerica, S.L. The price was Euro 530
thousand and a Euro 139 thousand goodwill was generated in this acquisition (see
Exhibit II). This company has also been consolidated by the global integration
method in 1997 and 1998 as Telefonica, S.A. effectively owned a 90% interest in
Double Click Iberoamerica, S.L. both before and after the transfer of this
investment to Terra Networks, S.A.
On November 4, 1999, Terra Networks, S.A. sold Double Click Iberoamerica,
S.L. to Double Click International Internet Advertising Limited (an unrelated
third party) for Euro 1,250 thousand, giving rise to extraordinary revenues of
Euro 720 thousand.
Terra Interactiva de Contenidos, S.A.
On April 13, 1999, Terra Networks, S.A. incorporated the sole-stockholder
company Terra Interactiva de Contenidos, S.A. (formerly Telefonica Interactiva
de Contenidos, S.A.), through the issuance of 660,000 shares of Euro 1 par value
each, with a capital stock of Euro 660 thousand and
X-13
<PAGE> 231
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional paid-in capital of Euro 18,631 thousand. This company purchases and
develops contents for the Terra Networks Group.
Terra Networks Guatemala, S.A.
On July 21, 1999, Terra Networks, S.A. acquired a 95% holding in Infovia,
S.A. (now Terra Networks Guatemala, S.A.) from the Panamanian Internet service
provider Infovia International Inc. for approximately Euro 3.82 million in cash.
The acquisition was accounted for using the purchase method. Goodwill of
approximately Euro 3.31 million resulted from the acquisition (see Exhibit II).
CIERV, S.L.
On July 29, 1999, Terra Networks, S.A. entered into a share purchase
agreement with the shareholders of Centro de Investigacion y Experimentacion de
Realidad Virtual, S.L. (CIERV), known as the Teknoland Group, which engages
mainly in the design of products such as web pages, intranets, the creation of
virtual communities and other web page-based services.
Under this agreement, CIERV was split into two companies, CIERV and CIERV
NUEVA, and Terra Networks, S.A. acquired, for Euro 6.47 million in cash, all the
shares of CIERV, which owns 14.33% of the capital of Corporacion Real Time Team,
S.L. (CRTT).
Subsequently, Terra Networks, S.A. subscribed to and paid in full a capital
increase of Euro 7.59 million at CRTT, increasing its ownership interest in this
company to 25%.
Terra Networks, S.A. has a purchase option on 26% of the shares of CRTT
from its founding shareholders after 36 months, although Terra Networks, S.A.
has the option to purchase this 26% earlier if CRTT fails to meet specified
revenue targets.
Terra Networks Argentina, S.A.
On July 28, 1999, Terra Networks, S.A. incorporated the holding company
Telefonica Interactiva Argentina, S.A. (now Terra Networks Argentina, S.A.) with
a capital stock of US$ 12,000, in which Terra Networks, S.A. has a 99.99%
holding. Capital was subsequently increased to US$ 10,453,000.
On September 21, 1999, Terra Networks Argentina, S.A. acquired all the
shares of Donde Latinoamericana, S.A., which owns the local portal Donde, for
US$ 4,504,000 in cash.
On September 9, 1999, Terra Networks Argentina, S.A. acquired all the
shares of Netgocios, S.A., which owns the local portal Gauchonet and the domains
registered in Argentina and the U.S. under Gauchonet, for a total amount of US$
5,486,000 in cash.
Terra Networks Mexico, S.A. de C. V.
Terra Networks, S.A. acquired all the shares of Informacion Selectiva, S.A.
(INFOSEL) from the stockholders of the Reforma Group through various
transactions structured around the Dutch company Bidasoa B.V., as described
below. At the end of the series of transactions, the sellers of Infosel received
US$ 220 million of the Terra Networks, S.A's ordinary shares and US$ 60 million
in cash. Infosel provides Internet access, portal and real-time financial
information services and services for companies.
On September 10, 1999, Terra Networks, S.A. and Bidasoa B.V. (a company
grouping together the stockholders of the Reforma Group) incorporated the
holding company Terra Networks Mexico,
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
S.A. de C.V., through a $60 million equity contribution made by Terra Networks,
S.A. After this contribution, Terra Networks, S.A possessed a 75% economic
holding in Terra Networks Mexico, S.A. de C.V and Bidasoa B.V. a 25% economic
holding. Bidasoa B.V. controlled all voting rights in this entity.
On October 5, 1999, Terra Networks Mexico, S.A. de C.V. agreed to acquire
all the shares of Infosel for US$ 60 million in cash. On that same date our
wholly owned subsidiary TSCR agreed to acquire from Bidasoa B.V. 25% of the
economic interests in the capital stock of Terra Networks Mexico, S.A. de C.V.
representing all of the voting rights on the common shares for US$ 235 million,
making Infosel an indirectly wholly-owned investee of Terra Networks, S.A.. This
transaction closed in November 1999.
On October 16, 1999, Bidasoa, B.V. agreed to acquire shares of Terra
Networks, S.A. for US$ 220 million at the institutional offering price. This
transaction was channeled through Taetel, S.L. (a Telefonica Group company),
which on November 17, 1999 acquired 16,417,420 million shares for Euro
213,426,460 and immediately sold them to Bidasoa B.V. for the equivalent US
dollar value of US$ 220 million.
Informacion Selectiva, S.A. owns all the shares of Infoshare
Communications, Inc., Guadalajara Teleport, S.A. de C.V. and Interdata Infosel,
S.A. de C.V.
The goodwill generated by these transactions amounted, in aggregate, to
euro 264,392 thousand (see Exhibit II).
Terra Networks USA, Inc.
On May 27, 1999, Terra Networks, S.A. incorporated the holding company
Terra Networks USA, Inc. (formerly Telefonica Interactiva USA, Inc.). On October
5, 1999, Terra Networks USA and International Discount Telecomunications
Corporation (IDT) entered into a joint venture contract to provide Internet
access and portal services for the Spanish-speaking market in the U.S.
Under this joint venture contract, on October 5, 1999, Terra Networks USA,
Inc. and IDT formed the Internet service provider Terra Networks Access Services
USA LLC (owned 51% and 49%, respectively). On that same date, Terra Networks
USA, Inc. and IDT formed Terra Networks Services USA LLC (owned 90% and 10%,
respectively) to engage in portal business activities.
In regards to the Terra Networks Access Services USA LLC, the parties
agreed that Terra Networks USA, Inc. would supply the funds required to cover
for two years the company's business plan requirements, up to a maximum of US$
30 million, and that IDT would contribute its customer roster of 45,782
customers. The accompanying consolidated balance sheet reflects the Group's
commitment to pay the aforementioned US$ 30 million, which is recorded under the
liability "Accounts payable to non-trade creditors" caption. The customer roster
contributed by IDT was recorded for the same amount under the "Intangible
Assets" caption (see Note 6).
IDT subscribed to shares of Terra Networks, S.A. for US$ 15 million at the
date of the public offering of shares. Similar to the shares of Terra Networks,
S.A. purchased by Bidasoa, B.V., this transaction was independent of the
formation of the joint ventures with IDT and did not impact the accounting for
such joint ventures.
X-15
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Terra Networks Chile Holding Limitada
On October 4, 1999, Terra Networks, S.A.'s subsidiary, Terra Networks Chile
Holding Limitada (formerly Telefonica Interactiva Chile Limitada), acquired from
CTC Mundo the 95% interest it owned of Proveedora de Servicios de Conectividad,
S.A.
Terra Networks Chile Holding Limitada paid US$ 40 million in cash,
generating goodwill of Euro 39,667 thousands, which is being amortized over a
period of 60 months (5 years).
(3) ACCOUNTING PRINCIPLES
The main accounting principles used in the preparation of these
consolidated financial statements are as follows:
A) GOODWILL IN CONSOLIDATION --
The accompanying consolidated balance sheets include goodwill, net of
amortization, arising from the excess of the amounts paid to acquire the shares
of the dependent companies consolidated or carried by the equity method over
their underlying book values of the net assets acquired at the acquisition date.
The goodwill is being amortized on a straight-line basis over five years
(see Note 4 and Exhibit II).
B) TRANSLATION METHODS (PERIOD-END EXCHANGE RATE METHOD) --
The financial statements of the Group companies abroad were translated to
euros at the exchange rates prevailing at period-end, except for:
1. Capital stock and reserves, which were translated at historical
exchange rates.
2. Goodwill arising at Terra Networks, S.A. on the acquisition of a
foreign holding, either directly or through a portfolio company in the
country concerned, which was translated at historical exchange rates.
3. Statements of operations, which were translated at the average
exchange rate for the period.
The exchange differences arising from application of these procedures are
included under "Shareholders' Equity" in the accompanying consolidated balance
sheets, net of the portions of said differences relating to minority interests,
which are recorded under "Minority Interests" on the liability side of the
accompanying consolidated balance sheets.
C) START UP EXPENSES --
Start up expenses, which include incorporation, preopening and capital
increase expenses, are recorded at cost. These costs relate mainly to expenses
associated with the public offering of shares, such as legal fees, public deed
and registration expenses, security underwriting and placement fees, etc., and
advertising expenses incurred in launching the Terra brand name and publicizing
Terra's public offering of shares.
These expenses are amortized on a straight-line basis over five years.
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D) INTANGIBLE ASSETS --
This caption in the accompanying consolidated balance sheets relate mainly
to intellectual property, computer software and other intangible rights.
Intellectual property is recorded at the amounts paid for the acquisition
from third parties of title to, or the right to use, trademarks, and is
amortized on a straight-line basis over five years.
Computer software is recorded at cost only when it will foreseeably be used
over several years, in which case it is amortized on a straight-line basis over
three years. Software maintenance expenses are expensed currently.
The "Other Intangible Assets" caption includes intangible rights relating
to the acquisition of franchises and customer rosters from third parties, which
are amortized on a straight-line basis over three to five years, as well as
rights acquired under long-term service contracts, which are amortized on a
straight-line basis over the contract term.
E) PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment is carried at cost.
The costs of expansion, modernization and improvements leading to increased
productivity, capacity or efficiency or to a lengthening of the useful lives of
the assets are capitalized.
Upkeep and maintenance expenses are expensed currently.
Property, plant and equipment is depreciated using the straight-line method
over the estimated useful life of the assets, as follows:
<TABLE>
<CAPTION>
YEARS OF
ESTIMATED
USEFUL LIFE
-----------
<S> <C>
Technical Installations..................................... 5-12
Furniture................................................... 7-11
Computer hardware........................................... 2-5
Other tangible fixed assets................................. 4
Other installations......................................... 10
</TABLE>
F) SHORT-TERM FINANCIAL INVESTMENTS --
All short-term financial investments are recorded at cost. As these
investments are of a short-term duration, the cost of these investments
approximates their fair value.
G) INVENTORIES --
Inventories are stated at the lower of cost or market, with cost being
determined in accordance with first-in first-out method of accounting. Obsolete
or defective inventories have been reduced to net realizable value. The
provisions to write down inventories are recorded on the basis of age and
turnover of inventory and when the companies are selling below cost for
promotional means. The amounts shown for 1999 correspond mainly to Internet
connection kits and modems in for Infosel and in TSCR.
X-17
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H) FOREIGN CURRENCY TRANSACTIONS --
Fixed-income securities and receivables and payables denominated in foreign
currencies are translated from the foreign currencies at the exchange rate
prevailing at the transaction date, and are adjusted at period-end to the
exchange rates then prevailing.
Exchange differences arising on adjustment of foreign currency accounts
payable and receivable to period-end exchange rates are classified by currency
and due date.
The positive net differences are recorded as deferred revenues under the
caption "Other long term liabilities" on the liability side of the consolidated
balance sheet, unless exchange losses have been charged to income in prior
periods, in which case the net positive differences are credited to period
income up to the limit of the negative net differences charged to income in
prior periods.
The positive differences deferred in prior periods are credited to income
in the period in which the related accounts receivable and payable fall due or
are repaid early, or are compensated with negative differences that are
recognized for the same or higher amount for each homogeneous group of
currencies, and negative exchange differences are first offset against any
positive difference, and any excess is charged to income.
For all periods presented, there were no deferrals of foreign-exchange
transaction gains as any gains realized had not exceeded cumulative foreign
exchange losses.
I) CORPORATE INCOME TAX AND OTHER TAXES --
These captions in the consolidated statements of operations include amounts
arising from Spanish corporate income tax and similar taxes applicable to Group
companies outside Spain, including those relating to period expenses and those
arising from adjustments to amounts recorded in prior periods.
The corporate income tax expense for each period is calculated on the basis
of book income before taxes, increased or decreased, as appropriate, by the
permanent differences from taxable income, defined as those arising between
taxable income and book income before taxes that do not reverse in subsequent
periods.
Tax relief and tax credits, excluding tax withholdings and prepayments, are
deducted from the corporate income tax charge in the period in which they are
definitively taken. The difference between the expense incurred and the tax paid
is due to revenue and expense recognition timing differences giving rise to
prepaid and deferred taxes (see Note 13).
J) RECOGNITION OF REVENUES AND EXPENSES --
General standard --
Revenues and expenses are recognized on an accrual basis, i.e., when the
goods and services are actually provided, regardless of when the resulting
monetary or financial flow occurs. Provisions for estimated returns and credits
are recorded at the time that the related revenues are recorded, as a direct
reduction to revenues.
Any differences between the estimated revenues accrued and those
subsequently invoiced are not material and are recorded in the following period.
In accordance with the accounting principle of prudence, only realizable income
is recorded at period-end, whereas contingencies and losses are recorded when
known.
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The main types of revenues recorded by the company are as follows:
ISP revenues ---
Revenues from fixed fee internet access, including those billed in advance,
are recognized during the period in which the services are provided. Amounts
billed or paid in advance by customers are recorded as deferred revenues and
included under "Other Liabilities". Subscription agreements related to ISP
operations generally have a duration for a period of twelve months.
Since June, 1999 free Internet access has been provided in Spain.
Additionally, since February, 2000 free Internet access has been provided in
Brazil, and since March, 2000 in Chile and Mexico. We expect to earn
traffic-inducement fees in all of the countries in which we currently offer free
Internet access. Traffic-inducement fees arise because users of the Internet
that connect through telephone lines are charged per minute fees by the local
telephone company. In Spain, the local telephone company is Telefonica de
Espana, S.A. Subsequent to year-end, we have or will enter into agreements with
the local telephone companies, including Telefonica de Espana, S.A., whereby
these local providers remit a portion of their interconnection fees from
Internet users to Terra Networks, S.A. based on traffic generated by Terra
Networks, S.A. (that is, based on minutes of use by users of Terra Networks,
S.A.'s ISP services). For example, Terra Networks, S.A., has signed a contract
with Telefonica Data Espana, S.A., a subsidiary of Telefonica de Espana, S.A.,
whereby Telefonica Data Espana, S.A. will pay us a Euro amount per minute for
each minute of network time used by one of our customers according to a sliding
scale. Revenues from traffic generation will be recorded in the period that the
users were connected to the telephone lines, regardless of when such fees are
remitted to the Company by the local telephone providers.
Advertising revenues --
Advertising revenues are derived principally from:
- Advertising arrangements under which the Group receives revenues based
on a cost-per-thousand impressions. These arrangements are pursuant to
short-term agreements with our customers. Revenues are recognized
ratably based on the impressions achieved to date over the rate
specified in each customer contract. Revenues under guarantee impression
contracts are not recorded until the guaranteed number of impressions is
reached.
- Sponsorship arrangements that allow advertisers to sponsor an area on
one of the Group's portals in exchange for a fixed payment. Fees from
these arrangements are recognized on a straight-line basis over the life
of the arrangement.
- Fees for design, coordination and integration of advertising campaigns
and sponsorships to be placed on one of the Group's portals. These fees
are recognized at the completion of each project, which generally take
one month or less to complete.
E-commerce revenues --
These revenues are derived from e-commence transactions conducted through
the Group's portals. The net fees received by the Group from the conducting of
an e-commerce transaction through the Group's portals are recognized on
notification of sales attributable to one of the Group's portals. To date,
e-commerce revenues have not been significant.
X-19
<PAGE> 237
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other revenues ---
The Group offers web hosting services consisting of allowing web users to
establish and maintain web sites using the hard disk space and servers of the
Group. An initial non-refundable installation fee is recognized at the
commencement of the web hosting service to the extent that direct costs exceed
this fee. To date these fees have been inmaterial. Web hosting fees that are
based on the amount of disk space and Internet band width required are
recognized ratably over the life of the hosting contract. To date, web hosting
revenues have been insignificant.
Together with web hosting services, our subsidiary Infosel also provides
other internet related corporate services, like web design and maintenance,
where fees are charged depending on the life and kind of contract. Infosel will
separately enter into contracts to develop the web site, host it and/or provide
maintenance of the web site. Infosel does not recognize revenues from the
development of web sites until (a) persuasive evidence of an arrangement exists,
(b) collection is probable, (c) the rights to the web site software has been
delivered to the customer, (d) the fee is otherwise fixed and determinable and
(e) vendor specific evidence exists related to this element. Furthermore,
Infosel recognizes revenues from the hosting and maintenance arrangements
ratably over the period to which these agreements relate.
In addition to these activities, Infosel provides a financial information
service, Infosel Financiero, launched in 1990, that displays real-time stock
prices, stock indexes, financial news and trend analysis to market professionals
in Mexico and New York, competing with services such as Reuters and Bloomberg.
The business model consists in charging a fixed amount per month for rental of a
display terminal. Revenues from this service are recognized monthly as the
service is provided.
Infosel owns LINCE, a proprietary electronic trading network for
fixed-income securities. The business model consists of charging a fixed amount
per year for the use of a lince terminal and fees based on the volume of
securities traded. Infosel entered into a venture with Remate Electronico S.A.
de C.V., which manages the venture and controls the customer relationships.
Remate Electronico will be entitled to all revenues earned by the venture.
Infosel will earn a technology license fee equal to 20% of Remate's revenues.
Revenues from this service are recognized monthly as the service is provided.
Infosel operates an electronic information transmission system that
operates in a private TCP/IP network between companies, called EDI Comercial. It
is used for B2B transactions, allowing its customers exchange orders and control
inventories. Clients are charged a fixed amount per year and fees depending on
the number of orders and the size in bytes transferred. Revenues from the annual
fees are recorded as revenues ratably throughout the year, while fees from the
transfer of information are recorded in the period that the information was
transferred.
K) CONVERSION TO EURO AS REPORTING CURRENCY --
The consolidated financial statements and notes to consolidated financial
statements are presented in Euros. The Company previously reported this
information in Spanish pesetas, to the extent that these financial statements
were consolidated into the consolidated financial statements of Terra Networks,
S.A.'s parent company, Telefonica, S.A. The conversion of peseta amounts into
Euros related to the financial information presented prior to the creation of
the Euro on January 1, 1999 was calculated using the exchange rate as of January
1, 1999 which was 1 Euro to 166.386 Spanish pesetas.
X-20
<PAGE> 238
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The comparative consolidated financial statements reported in Euros show
the same trends as would have been presented if the Company had presented such
statements in Spanish pesetas. The consolidated financial statements are not
comparable to financial statements of other companies that report in Euros and
that restate amounts from currencies other than Spanish pesetas.
L) STOCK SPLIT AND SHARE ISSUES TO TELEFONICA --
All share and purchase amounts have been retroactively restated to reflect
the 1:2 reverse stock split approved by our Board of Directors on September 7,
1999. Furthermore, loss per share amounts in Note 20 reflect the retroactive
effect and issuance of 193,495,585 ordinary shares to Telefonica, S.A. shortly
thereafter. See Note 11.
(4) GOODWILL IN CONSOLIDATION
The variations in "Goodwill in Consolidation" and in the related
accumulated amortization in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THOUSANDS
OF EUROS
---------
<S> <C>
BALANCE AT 12/31/97......................................... 2,789
-------
Amortization................................................ (339)
Translation differences..................................... (162)
-------
BALANCE AT 12/31/98......................................... 2,288
=======
Additions................................................... 535,210
Retirements................................................. (139)
Amortization................................................ (28,654)
-------
BALANCE AT 12/31/99......................................... 508,705
=======
</TABLE>
The additions to goodwill arose in 1999 on the acquisitions of holdings in
the various companies composing the Group. The additions in 1999 relate mainly
to the purchase of Infosel and Terra Networks Brasil, S.A. (see Notes 2-c and
Exhibit II).
The Group amortizes existing goodwill over 5 years. Amortization expense
recorded during the year ended December 31, 1999 relates to amortization of
goodwill from the date of acquisition of the holdings through December 31, 1999.
X-21
<PAGE> 239
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) START-UP EXPENSES
The detail of the balances of and changes in this caption in 1999 and 1998,
are as follows:
<TABLE>
<CAPTION>
THOUSANDS
OF EUROS
---------
<S> <C>
BALANCE AT 12/31/97......................................... 30
------
Amortization................................................ (8)
------
BALANCE AT 12/31/98......................................... 22
======
Additions................................................... 52,028
Amortization................................................ (920)
------
BALANCE AT 12/31/99......................................... 51,130
======
</TABLE>
The additions for 1999 relate mainly to expenses associated with the public
offering of Terra Networks, S.A. common shares and with the advertising for the
launch of the Terra brand name.
(6) INTANGIBLE ASSETS
The details of the balances of the intangible asset accounts, the related
accumulated amortization and the variations therein in the years ended December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
THOUSANDS OF EUROS
<S> <C> <C> <C>
BALANCE AT 12/31/97.................................... 1,408 (512) 896
------ ------ ------
Additions.............................................. 171 (451) (280)
Retirements............................................ (150) 61 (89)
------ ------ ------
BALANCE AT 12/31/98.................................... 1,429 (902) 527
====== ====== ======
Additions.............................................. 94,847 (3,136) 91,711
Retirements............................................ (510) 474 (36)
Inclusion of companies................................. 605 -- 605
------ ------ ------
BALANCE AT 12/31/99.................................... 96,371 (3,564) 92,807
====== ====== ======
</TABLE>
"Inclusion of companies" includes the balances of the dependent companies
as of the date on which they were acquired and first included in consolidation.
The translation differences arising from translation of the intangible
assets of the foreign dependent companies to Euro at the year-end exchange rates
are included in "Additions".
The additions for 1999 correspond mainly to the following items:
* Contracts with Telefonica del Peru, S.A.A. (TdP) and Telefonica Servicios
Internet del Peru, S.A.C. (TSI) --
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<PAGE> 240
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 20, 1999, Terra Networks Peru, S.A. entered into contracts with
TdP and TSI that enabled it to commence operations in the residential Internet
segment. The main terms of the contracts are as follows:
1. TdP undertakes to provide Terra Networks Peru, S.A., for a ten-year
period and under the most favorable terms, the telecommunications
services required to carry on its business, to grant it the right to use
its cable broadcasting distribution network and to not provide directly
or through subsidiaries Internet services for residential users. The
consideration for the foregoing paid by Terra Networks, S.A. amounted to
US$ 25 million in cash, and this amount was recorded as an intangible
asset and is being amortized at consolidated level on a straight-line
basis over five years.
2. TSI transferred to Terra Networks Peru, S.A. all its contracts with
customers and the customer database of the Internet Provider Centers and
made available to the latter the assets assigned to or obtained for the
provision of Internet services to residential customers. Terra Networks
Peru, S.A. paid US$ 5 million in this connection, and this amount was
recorded as an intangible asset and is being amortized on a
straight-line basis over five years.
3. Terra Networks Peru, S.A. undertakes not to offer directly or
indirectly Internet services to nonresidential customers, not to provide
telecommunications services that might compete with those of TdP and to
use the telecommunications infrastructures and services provided by TdP
and its subsidiaries.
* Acquisition of franchises in Mexico ---
In 1999 Informacion Selectiva, S.A. (Infosel) acquired from various
Internet Service Providers the franchises under which they rendered their
services. For this purpose, Infosel entered into individual contracts with each
of the companies concerned, which assigned Infosel the rights and obligations
they had with their customers for a total amount of Euro 15.82 million in cash.
This amount was recorded as an intangible asset and is being amortized on a
straight-line basis over three years.
* Contribution by IDT of its customer roster --
As described in Note 2, in 1999 Terra Networks USA, Inc. and IDT
incorporated the Internet service provider Terra Networks Access Services USA
Llc with ownership interests of 51% and 49%, respectively. In compliance with
the joint-venture agreements, IDT contributed to the new company its customer
roster, which was valued at US$ 28.8 million (Euro 28.58 million). This amount
was recorded as an intangible asset and is being amortized on a straight-line
basis over five years.
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<PAGE> 241
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PROPERTY, PLANT AND EQUIPMENT
The details of the balances of property, plant and equipment, the related
accumulated amortization and the variations therein in 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
TECHNICAL PROJECTS COMPUTER FURNITURE ACCUMULATED
INSTALLATIONS IN PROGRESS HARDWARE AND OTHER TOTAL AMORTIZATION NET
------------- ----------- -------- --------- ------ ------------ ------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/97.......... -- -- 531 20 551 (72) 479
----- ------ ------ ----- ------ ------- ------
Additions.................... 164 133 2,882 100 3,279 (260)
Retirements.................. -- -- (2) (18) (20) --
----- ------ ------ ----- ------ ------- ------
BALANCE AT 12/31/98.......... 164 133 3,411 102 3,810 (332) 3,478
===== ====== ====== ===== ====== ======= ======
Additions.................... 1,184 10,524 4,658 4,081 20,447 (2,216)
Retirements.................. -- (288) (775) (12) (1,075) 234
Inclusion of companies....... 198 723 21,446 2,265 24,632 (8,244)
----- ------ ------ ----- ------ ------- ------
BALANCE AT 12/31/99.......... 1,546 11,092 28,740 6,436 47,814 (10,558) 37,256
===== ====== ====== ===== ====== ======= ======
</TABLE>
According to Spanish Accounting Principles the inclusion of assets from
acquired companies, should be made by each caption separately, not by the net
book value.
The main additions for 1999 correspond to the acquisition by Terra
Networks, S.A. and Terra Networks Chile, S.A. of property, plant and equipment.
The additions for "Projects in progress" in 1999 relate mainly payments in
advance for the construction of a building for Terra Networks Mexico, S.A.
"Inclusion of companies" includes the balances of the dependent companies
as of the date on which they were acquired and first included in consolidation
and mainly relates to Terra Networks Brasil, S.A. (formerly Nutec Informatica,
S.A.) and Informacion Selectiva, S.A. (Infosel).
The translation differences arising from translation of the property and
equipment of the foreign dependent companies to Euro at the year-end exchange
rates are included in "Additions".
(8) OTHER LONG-TERM ASSETS
The detail of the balances of and changes in this caption in 1999 and 1998,
are as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT BALANCE AT
12/31/97 ADDITIONS 12/31/98 ADDITIONS 12/31/99
---------- --------- ---------- --------- ----------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C>
Loans to affiliated Companies..... 842 388 1,230 266 1,496
Long-term Guarantees and
Deposits........................ -- -- -- 236 236
Long-term deferred expense........ -- -- -- 1,841 1,841
Other long-term loans............. -- -- -- 772 772
--- --- ----- ----- -----
Total............................. 842 388 1,230 3,115 4,345
=== === ===== ===== =====
</TABLE>
The "Loans to affiliated Companies" caption as of December 31, 1999
includes mainly a long-term loan from Telefonica Servicios y Contenidos por la
Red, S.A. to Telefonica, S.A.
"Long-term Deferred Expense" represents fees paid to acquired trade names.
Such trade names are being amortized over a period of five years.
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<PAGE> 242
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) ACCOUNTS RECEIVABLE
The details of the balances of this caption as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
12/31/98 12/31/99
-------- --------
THOUSANDS OF EUROS
<S> <C> <C>
Customers................................................... 7,812 18,426
Other accounts receivable................................... 7 6,232
Allowance for bad debts..................................... (2,264) (4,360)
------ ------
TOTAL....................................................... 5,555 20,298
====== ======
</TABLE>
(10) SHORT-TERM FINANCIAL INVESTMENTS
Short-term investments represents our interests in short-term equity/debt
securities or other short-term financial instruments.
Unlisted securities --
As of December 31, 1999, short-term financial investments of Euro 569.55
million are held by the following companies:
<TABLE>
<CAPTION>
THOUSANDS
HOLDER OF EUROS
------ ---------
<S> <C>
Terra Networks, S.A......................................... 538,519
Terra Networks Mexico....................................... 12,868
Terra Networks Brasil....................................... 8,015
Terra Networks Chile........................................ 4,916
OLE......................................................... 3,089
TSCR........................................................ 1,220
Terra Networks Argentina.................................... 920
-------
BALANCE AT 12/31/99......................................... 569,547
=======
</TABLE>
The short-term financial investment held by Terra Networks, S.A., OLE and
TSCR as of December 31, 1999 relates to the current accounts held by these
companies at Telefonia y Finanzas, S.A. (which belongs to the Telefonica Group).
The current account balances earn interest at market rates. Thus, the carrying
value of these investments approximates their fair value.
The remainder of the short-term financial investments consists of financial
investments with original maturities of three months to twelve months.
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<PAGE> 243
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SHAREHOLDERS' EQUITY
The details of the balances of and changes in equity accounts in the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
LOSS OF TOTAL
CAPITAL RESERVES THE PERIOD EQUITY
------- -------- ---------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C>
BALANCE AT 12/31/97..................... 1,322 3,182 (1,506) 2,998
------- ------- ------- ---------
Charges to reserves of 1997............. -- (1,506) 1,506
Translation differences................. -- 73 --
Capital increase........................ 4,267 -- --
Loss of the period...................... -- -- (3,745)
------- ------- ------- ---------
BALANCE AT 12/31/98..................... 5,589 1,749 (3,745) 3,593
======= ======= ======= =========
Charges to reserves of 1998............. -- (3,745) 3,745
Translation differences................. -- (631) --
Investment by parent company............ (5,529) 2,933 --
Capital increase........................ 559,940 754,625 --
Loss of the period...................... -- -- (81,404)
------- ------- ------- ---------
BALANCE AT 12/31/99..................... 560.000 754,931 (81,404) 1,233,527
======= ======= ======= =========
</TABLE>
A) CAPITAL STOCK --
The capital stock of Terra Networks, S.A. as of December 31, 1999 is
represented by 280,000,000 fully subscribed and paid registered shares of 2 Euro
nominal value each.
The amounts of capital stock present the main existing company at each
time; for 1997, correspond to TSCR, for 1998 correspond to TSCR and Terra
Networks, S.A. (since it was incorporated at December 4, 1998), and for 1999
correspond to Terra Networks, S.A.
On April 23, 1999, Terra Networks, S.A. redenominated its capital stock in
Euros. Accordingly, on that date the capital stock amounted to Euro 60,101.21,
the par value of each of the shares being Euro 6.010121. Terra Networks, S.A.
subsequently modified its capital stock to leave it at 60,000 shares of Euro
1.00168683 par value each.
B) CAPITAL INCREASE --
The following capital increases were carried out in 1999:
1. On April 23, 1999 Terra Networks, S.A. increased capital by Euro
2,944,959.28 through the issuance of 2,940,000 shares of the same
class of Euro 1.00168683 par value each, prior to the stock split
described below. All these shares were subscribed and paid by Terra
Networks, S.A.'s sole shareholder, Telefonica, S.A. The issue was
made with an additional paid-in capital of Euro 7 per share, giving a
total additional paid-in capital of Euro 21.04 million.
2. On September 7, 1999, Terra Networks, S.A.'s sole shareholder,
Telefonica, S.A., adopted, inter alia, the following resolutions:
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<PAGE> 244
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a. To increase the par value of Terra Networks, S.A.'s shares and to
reduce the number thereof in a ratio of 2 to 1.
b. The capitalization of accounts payable to the sole shareholder
Telefonica, S.A. equal to Euro 266.79 million.
c. Contribution of funds by Telefonica, S.A. equal to Euro 120.2
million.
3. On October 1, 1999, the Shareholders Meeting of Terra Networks, S.A.
approved, inter alia, the following agreements:
a. To increase capital, the increase being subscribed by Infosearch
Holdings, S.A. (former shareholder of OLE) by Euro 20.8 million
(see Note 2-c).
b. Capital increase amounting to Euro 30.21 million to permit the
entry into the shareholder structure of the finance entities acting
as agents for the Terra Networks, S.A.'s Stock Option Plan for its
employees (see Note 17-b).
4. On November 16, 1999, through a public deed, capital was further
increased by an amount of Euro 123.15 million through the issuance of
61,576,415 shares of Euro 2 par value each. At the same time, the shares
were issued with an additional paid-in capital of approximately Euro
670.91 million.
5. On December 2, 1999, through a public deed, capital was further
increased by an amount of Euro 9 million through the issuance of
4,500,000 shares of Euro 2 par value each. At the same time, the shares
were issued with an additional paid-in capital of Euro 49.5 million.
The capital increases described in points 4 and 5 were carried out through
a public offering of shares.
The effects of the above-mentioned capital increase were reflected in
shareholders' equity as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES MILLIONS OF EUROS
------------------------- --------------------
CUMULATIVE ISSUE PRICE SUBSCRIBED PAID-IN
OPERATION ISSUED TOTAL (EURO/SHARE) CAPITAL SURPLUS
--------- ----------- ----------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
INITIAL SITUATION......... 3,000,000 3,000,000 3.00 21.04
Reverse stock split 1 for
2....................... 1x2 1,500,000 -- --
Accounts payable
capitalization.......... 133,394,375 134,894,375 2.00 266.79 --
Contribution of funds..... 60,101,210 194,995,585 2.00 120.20 --
Agreement with
INFOSEARCH.............. 4,928,000 199,923,585 4.22 9.86 10.94
Employee Stock Option
Plan.................... 14,000,000 213,923,585 2.16 28.00 2.24
Public offering of
shares.................. 61,576,415 275,500,000 11.81 - 13 123.15 670.91
Public offering of
overalotted shares...... 4,500,000 280,000,000 13 9.00 49.5
----------- ------ ------
FINAL SITUATION........... 280,000,000 560.00 754.63
=========== ====== ======
</TABLE>
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<PAGE> 245
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C) LEGAL RESERVE --
Under the revised Corporations Law, 10% of income for each year must be
transferred to the legal reserve until the balance of this reserve reaches at
least 20% of capital stock. The legal reserve can be used to increase capital,
provided that the remaining reserve balance does not fall below 10% of the
increased capital stock amount. Otherwise, until the legal reserve exceeds 20%
of capital stock, it can only be used to offset losses, provided that sufficient
other reserves are not available for this purpose. At December 31, 1999,Terra
Networks, S.A. had no legal reserve due to its losses.
D) RESERVES --
Consolidated reserves include the reserves and retained earnings of the
Terra Networks Group's subsidiaries. Translation differences relate mainly to
the effect of exchange rate fluctuations on the net assets of the companies
located outside Spain (see Note 3-b). These effects gave rise to a decrease of
Euro 631 thousand in 1999, as a result of the consolidation of Terra Networks
Brasil Ltda., Terra Networks Chile Holding Ltda., Terra Networks Guatemala,
S.A., Terra Networks Peru, S.A., Terra Networks Argentina, S.A. and Terra
Networks Mexico, S.A. de C.V., and an increase of Euro 73 thousand in 1998.
E) INVESTMENT BY PARENT COMPANY --
"Investment by parent company" includes the capital increases in the
companies owned by Telefonica, S.A., before the creation of the Group.
Reserves contribution of companies acquired by Terra Networks, S.A. from
its parent company, Telefonica, S.A. are registered under "Investment by parent
company".
(12) MINORITY INTERESTS
This caption relates to the share of minority shareholders in the equity
and loss for the year of the Group companies consolidated by the global
integration method. The variations for the years ended December 31, 1999 and
1998 in the balances of this caption in the consolidated balance sheets are as
follows:
<TABLE>
<CAPTION>
THOUSANDS
OF EUROS
---------
<S> <C>
BALANCE AT 12/31/97......................................... 1,664
------
Loss for the year........................................... (1,673)
Variation in translation differences........................ 94
------
BALANCE AT 12/31/98......................................... 85
======
Capital contribution and acquisitions....................... 3,174
Loss for the year........................................... (1,928)
Variation in translation differences........................ (30)
------
BALANCE AT 12/31/99......................................... 1,301
======
</TABLE>
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<PAGE> 246
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The increase in 1999 relates mainly to the consolidation by global
integration of Telefonica Interactiva Brasil Ltd., Terra Networks Mexico, S.A.
de C.V. and Terra Networks USA Inc. (see Note 2-c).
(13) TAX MATTERS
A) TAX RECEIVABLES AND ACCRUED TAXES PAYABLE --
The details of "Accrued Taxes Payable" and "Tax Receivables" as of December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
12/31/98 12/31/99
-------- --------
THOUSANDS OF EUROS
<S> <C> <C>
ACCRUED TAXES PAYABLE:
Long-term deferred tax liability............................ -- 9,809
--- ------
TOTAL TAXES PAYABLE LONG-TERM............................. -- 9,809
=== ======
Foreign taxes (short-term).................................. -- 6,924
Other taxes (short-term).................................... 416 1,112
--- ------
TOTAL TAXES PAYABLE SHORT-TERM............................ 416 8,036
=== ======
TAX RECEIVABLES:
Deferred income tax assets and offset of tax losses......... -- 52,435
Other long-term deferred tax payments....................... 55 54
--- ------
TOTAL TAX RECEIVABLES LONG-TERM........................... 55 52,489
=== ======
Tax prepayments/withholdings (short-term)................... 153 450
Foreign taxes (short-term).................................. -- 11,725
Other taxes (short-term).................................... 522 10,997
--- ------
TOTAL TAX RECEIVABLES SHORT-TERM.......................... 675 23,172
=== ======
</TABLE>
The years open for review by the tax inspection authorities vary from one
consolidated company to another, although all returns from 1995 and later are
generally open. No additional material liabilities are expected to arise for the
Group in the event of a tax inspection.
B) CORPORATE INCOME TAX AND TAX LOSS CARRY-FORWARDS --
The corporate income tax of each of the Group companies is calculated on
the basis of income determined by application of generally accepted accounting
principles, which does not necessarily coincide with taxable income.
For the year ended December 31, 1999, the companies included in the Group
had no taxable income subject to corporate income tax.
The corporate income tax legislation in force in the countries in which the
Group companies are taxed provides that, in certain circumstances, tax losses
incurred in prior years may be carried forward for offset against the taxable
income obtained in subsequent years. Specifically, tax loss carryforwards
incurred by the Group companies expire as follows:
1. In Spain and Mexico tax losses may be carried forward for offset in a
period of ten years from the year in which they were incurred.
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<PAGE> 247
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. In Brazil and Chile there is no deadline for the offset of tax
losses, although in Brazil the amount of the losses offset may not
exceed 30% of the total taxable income in any one taxing period.
3. In Peru and Argentina tax losses may be carried forward for offset in
a period of four and five years, respectively, from the year in which
they were incurred.
As of December, 31, 1999, the period of generation of amounts of the tax
loss carry-forwards are the following:
<TABLE>
<CAPTION>
THOUSANDS
PERIOD OF GENERATION OF EUROS
-------------------- ---------
<S> <C>
Before 1997................................................. 3,345
1997........................................................ 1,475
1998........................................................ 8,430
1999........................................................ 119,231
-------
132,481
=======
</TABLE>
The Group recorded under the "Deferred Income Tax Assets and Offset of Tax
Losses" caption the tax assets recorded in the individual financial statements
of the following subsidiaries:
<TABLE>
<CAPTION>
TAX LOSSES INCURRED
-------------------
THOUSANDS OF EUROS
<S> <C>
Terra Networks, S.A......................................... 34,655
Telefonica Servicios y Contenidos por la Red, S.A........... 11,024
Terra Networks Mexico, S.A. de C.V. and subsidiaries........ 6,756
------
52,435
======
</TABLE>
The detail of the positive net balance of the "Corporate Income Tax"
caption in the accompanying consolidated statement of operations is as follows:
<TABLE>
<CAPTION>
THOUSANDS
OF EUROS
---------
<S> <C>
Tax assets of subsidiaries (1999)........................... 45,755
Recognition of deferred tax liability in consolidation...... (9,809)
------
35,946
------
Other items (net balance)................................... (47)
------
35,899
======
</TABLE>
A long-term deferred tax liability of Euro 9,809 thousand was recognized in
order to eliminate from the accounts the duplication arising from aggregating
the individual tax assets taken into account in the investment portfolio
provision recorded by Terra Networks, S.A.
The "Deferred Income Tax Assets and Offset of Tax Losses" will be reversed
to the extent that the companies that generated them obtain taxable income, as
envisaged in the Group's business plan. The deferred tax liabilities will also
be reversed when Telefonica Servicios y Contenidos por la Red, S.A. and Terra
Networks Mexico, S.A. de C.V. and subsidiaries obtain taxable income and,
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<PAGE> 248
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordingly, Terra Networks, S.A. reverses investment portfolio provisions
relating to these companies.
C) RECONCILIATION OF THE INCOME PER BOOKS TO THE TAXABLE INCOME --
The reconciliation of income per books to taxable income for corporate
income tax purposes for the years ended December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
THOUSANDS OF EUROS
<S> <C> <C>
Loss before tax and minority interest.................. (6,752) (119,231)
Consolidation adjustments.............................. 210 --
Other adjustments...................................... -- (8,741)
Timing differences:
Arising in the year.................................. 141 338
TAXABLE INCOME (LOSS).................................. (6,401) (127,634)
</TABLE>
The adjustments for timing differences relate mainly to amortization
expenses.
For the year ended December 31, 1999 the loss before tax increased because
of the recognition of a deferred income tax asset in respect to the losses of
prior years recorded in the individual financial statements of Informacion
Selectiva, S.A.
D) TAX CONSOLIDATION WITH TELEFONICA S.A. --
None of the companies of the Group belong, for corporate income tax
purposes, to the tax consolidation group of Telefonica S.A.
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<PAGE> 249
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RELATED COMPANIES
The details of the amounts receivable from and payable to related companies
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
THOUSANDS OF EUROS
<S> <C> <C>
CTC due to Terra Networks Chile, S.A................... 317 481
Telefonica due to Double Click, S.L.................... 49 --
TTD due to Double Click, S.L........................... 14 --
TELYCO due to TSCR..................................... 406 276
Telefonica, S.A. due to TSCR........................... -- --
CTC Corp due to Terra Networks Chile, S.A.............. 374 --
Telefonica Data, S.A. due to TSCR...................... -- 1,719
Telefonica, S.A. due to Terra Networks, S.A............ -- 367
TPI due to Terra Networks, S.A......................... -- 210
TPI due to OLE......................................... -- 121
Other.................................................. 114 323
----- ------
TRADE ACCOUNTS RECEIVABLE FORM RELATED COMPANIES....... 1,274 3,497
===== ======
TSCR due to TELYCO..................................... 185 324
TSCR due to Telefonica, S.A............................ 230 258
TSCR due to TDATA (formerly TSAI)...................... 1,221 5,674
TSCR due to Tempotel................................... 89 120
TSCR due to UGS (TGS).................................. -- 42
TSCR due to TS......................................... 309 42
TSCR due to Telefonica Multimedia...................... 53 --
TSCR due to Estratel................................... -- 1,568
TSCR due to TIDSA...................................... -- 73
Double Click, S.L. due to TPI.......................... 342 --
Double Click, S.L. due to TDATA (formerly TSAI)........ 6 --
Terra Networks Chile, S.A. due to CTC Corp............. 465 1,284
Terra Networks Chile, S.A. due to Nexcom, S.A.......... 195 659
Terra Networks Chile, S.A. due to CTC Mundo, S.A....... 1,930 201
Terra Networks Chile, S.A. due to CTC.................. 2,716 1,480
Terra Networks, S.A. due to TPI........................ -- 367
Terra Networks, S.A. due to Telefonica I+D............. -- 1,418
OLE due to Telefonica Data............................. -- 355
OLE due to Telefonica, S.A............................. -- 313
Terra Interactiva de Contenidos, S.A. due to Telfisa... -- 823
Other.................................................. 49 1,638
----- ------
ACCOUNTS PAYABLE TO RELATED COMPANIES.................. 7,790 16,639
===== ======
</TABLE>
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<PAGE> 250
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) REVENUES AND EXPENSES
REVENUES --
The breakdown, by geographical market (based on the country of domicile of
the company that provides the service), of "Total revenues" in the accompanying
consolidated statement of operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Terra Networks, S.A. (Spain)............................. -- -- 323
TSCR (Spain)............................................. 1,069 4,556 8,204
OLE (Spain).............................................. -- -- 1,340
Double Click, S.L (Spain)................................ 72 1,115 1,304
Terra Interactiva de Contenidos, S.A. (Spain)............ -- -- 24
Terra Networks Chile..................................... 1,409 6,474 9,911
Terra Networks Brasil.................................... -- -- 14,808
Terra Networks Mexico.................................... -- -- 11,065
Terra Networks USA....................................... -- -- 2,224
Terra Networks Guatemala................................. -- -- 944
Terra Networks Argentina................................. -- -- 42
Terra Networks Peru...................................... -- -- 42
----- ------ ------
2,550 12,145 50,231
===== ====== ======
</TABLE>
The operating revenues relate mainly to the following (see note 3-j):
1. Internet service provider revenues. These relate mainly to the
revenues from fixed-charge subscriptions fees to provide Internet
services chiefly to the residential and SOHO markets. In June 1999 free
Internet services began to be provided in Spain, giving rise to
traffic-inducement revenues as a result of the traffic generated by
Terra destined for the network of Telefonica Data Espana, S.A., under
the contract between the two parties.
2. Portal advertising revenues. These relate to revenues received based
on a price per one thousand impressions on Terra's portals, and pursuant
to agreements in which customers sponsor portal areas based on a fixed
amount.
3. E-commerce revenues. These relate to revenues arising from e-commerce
transactions made through the Terra Group's portals.
4. Corporate services. These relate to corporate services rendered to
companies such as connection services, development of applications, web
developing, hosting, e-commerce between companies and financial
information.
X-33
<PAGE> 251
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PERSONNEL EXPENSES --
The details of personnel expenses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Wages and salaries....................................... 810 2,946 17,946
Employee welfare expenses and other...................... 118 229 1,996
--- ----- ------
928 3,175 19,942
=== ===== ======
</TABLE>
AVERAGE HEADCOUNT --
The Group had an average of 1,870, 139 and 73 employees in the years ended
December 31, 1999, 1998 and 1997 and the year-end headcount was 2,119 as of
December 31, 1999.
OTHER OPERATING EXPENSES --
The detail of the operating expenses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Renting and leasing...................................... 113 666 4,199
Repair and maintenance................................... 36 132 768
Professional services.................................... 47 557 10,266
Bank services............................................ 4 10 307
Local taxes.............................................. -- 55 2,820
Marketing expenses....................................... 317 2,269 48,147
Water, light, telecommunications and other supplies...... 69 275 5,680
Cleaning services........................................ -- 21 38
Uniforms and other equipment............................. 12 -- --
Office material.......................................... 294 72 461
Travel Expenses.......................................... -- 35 2,262
Insurance premiums....................................... -- 12 281
Transports............................................... 36 132 475
Other.................................................... 165 324 7,163
Bad debt allowance....................................... 1,051 995 1,037
----- ----- ------
2,144 5,555 83,904
===== ===== ======
</TABLE>
(16) DIRECTORS' REMUNERATION AND OTHER BENEFITS
During the year December 31, 1999 Telefonica, S.A. has charged the Group
Euro 565 thousand related to its Directors' remuneration, which has been
included under "Professional Services". No such charges were made to Terra
Networks, S.A. in 1998. As of December 31, 1999 there are no other commitments
to Board members.
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<PAGE> 252
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) OTHER INFORMATION
A) "YEAR 2000 ISSUE" (UNAUDITED) --
The Group companies made a satisfactory transition to the Year 2000, and
there were no anomalies that affected the services rendered or the computerized
management processes.
B) STOCK OPTION PLAN --
On October 1, 1999, the Shareholders' Meeting of Terra Networks, S.A.
approved the creation of a Stock Option Plan for the Group's executives (which
was then extended to employees) by granting them purchase options on shares of
Terra Networks' common stock. It also empowered the Board of Directors to
establish the terms and conditions of the Stock Option Plan and, pursuant to
Article 75 et seq. of the Corporations Law, to acquire treasury stock
representing up to a maximum of 5% of the capital stock during an 18-month
period.
The General Shareholders' Meeting of Terra Networks, S.A. issued 14 million
ordinary shares for distribution under the Stock Option Plan. Pursuant to the
aforementioned resolutions of the Shareholders' Meeting, on October 18, 1999,
the Board of Directors resolved to set up the following Stock Option Plan:
1. Two series of options were approved, Series A and Series B.
2. An exercise price of Euro 2.16 per Series A options and the initial
public offering retail price euro 11.81 for Series B options (finally
all the options were Series B).
3. Term of four years and three months.
4. The options might have been exercised at a rate of one-third each
year from the second year from the date on which the options are granted
to the employees.
5. The options are nontransferable.
On December 1, 1999, the Board of Directors upon the proposal of Terra
Networks, S.A.'s Appointments and Compensation Committee adopted the following
resolutions:
1. To limit the types of stock option to the series B, i.e. options with
an exercise price equal to the offering retail price, set at Euro 11.81
per share. The plan will therefore not include options of any other
type.
2. To extend the Plan to 1,082 employees of the various Group companies
(in Mexico, Brazil, Spain, Chile, Guatemala, Argentina, Peru and the
U.S.).
3. The aforementioned 1,082 employees may acquire 2,582,588 shares
representing 0.92% of Terra Networks, S.A.'s capital stock, by
exercising the options.
No member of the Board of Directors may participate in the Plan or be a
beneficiary thereof.
Pursuant to the amendments to the revised Corporations Law and the
Securities Market Law on the treatment of stock options and similar compensation
systems, the exercise or disposal of option rights granted prior to January 1,
2000, requires the prior approval of the Shareholders' Meeting.
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<PAGE> 253
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Stock Option Plan was arranged as follows:
1. Two finance entities subscribed to a capital increase at Terra
Networks, S.A. on October 5, 1999, numbering 14 million shares which,
after all the capital increases envisaged in the public share offering
process, represent 5% of the capital stock of Terra Networks, S.A.
2. The acquisition price in this increase was Euro 2 per share par value
plus additional paid-in capital of Euro 0.16 per share, resulting in an
amount of Euro 30.21 million.
3. Simultaneously, the finance entities granted an irrevocable purchase
option on the shares to Terra Networks, S.A., to be exercised by March
31, 2004, for a price equal to the price at which the entities acquired
the shares. Terra Networks, S.A. will exercise this option as and when
it has to meet the commitments to its employees (with a view to being
able to exercise one-third of the option at three different dates during
the four-year period).
5. Terra Networks, S.A. will redeem any shares not acquired under the
Plan.
C) CONTRACT WITH MCKINSEY & CO.
Under a consulting contract with McKinsey & Co, Terra Networks, S.A. has
assumed payment commitments until December 31, 2000, that will accrue through
that date on the basis of the increase in value of Terra's shares.
(18) SUBSEQUENT EVENTS
A) ACQUISITIONS AND CO-OPERATION AGREEMENTS --
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) --
In January 2000, Terra Networks, S.A. entered into a protocol of intent
with BBVA to collaborate in the development of new Internet services and
applications. As part of this agreement, Terra Networks, S.A. agreed to take a
significant minority stake (20% which might have been increased to 35%) in Uno-e
Holding which in turn holds a 100% stake in Uno-e Bank, the online bank being
developed by BBVA, and BBVA agreed to acquire 3% of our share capital from
Telefonica, S.A of at market price.
In February 2000, Telefonica and BBVA entered into a strategic alliance
under which either Telefonica, S.A. or Terra Networks, S.A. might have acquired
up to 49% of Uno-e Holding and committed to participate in the international
expansion of online banking projects.
In March 2000, the proposed merger of Uno-e Bank and First-e group plc to
create Uno First Group was announced. Terra Networks, S.A. and BBVA will own,
through Uno-e Holding, 67,5% of UnoFirst. BBVA will own 51% and Terra Networks,
S.A. will own the remaining 49% of Uno-e Holding.
Either First-e's current sole shareholder, Enba plc, an Irish e-finance
incubator company, or Enba's existing shareholders will own the remaining stake
of Uno First. Under the agreement, which is subject to certain conditions and
approvals, Terra Networks, S.A. and BBVA will contribute their interests in
Uno-e Bank to UnoFirst, subscribe to a 362 million Euro capital increase in
UnoFirst and acquire shares of First-e by an amount of 291 million Euro. Enba
will contribute its interests in First-e to UnoFirst.
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aremate.Com ---
Terra Networks, S.A. has forged a strategic alliance with the U.S. company
Aremate.com, Inc., the leading on-line auction company in Latin America, whereby
Terra undertakes to acquire, a 30% stake in that company. In turn, Terra
Networks, S.A. through its subsidiary Terra Networks USA, Inc. have paid US$ 45
million to Aremate.com Inc. in cash.
Agencia Estado --
Terra Networks, S.A. and Agencia Estado have forged a strategic alliance
whereby Terra's portal in Brazil will use exclusively the contents of the media
owned by the Estado Group, one of the largest and most long-standing media
groups in Brazil. The purpose of the agreement is to increase the audience of
Terra and the Estado Group in Brazil, and to create new opportunities for
generating advertising, service and e-commerce revenues. Accordingly, Terra is
now the portal with the greatest volume of local information in the Brazilian
market.
Sun Microsystems --
Terra Networks, S.A. and Sun Systems entered into a framework cooperation
agreement for the joint performance of technological projects relating to the
creation and dissemination of services through the Internet.
Chevere --
On March 8, 2000, the Company, acting through its affiliate Terra Networks
Venezuela, S.A., entered into an agreement with the Venezuelan company Dotcom
Publicidad, C.A. for the purchase of the portal "CHEVERE". This agreement also
involves the purchase of the commercial assets of Dotcom Publicidad, C.A.,
including the rights over the domains "CHEVERE.COM" and "CHEVERE.COM.VE" and
over the trademark "CHEVERE!". The portal "CHEVERE" is one of the most important
portals in Venezuela, with more than three million page views per month.
Logista --
Terra Networks, S.A. has entered into an agreement with the Spanish company
Compania de Distribucion Integral Logista, S.A. to incorporate a company to
develop e-commerce related services such as billing, packaging and payment
monitoring (e-fulfillment) in connection with on-line purchases. The new company
will operate initially in Spain, Portugal, France, Latin America and USA.
Telepizza --
On April 26, 2000 Terra Networks, S.A. and the company Tele Pizza, S.A.
have signed a Memorandum of Understanding for the joint development and
exploiting of trading through communication networks such as Internet and
telephony, of convenience products (books, video tapes, CD's, prepaid cards,
entertainment products, etc.) including their distribution and delivery within a
period ranging from one to twenty four hours.
The said activity would be carried out through the incorporation of a new
company 50% owned by each of the parties. The Memorandum of Understanding covers
the contribution by Terra Networks, S.A. of its knowledge on communication
networks and on Internet, and the contribution by
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tele Pizza, S.A. of its experience and know how in reception of orders,
organization, storage, client portfolio and direct marketing.
IDT --
On April 30, 2000 Terra Networks, S.A. signed an agreement with IDT
Corporation ("IDT") by which the company will acquire from IDT Corporation the
49% interest it holds in Terra Networks Access Services (Terra's subsidiary that
exploits its access provider business in the U.S.) and the 10% interest it holds
in Terra Networks Portal Services (Terra's subsidiary that exploits the portal
business in the U.S.). IDT will receive in exchange ordinary shares of Terra's
capital stock, 3.75 million if the closing date is before July 31, 2000 or 4
million if the closing date is between August 1, 2000 and September 20, 2000.
LYCOS --
On May 16, 2000 the Board of Directors of Terra Networks, S.A. approved an
agreement with LYCOS, INC. ("Lycos") by virtue of which Terra Networks, S.A.
will acquire 100% of the shares in Lycos through a share capital increase with
share exchange. The exact number of shares to be issued in exchange shall be
determined by dividing $97.55 by the average closing price of Terra shares on
the Spanish Automated Quotation System (Sistema de Interconexion
Bursatil-Mercado Continuo), each closing price expressed in U.S. dollars, using
the noon buying rate of Euro for U.S. dollar as published by the Federal Reserve
Bank of New York, for the ten full trading days ending on the tenth trading day
prior to the contribution of the Lycos shares to Terra, provided, however, that
maximum and minimum limits have been fixed for the share exchange in such a
manner that if the average quotation price is equal to or greater than US$
68.06, the exchange ratio shall be 1.433 Terra shares for each Lycos share, and
if the average quotation price is equal to or less than US$ 45.37, the exchange
ratio shall be 2.15 Terra shares for each Lycos share.
After the merger, Telefonica, S.A. will hold approximately, between 31.8%
and 40.6%, depending on the final exchange formula, of the resulting company
(between 32.7% and 41.6% including 100% of the shares held by affiliates of
Telefonica, S.A.). The former shareholders of Lycos will hold between 41.6% and
51.6% of shares in our common stock. However, Lycos has committed in the
Agreement and Plan of Reorganization not to take any action, including issuing
new Lycos shares, that could reasonably be expected to result in its
shareholders owning or having voting rights in excess of 50% of Terra Lycos upon
completion of the combination. The majority shareholder of Lycos (CMGI) will
hold approximately between 4.2% and 5.7% of the resulting company.
The agreement is subject to certain convenants and termination clauses
described in the Articles VIII and IX of the Agreement and Plan of
Reorganization dated May 16, 2000. For example, under the terms of the Agreement
and Plan of Reorganization, each company must obtain approval of its
shareholders for the transaction as well as comply with other provisions of the
Agreement and Plan of Reorganization, for example those relating to
reorganization and conduct of business.
The President of Telefonica, S.A. will be the Executive Chairman of the new
company and the Chief Executive Officer will be the current Chief Executive
Officer of Lycos, while three representatives of Lycos shall be joining Terra's
Board of Directors after the merger.
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bertelsmann Group --
Terra Networks, S.A. has entered into an agreement with Bertelsmann Group
whereby Bertelsmann commits to purchase Internet services from Terra-Lycos over
the next few years. Terra-Lycos will also gain access to Bertelsmann's catalogue
of books, music, television, film and other media content.
Telefonica Moviles --
Terra Networks, S.A. has reached an agreement for the incorporation of a
joint venture with Telefonica Moviles, S.A., with the latter holding 51% and
Terra Networks, S.A. holding 49%, which shall develop portals based on WAP
mobile technology.
B) CAPITAL INCREASE --
On the General Meeting held on June 8, 2000, the Board of Directors of
Terra Networks, S.A. gives the authorization to carry out the next operations:
- Capital increase by means of the issuance of 35,483,871 new ordinary
shares with a face value of Euro 2 and an issue premium of Euro 60 per
share.
- Regarding the acquisition of the 49% interest of Terra Networks Access
Services, LLTD. and the 10% interest in Terra Networks Interactive
Services, LLTD. (see note 18-a) Terra Networks, S.A. will increase
capital issuing 4,000,000 new ordinary shares with a face value of Euro
2 and a minimum issue premium of Euro 9 per share. If the closing date
of this operation is before July 31, 2000 Terra Networks, S.A will
deliver 3,750,000 ordinary shares. If the closing date of this operation
is after July 31, 2000 Terra Networks, S.A. will deliver 4,000,000
ordinary shares. In both cases these shares will be subscribed and fully
paid with contributions consisting of shares of the two companies
mentioned above.
- Regarding the acquisition of the 100% of the shares in LYCOS, INC. (see
note 18-a), there will be a capital increase issuing a maximum of
340,922,712 new ordinary shares, with a face value of Euro 2 and an
issue premium of Euro 9 per share. These shares will be subscribed and
fully paid with contributions consisting of "LYCOS, INC.'s" shares.
- Issue of warrants for a maximum amount of 38,346,984, for the
subscription of "Terra Networks, S.A.'s" shares, which will be exchanged
by the options on LYCOS, INC's shares. Furthermore, in order to attend
the issue of warrants, there will be a capital increase issuing a
maximum of 82,446,016 new ordinary shares, with a face value of Euro 2
and an issue premium of Euro 9 per share.
C) TRANSFER OF LINES OF BUSINESS OF TELEFONICA INTERACTIVA DE CONTENIDOS --
On February 1, 2000, the transfer of the contents business line from Terra
Interactiva de Contenidos, S.A. to Terra Networks, S.A. was formalized, as
resolved by the latter's Board of Directors on December 1, 1999.
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price established under the business line transfer agreement
was equal to the value of the assets and rights contributed (assets), net of the
existing obligations (liabilities), plus the value of the two loans granted by
Terra Interactiva de Contenidos, S.A. to Terra Networks, S.A. and the accrued
interest payable, as follows:
<TABLE>
<CAPTION>
THOUSANDS
OF EUROS
---------
<S> <C>
Assets...................................................... 5,133
Liabilities................................................. (4,087)
Loans....................................................... 12,020
Accrued interest payable.................................... 210
------
TOTAL....................................................... 13,276
======
</TABLE>
(19) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C>
USE OF FUNDS
Funds used in operations.............................. 721 2,523 46,478
Start-up expenses and debt arrangement expenses....... 30 -- 52,028
Fixed assets additions
Intangible assets................................... 446 171 95,452
Property, plant and equipment....................... 472 3,279 36,835
Long-term financial investments..................... 842 388 5,128
Goodwill.............................................. 3,099 -- 535,210
Prepaid taxes (net)................................... 55 -- 42,625
Minority interest..................................... -- 1,579 --
Translation differences............................... -- -- 631
----- ----- ---------
TOTAL FUNDS USED...................................... 5,665 7,940 814,387
----- ----- ---------
FUNDS OBTAINED
IN EXCESS OF FUNDS APPLIED.......................... 1,875 -- 504,967
===== ===== =========
</TABLE>
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C>
SOURCE OF FUNDS
Funds from operations................................. -- -- --
Stockholder equity increase........................... 5,693 4,340 1,311,969
Minority interests.................................... 1,664 -- 1,216
Long-term debt........................................ 183 38 5,153
Fixed assets disposals
Intangible assets................................... -- 89 36
Property, plant and equipment....................... -- 20 841
Long-term financial investments..................... -- -- 139
----- ----- ---------
TOTAL FUNDS OBTAINED.................................. 7,540 4,487 1,319,354
----- ----- ---------
FUNDS APPLIED IN EXCESS OF
FUNDS OBTAINED................................... -- 3,453 --
===== ===== =========
</TABLE>
VARIATIONS IN WORKING CAPITAL --
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C>
INCREASE IN WORKING CAPITAL
Inventories........................................... -- 509 2,106
Accounts receivable................................... 4,296 2,712 39,463
Short-term financial investments...................... 144 2,697 566,704
Cash.................................................. 1,521 -- 20,291
Other................................................. 7 -- 17,139
Total................................................. 5,968 5,918 645,703
----- ----- ---------
INCREASE IN WORKING CAPITAL........................... 1,875 -- 504,967
===== ===== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
DECREASE IN WORKING CAPITAL 12/31/97 12/31/98 12/31/99
--------------------------- -------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Accounts payable............................................ 4,087 7,766 140,736
Short-term financial investments............................ -- -- --
Cash........................................................ -- 1,605 --
Other....................................................... 6 -- --
----- ----- -------
Total....................................................... 4,093 9,371 140,736
----- ----- -------
DECREASE IN WORKING CAPITAL................................. -- 3,453 --
===== ===== =======
</TABLE>
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the balances in the consolidated statements of
operations to the funds obtained from operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/97 12/31/98 12/31/99
-------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Loss.................................................... (1,971) (5,418) (83,332)
Loss attributed to minority interests................... 465 1,673 1,928
------ ------ -------
(1,506) (3,745) (81,404)
====== ====== =======
Plus/(Less):
Depreciation and amortization........................... 464 701 6,272
Amortization of goodwill in consolidation............... 310 339 28,654
Translation differences................................. -- 181 --
Other................................................... 11 1 --
FUNDS FROM OPERATIONS................................... (721) (2,523) (46,478)
</TABLE>
(20) DIFFERENCES BETWEEN SPANISH AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND OTHER REQUIRED DISCLOSURES
The consolidated financial statements of Terra Networks, S.A. were prepared
in accordance with generally accepted accounting principles in Spain ("Spanish
GAAP"), which differ in some respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). A reconciliation of net loss and
shareholder's equity from Spanish GAAP to U.S. GAAP is provided in this Note.
The most significant differences are as follows:
1. Research and development
In accordance with Spanish GAAP, research and development costs are
capitalized and amortized over a period not exceeding five years. Under U.S.
GAAP research and development costs for maintenance, services performed by
others, equipment and purchased intangibles that have no alternative future use
are expensed when acquired, incurred or constructed.
2. Accruals and deferrals
Different criteria are applied under Spanish and U.S. GAAP to accrue
certain items and, accordingly, related adjustments have to be made in the
reconciliation of net loss and shareholder's equity:
a) Capital increase expenses. In accordance with Spanish GAAP, expenses
associated with equity issuance are capitalized and amortized over
five years. Under U.S. GAAP capital increase expenses must be charged
against the gross proceeds of the new capital.
b) Start-up expenses. In accordance with Spanish GAAP, period expenses
incurred during the start-up of a business which will contribute to
obtain future revenues may be deferred and amortized over five years.
Under U.S. GAAP, start-up costs must be expensed as incurred.
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(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. Corporate income tax
In accordance with Spanish GAAP and with Corporate Income Tax Law 43/1995,
tax losses may be carried forward for ten years from the commencement of the tax
period following that in which the tax losses were incurred. However, under
Article 23.3 of said law, newly formed entities may calculate the period for the
offset from the first tax period when their taxable base is positive. Under
Spanish GAAP tax credits are only registered when there is true and total
certainty that these tax credits will be realized. Under U.S. GAAP, deferred tax
assets, including tax credits and carryforwards are recorded to the extent that
they are more likely than not to be realized.
Spanish GAAP permit the recognition of deferred tax assets, including those
arising from net operating loss carryforwards, if it can be demonstrated that
the deferred tax assets can be realized within a ten-year period from the date
on which the assets were generated. For 1999 financial statements, the Group has
recognized such tax assets under Spanish GAAP, since the business plan prepared
by management indicates that these assets will be realized within a ten-year
period, even in "worst-case scenarios".
Under U.S. GAAP, deferred tax assets should be recognized if it is "more
likely than not" that these assets will be realized. In making a determination
of whether it is more likely than not that a deferred tax asset is realizable,
all available evidence, both positive and negative, should be considered.
Companies should look to both objective evidence, such as a company's operating
history, as well as subjective evidence, such as a company's budgets and
business plans, to determine whether a valuation allowance is needed. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified.
Under U.S. GAAP, reaching a conclusion that a valuation allowance is not
needed is difficult when there is significant objective negative evidence, such
as cumulative losses, in recent years. All of the companies in the Group have
incurred such losses in each tax reporting period since its inception. Moreover,
the Group does not have other objective, positive evidence such as existing
contracts or a firm sales backlog, that will produce more than enough taxable
income to realize the deferred tax asset based on existing sales prices and cost
structures. Based on this evidence, a valuation allowance would be provided in
full against the deferred tax assets related to the Group's net operating losses
under U.S. GAAP.
4. Consolidation method
Under Spanish GAAP, companies in which a holding of at least 20% if
unlisted and 3% if listed is owned are carried by the equity method; investments
in companies in which Terra Networks, S.A. owns less than 50% of the common
voting stock must be consolidated when such companies are considered under
Spanish GAAP to be controlled by Terra Networks, S.A. In general, under U.S.
GAAP, companies in which a holding of between 20% and 50% is owned are carried
by the equity method.
5. Allocation of Purchase Price
The Group, under Spanish GAAP, has recorded the difference between the
purchase price of acquired companies such as Infosel, Nutec and Ole and the fair
value of the net assets acquired in these entities as goodwill. This goodwill is
being amortized over a period of five years beginning from the date of each
acquisition. Under U.S. GAAP, a portion or potentially all of this difference
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(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would have been classified as an acquired intangible asset called clients and
web visitors base. However, as such clients or web visitors base would have been
amortized over the same period as the goodwill recorded under Spanish GAAP, no
adjustment between reported net income and shareholders' equity under Spanish
and U.S. GAAP arises.
6. Goodwill
Spanish GAAP requires that amounts paid to acquire companies in excess of
the fair value of the assets acquired (including identified intangible assets)
at their purchase date be accounted for as goodwill and amortized over a period
not exceeding 20 years. The Group amortizes its goodwill over its estimated
useful life of five years for Spanish GAAP. The life is appropriate under U.S.
GAAP.
Subsequent to acquisition (for U.S. GAAP purposes), the Group evaluates
whether events and circumstances have occurred that indicate the remaining
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Group uses an estimate of undiscounted
cash flows from the underlying assets over the remaining life of those assets in
measuring whether the goodwill is recoverable. To the extent that undiscounted
cash flows are less than the carrying value of the goodwill, the Group will
record an impairment loss based on the difference between the fair value of the
goodwill (estimated using discounted cash flows) and its carrying value.
Goodwill from acquisitions from related parties. --
Under Spanish GAAP, we were required to account for our acquisition of over
90% interest in Double Click Iberoamerica, S.L. under the purchase method of
accounting. The fair value of the net assets we acquired was equivalent to the
costs basis of these assets. We did not amortize any of this goodwill during any
period presented, as this acquisition was with an affiliated entity.
Under U.S. GAAP, goodwill would not be recognized on this "acquisition" as
the majority shareholder, Telefonica, S.A., effectively owned a 90 % interest in
Double Click Iberoamerica, S.L. both before and after the transaction. Instead,
the transfer of this investment from one Telefonica S.A. subsidiary to another
would be accounted for at the historical cost basis of the Double Click
Iberoamerica, S.L. investment. Any excess in the value of the consideration
given by Terra Networks, S.A. over the historical cash basis of the Double Click
Iberoamerica, S.L. net assets would be regarded as a reduction in shareholders'
equity.
On November 4, 1999, Terra Networks, S.A. sold DoubleClick Iberoamericana,
S.L. to Double Click International Internet Advertising Limited, an unrelated
party, for Euro 1.25 million, giving rise to extraordinary revenues, under
Spanish GAAP of Euro 721 thousand.
In April 1999, Terra Networks, S.A. acquired 100% of OLE from INFOSEARCH
HOLDINGS, S.A. for Euro 12.02 million in cash and agreed to sell INFOSEARCH
HOLDINGS, S.A. 4,928,000 shares for euro 20.8 million. The estimated fair value
of the shares to be sold was Euro 54.0 million. For U.S. GAAP purposes, the
difference between the fair value of the shares and the amount received from the
sale of Euro 33.2 million would be considered additional purchase price. This
additional consideration would result in the same amount of goodwill. For
Spanish GAAP purposes the shares sold would be recorded based on the amount of
cash received and would not be considered to be additional purchase price.
On October 4, 1999, Terra Networks, S.A.'s subsidiary, Terra Networks Chile
Holding Limitada (formerly Telefonica Interactiva Chile Limitada), acquired from
CTC Mundo the 95% interest it owned
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TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Proveedora de Servicios de Conectividad, S.A. Terra Networks Chile Holding
Limitada paid US$ 40 million in cash, generating goodwill of Euro 39,667
thousands, which is being amortized over a period of 60 months (5 years). As
both CTC Mundo and Terra Networks, S.A. were under common control of Telefonica,
S.A. at the time of this transaction, according to U.S. GAAP the acquisition of
Proveedora de Servicios de Conectividad, S.A. would be considered a
reorganization of entities under common control. Therefore, under U.S. GAAP, we
would record Proveedora de Servicios de Conectividad, S.A. at its historical
cost basis and not recognize the goodwill associated with the transaction.
7. Joint Venture with IDT
As described in Notes 2 and 6, Terra Networks, S.A. formed a joint venture
with IDT called Terra Networks Access Services USA LLC. Upon formation of this
venture, IDT contributed a customer list containing approximately 46,000 users
to the joint venture, while Terra Networks, S.A. agreed to contribute up to US$
30 million in cash during a two year period following the formation of the joint
venture. The timing and extent of the contributions would be determined based on
mutual arrangements between Terra Networks S.A. and the joint venture. In
exchange for these contributions, IDT received a 49% interest in the joint
venture while Terra Networks, S.A. received a 51% interest in the entity.
Under Spanish GAAP, the Group has reflected an intangible asset for the
customer list of US$ 28.8 million, with an offsetting obligation of the same
amount to the joint venture. Under U.S. GAAP, the customer list contributed to
the joint venture would be recorded at IDT's carrying basis for such list. This
amount was zero as of the date that the list was transferred to the joint
venture. Moreover, the joint venture would not reflect an obligation for funding
from Terra Networks, S.A. until such time that Terra Networks, S.A. incurs a
binding obligation to make such funding.
In addition, under Spanish GAAP, this investment has been consolidated as
Terra Networks, S.A. has a majority voting interest in this entity. However,
under U.S. GAAP, this investment cannot be consolidated since the minority
shareholders in the investment have substantial participative rights in the
joint venture. Accordingly, this investment would be recorded under the equity
method for U.S. GAAP purposes. While this difference would not result in any
differences in reported net loss or shareholders' equity between U.S. GAAP and
Spanish GAAP, reported intangible assets and current liabilities would be lower
by Euro 30.893 thousands as of December 31, 1999 had U.S. GAAP been employed.
X-45
<PAGE> 263
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. The following is a reconciliation of shareholders' equity and net loss from
Spanish GAAP to U.S. GAAP.
<TABLE>
<CAPTION>
12/31/97 12/31/98 12/31/99
-------- -------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY PER SPANISH GAAP................. 2,998 3,593 1,233,527
Deductions for U.S. GAAP purposes:
Research and development expenses................... -- -- (247)
Start-up costs
Advertising...................................... (30) (22) (18,102)
Initial public offering.......................... -- -- (33,028)
Goodwill arising from OLE acquisition (net)......... -- -- 28,236
Goodwill arising from Chile acquisition (net)....... -- -- (38,345)
Valuation allowances on deferred tax assets (a)..... (377) (1,711) (42,625)
Minority interest................................ 1 14 --
Tax effects of above adjustments................. 11 8 --
Other............................................ -- -- 55
----- ------ ---------
Total differences..................................... (395) (1,711) (104,056)
----- ------ ---------
SHAREHOLDERS' EQUITY PER U.S. GAAP.................... 2,603 1,882 1,129,471
===== ====== =========
</TABLE>
(a) Includes Euro 6,677 thousands of tax carried forward relating mainly
to Informacion Selectiva, S.A.
<TABLE>
<CAPTION>
12/31/97 12/31/98 12/31/99
------------ ------------ ------------
THOUSANDS OF EUROS
<S> <C> <C> <C>
NET LOSS PER SPANISH GAAP................. (1,506) (3,745) (81,404)
Reversal of amortization of start-up
costs................................ -- 8 920
Additions to start-up costs
(advertising)........................ (28) -- (19,020)
Additions to research and development
expenses............................. -- -- (343)
Reversal of amortization of research and
development expenses................. -- -- 96
Amortization of Goodwill OLE............ (4,982)
Amortization of Goodwill Chile.......... -- -- 1,322
Corporate income tax.................... (377) (1,334) (35,899)
Minority interest....................... 1 13 --
Tax effects of above adjustments........ 11 (3) --
----------- ----------- -----------
NET LOSS PER U.S. GAAP.................... (1,899) (5,061) (139,310)
----------- ----------- -----------
NET LOSS PER SHARE U.S. GAAP.............. (0.01) (0.026) (0.68)
----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING....... 193,525,585 193,525,585 203,763,953
=========== =========== ===========
</TABLE>
Shareholders' rights and all dividend distributions are based on the
financial statements as reported for local Spanish statutory purposes by Terra
Networks, S.A.
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<PAGE> 264
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. Comprehensive income
Comprehensive income is defined in FASB Concepts Statements No. 6 and SFAS
No. 130, "Reporting Comprehensive Income", as "the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners".
SFAS No. 130 describes the items that qualify as components of
comprehensive income, such as:
a. Foreign currency translation adjustments;
b. Gains and losses on foreign currency transactions that are designated
as, and are effective as, economic hedges of a net investment in a
foreign entity, commencing, as of the designation date;
c. Gains and losses on intercompany foreign currency transactions that
are of a long-term-investment nature (that is, settlement is not planned
or anticipated in the foreseeable future), when the entities to the
transaction are consolidated, combined, or accounted for by the equity
method in the reporting enterprise's financial statements;
d. A change in the market value of a futures contract that qualifies as
a hedge of an asset reported at fair value pursuant to FASB No. 115;
e. A net loss recognized pursuant to FASB No. 87 as an additional
pension liability not yet recognized as net periodic pension cost;
f. Unrealized holding gains and losses on available-for-sale securities;
g. Unrealized holding gains and losses that result from a debt security
being transferred into the available-for-sale category from the
held-to-maturity category;
h. Subsequent decreases (if not an other-than-temporary impairment) or
increases in the fair value of available-for-sale securities previously
written down as impaired.
For each of the three years in the period ended December 31, 1999, the only
component of comprehensive income (loss) besides net loss is the Group's foreign
currency translation adjustments related to its investments that have functional
currencies other than the Euro. The following represents the statement of
comprehensive income prepared using U.S. GAAP:
<TABLE>
<CAPTION>
12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- --------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C>
NET LOSS PER U.S. GAAP........................... (1,343) (1,899) (5,061) (139,310)
Other comprehensive income (expense)-............
Foreign currency translation adjustments......... -- 66 73 (631)
------ ------ ------ --------
COMPREHENSIVE LOSS............................... (1,343) (1,833) (4,988) (139,941)
====== ====== ====== ========
</TABLE>
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<PAGE> 265
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. Statement of cash flows
Spanish GAAP does not require the presentation of statements of cash flows.
For purposes of the statement of cash flows, the Group considers all highly
liquid debt instruments (or investments) purchased with an original maturity of
three months or less to be cash equivalents.
<TABLE>
<CAPTION>
12/31/97 12/31/98 12/31/99
-------- -------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C>
Net loss per Spanish GAAP............................. (1,971) (5,418) (83,332)
------ ------ ---------
Adjustments to reconcile net loss to net
Cash used in operating activities --
Depreciation and amortization.................... 464 701 6,272
Amortization of goodwill......................... 310 339 28,654
Minority interest in loss of consolidated
Subsidiaries................................... 465 1,673 1,928
Other............................................ 11 182 --
Changes in operating assets and liabilities, net of
Effects from purchase of new investments --
(Increase) Decrease --
Inventory........................................... -- (509) (2,106)
Accounts receivable.............................. (4,294) (2,714) (39,463)
Prepaid taxes.................................... (55) -- (42,625)
Other current assets............................. (145) (2,697) (566,704)
Prepayments...................................... (2) 2 (17,139)
Increase (Decrease) --
Trade creditors.................................. 3,712 6,853 64,933
Non-trade creditors.............................. 70 577 58,329
Other liabilities................................ 305 336 17,474
------ ------ ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... (1,130) (675) (573,779)
------ ------ ---------
Cash flow from investing activities:
Cash paid for financial investments................. -- -- (5,128)
Acquisitions of businesses.......................... (3,099) -- (535,071)
Cash acquired in acquisition........................ -- -- --
Capital expenditures................................ (1,760) (3,729) (131,410)
Purchase of short-term financial investments........ -- -- --
Payments for start-up costs......................... (30) -- (52,028)
Translation differences............................. -- -- (631)
------ ------ ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... (4,889) (3,729) (724,268)
------ ------ ---------
Cash flow from financing activities:
Proceeds from issuance of common stock.............. -- -- 1,314,571
Increases in accounts payable to affiliates......... -- -- --
Proceeds from other capital contributions........... 5,693 4,340 (2,602)
Increase (decrease) in other-long term
liabilities...................................... 183 38 5,153
Contributions from minority interest owners......... 1,664 (1,579) 1,216
------ ------ ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... 7,540 2,799 1,318,338
------ ------ ---------
Net change in cash and cash equivalents............... 1,521 (1,605) 20,291
Cash and cash equivalents at beginning of year........ 232 1,753 148
------ ------ ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. 1,753 148 20,439
====== ====== =========
</TABLE>
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<PAGE> 266
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. Advertising
The Group companies advertise their branded services and products through
national and regional media in the countries in which they operate. These
advertising costs are expensed as incurred, and are charged to "operating
expenses". The disclosure required by SOP 97.3 for advertising expenses is as
follows: for the year ended as of December 31, 1999, 1998 and 1997 amounted to
Euro 48,147, Euro 2,269 and Euro 317 thousand, respectively.
12. Disclosure of fair value of financial instruments.
SFAS No. 107 requires that the Group disclose the estimated fair value of
its financial instruments as of December 31, 1999, 1998 and 1997. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate such fair value:
a) Cash and cash equivalents
The fair value of these investments approximates their carrying value due
to the short maturity of the instruments.
b) Current assets and short-term credit/investments
The carrying value for current assets approximates fair value because of
the relatively short time between the origination of the instruments and their
expected realization.
c) Long-term financial investments
The fair value of long-term financial investments is estimated based on
listed market prices for those or similar investments. The Group had no such
investments at December 31, 1997, 1998 and 1999. For investments for which there
are no market prices, a reasonable estimate of fair value could not be made
without incurring excessive costs. In view of the limited volume of these
investments considered individually, the cost of valuing them based on an
estimate of future cash flows discounted at market interest rates for
investments of this type would be disproportionate with respect to the
additional information to be gained thereby, and the Group's management
considers that the difference between the book value and the fair value is not
material.
d) Debts to financial institutions
The fair value of these debts was estimated based on the discounted value
of future cash flows expected to be paid, using discount rates that reflect the
relative risks involved. The Group had no such debts as of December 31, 1998 and
1999.
e) Accounts receivable and accounts payable
The fair value of these instruments approximates their carrying value
because of their short-term nature.
13. Stock option plan
As described in Note 17-b, the Company has a stock incentive plan that was
adopted on October 1, 1999. On November 17, 1999, the date of the Group's
initial public offering ("IPO"),
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<PAGE> 267
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14,000,000 (2,582,588 granted in 1999) options to acquire ordinary shares of
Terra Networks, S.A. were issued to employees of the Company. The exercise price
of these options was Euro 11.81, which was equivalent to the retail offering
price of shares issued in the Group's IPO. These options has an expiration date
of four years and three months from the date of grant and would vest at a rate
of one-third each year from the second year from the date on which the options
were granted. Accordingly, at December 31, 1999, none of these options is
exercisable. Furthermore, none of these options was forfeited during the period
from the date of grant to December 31, 1999.
At December 31, 1999, the weighted average contractual life of outstanding
options was 4.1 years and the fair value of options granted during 1999 was
approximately $7.96 per share, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for the 1999 grants: risk-free interest rate
of 5.915%; expected life of 4 years; expected dividend yield of zero percent;
and assumed volatility of 90% based on a study of volatility factors of public
companies in the same industry as Terra Networks, S.A., such as Yahoo!, AOL,
Amazon and others.
Terra Networks, S.A. applies Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock option
grants to employees and directors. Accordingly, no compensation cost has been
recognized related to such grants in the accompanying Statements of Operations
for the years ended December 31, 1999, as the exercise price of the options was
equivalent to the fair value of Terra Networks' ordinary shares on the
measurement date. Had compensation cost for these grants been determined
consistent with Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation," the Group's net loss would have been increased by
approximately $927 thousand and the Group basic and diluted loss per share under
U.S. GAAP would have increased by $ 0,004 per share for the year ended December
31, 1999.
14. Earning Per Share
The Group has no potentially dilutive shares, as defined under FAS 128
"Earning Per Share". Therefore, there are no differences between basic and
diluted loss per share for any periods presented.
As described in Note 11 Telefonica, S.A. converted accounts due from Terra
Networks, S.A. into share capital of Terra Networks, S.A. on September 7, 1999.
Also on this date, Telefonica, S.A. invested Euro 120.2 million in exchange for
share capital of Terra Networks, S.A. As the shares were issued at a price well
below fair value, these transactions are considered nominal transaction under
SAB No. 98. Accordingly, share amounts have been retroactively restated for
purposes of calculating earnings per share as if these issuances had occurred on
January 1, 1997.
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<PAGE> 268
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. Business segment data
The Group operates in some business segments, based on geographic regions
in which the Group conducts operations. These segments are consistent with the
way management analyses its businesses. The main figures by geographic region
for the year ended as of December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION
SPAIN BRAZIL MEXICO COUNTRIES ADJUSTMENTS TOTAL
--------- ------- ------- --------- ------------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
1997
Net loss of the segment........ 1,123 -- -- 383 -- 1,506
Sales to clients............... 981 -- -- 1,481 -- 2,462
Depreciation and amortization
expenses..................... 444 -- -- 20 -- 464
Amortization of goodwill....... -- -- -- -- 310 310
Income tax credit.............. 354 -- -- 9 -- 363
Total assets................... 2,213 -- -- 9,584 -- 11,797
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOLIDATION
SPAIN BRAZIL MEXICO COUNTRIES ADJUSTMENTS TOTAL
--------- ------- ------- --------- ------------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
1998
Net loss of the segment........ 2,220 -- -- 1,525 -- 3,745
Sales to clients............... 4,447 -- -- 6,314 -- 10,761
Depreciation and amortization
expenses..................... 528 -- -- 173 -- 701
Amortization of goodwill....... -- -- -- -- 339 339
Income tax credit.............. 1,195 -- -- 139 -- 1,334
Total assets................... 7,777 -- -- 10,840 -- 18,617
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOLIDATION
SPAIN BRAZIL MEXICO COUNTRIES ADJUSTMENTS TOTAL
--------- ------- ------- --------- ------------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
1999
Net loss of the segment........ 89,719 37,064 9,592 13,139 (68,110) 81,404
Sales to clients............... 6,647 15,991 10,842 10,770 (14,310) 29,940
Depreciation and amortization
expenses..................... 2,855 234 1,533 1,671 (21) 6,272
Amortization of goodwill....... -- 18,307 1,689 1,833 6,825 28,654
Income tax credit.............. 43.988 (529) 577 12 (8,149) 35,899
Total assets................... 1,586,239 222,771 118,177 138,630 (660,352) 1,405,465
</TABLE>
Interest revenue and expense for the Group or its segments were not
significant in 1999 and 1998. Terra Networks, S.A. had no significant non-cash
expenses, other than depreciation and amortization.
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<PAGE> 269
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING PRINCIPLES --
All transactions between segments are made at market prices or at prices
which have been approved, and published, by the regulatory authority.
The accounting principles used in accounting for the segments are the same
as those used in the consolidated financial statements. There are no
transactions between segments.
Geographic distribution of sales for the year ended as of December 31, 1999
and 1998 was as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
THOUSANDS OF EUROS
------------------
<S> <C> <C>
SALES TO EXTERNAL CLIENTS:
Spain....................................................... 5,562 8,330
Chile....................................................... 5,199 9,911
Mexico...................................................... -- 11,065
Brazil...................................................... -- 14,808
United States............................................... -- 2,224
Peru........................................................ -- 42
Argentina................................................... -- 42
Guatemala................................................... -- 944
------ ------
10,761 47,366
Sales to related parties.................................... 1,384 2,865
------ ------
TOTAL REVENUES.............................................. 12,145 50,231
====== ======
</TABLE>
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<PAGE> 270
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The distribution of fixed assets and intangible assets at December 31, 1999
and 1998 was as follows:
<TABLE>
<CAPTION>
1998 1999
------ -------
THOUSANDS OF EUROS
------------------
<S> <C> <C>
PROPERTY PLANT AND EQUIPMENT (NET):
Spain....................................................... 1,439 9,719
Chile....................................................... 2,039 8,734
Mexico...................................................... -- 9,221
Brazil...................................................... -- 7,495
United States............................................... -- 1,504
Peru........................................................ -- 78
Argentina................................................... -- 307
Guatemala................................................... -- 198
----- ------
TOTAL....................................................... 3,478 37,256
===== ======
INTANGIBLE ASSETS (NET):
Spain....................................................... 527 12,310
Chile....................................................... -- 529
Mexico...................................................... -- 16,300
Brazil...................................................... -- 4,256
United States............................................... -- 29,871
Peru........................................................ -- 28,465
Argentina................................................... -- 1,058
Guatemala................................................... -- 18
----- ------
TOTAL....................................................... 527 92,807
===== ======
</TABLE>
16. Pro Forma Effect of Acquisitions
U.S. GAAP requires the disclosure of certain information about significant
acquisitions that occur during the periods for which financial statements are
presented.
The following unaudited information presents the results of operations of
the Group as if the material acquisition of Telefonica Interactiva Brasil, OLE
and Informacion Selectiva, S.A. de C.V. (Infosel) had taken place at the
beginning of each period presented:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
(UNAUDITED)
IN THOUSANDS OF EUROS, EXCEPT
PER SHARE DATA
<S> <C> <C>
Revenues............................................... 50,840 78,530
Net loss............................................... (115,634) (163,674)
Net loss per share..................................... (1.93) (0.80)
</TABLE>
These unaudited results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the dates
indicated, or which may result in the future.
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<PAGE> 271
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. Classification Differences --
In the Spanish GAAP financial statements, amortization of goodwill is shown
separately in the consolidated statement of operations below operating loss. For
U.S. GAAP reporting purposes, amortization of goodwill is shown as a deduction
before operating income. The amount of goodwill amortization recorded as a
component of financial expenses under Spanish GAAP was Euro 28,654, 339 and 310
thousands for the years ended December 31, 1999, 1998 and 1997.
Under Spanish GAAP, certain income and expenses, such as those arising from
the disposition of fixed assets can be classified as extraordinary items. Under
U.S. GAAP, these amounts would be classified as a component of operating income
(loss).
18. New accounting standards --
Accounting for Derivatives --
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting treatment.
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for
fiscal years beginning after June 15, 2000. A company may also implement the
Statement as of the beginning of any fiscal quarter after issuance; however,
SFAS No. 133 cannot be applied retroactively. The Group plans to adopt SFAS No.
133 in 2001 but does not expect the impact of this new statement to be material.
Web Site Development Costs --
The Emerging Issues Task Force (EITF) has recently issued EITF 00-2,
"Accounting for Web Site Development Costs." The Task Force has reached a
consensus that all costs associated with the planning of web site development
projects should be expensed as incurred, while costs incurred in the application
and development stage should generally be capitalized in accordance with
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," or other relevant pronouncements. Cost incurred in the operations
of the web site are generally expensed as incurred. The EITF has not yet reached
a consensus as to the accounting for the costs of developing and displaying
content or other information on a web site, but the Task Force plans further
discussion on this issue. EIFT 00-2 is effective for web site development costs
incurred for fiscal quarters beginning after June 30, 2000. As the Group's
current policy is substantially consistent with the consensuses reached in EITF
00-2, the Group does not expect that the issuance of this pronouncement will
have a material effect on its financial condition or results of operations.
The majority of the Group's software and software related expenditures
relate to the development and maintenance of its portal. Under Spanish GAAP and
U.S. GAAP, internal and external costs incurred in the planning or conceptual
development of the Group's portal are
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<PAGE> 272
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expensed as incurred. Once the planning or conceptual development of a web site
enhancement project has been achieved, and the project has reached the
application or development stage, the following costs are capitalized as
intangible assets:
- external direct costs of materials and services used in the project,
- payroll and payroll-related costs for employees who are directly
associated with and who devote time to the project (to the extent of the
time spent directly on the project) and
- interest cost incurred in the development of the project, if material.
Training and routine maintenance costs are expensed as incurred. Costs
incurred that result in enhancements or additional functionality to the web site
are capitalized in accordance with the policy described above.
During the years ended December 31, 1999, 1998 and 1997, most of our costs
are charged to the profit and loss as expenses relating to web site development.
Those costs are basically contents purchases or renting paid to our suppliers
and these costs have been not capitalized.
19. Barter Transactions --
Emerging Issues Task Force ("EITF") 99-17, "Accounting for Advertising
Barter Transactions" provies accounting guidance for barter transactions
involving a nonmonetary exchange of advertising. Generally, such barter
transactions should only be recorded as revenues and cost to the extent that the
fair value of the advertising surrendered in the transaction is determinable
based on a company's historical practice of receiving cash for similar
advertising provided to buyers unrelated to the counterparty in the transaction.
In addition, if an entity engages in advertising barter transactions for which
the fair value is not determinable within the limits of EITF 99-17, no revenues
or costs should be recorded, but information regarding the volume and type of
advertising surrendered and received (such as the number of equivalent pages,
the number of minutes, or the overall percentage of advertising volume) should
be disclosed for each income statement period presented.
The fair value of the Group's barter transactions, which are very limited,
cannot be determined in accordance with the provisions of EITF 99-17 and
therefore, the Group has not recorded and revenues or costs related to these
transactions. Additionally, the volume of advertising transactions was not
significant for the three years ended December 31, 1999, both for displaying and
for surrendering advertising.
20. Related Party Transactions --
Terra Networks, S.A. has entered or expects to enter into a number of
agreements with its parent company, Telefonica S.A. and its subsidiary or
affiliated companies. The most significant contract involves a fee that
Telefonica Data Espana, S.A. will pay to Terra Networks, S.A. for the Internet
traffic that Terra Networks, S.A. captures for Telefonica Data. This contract
was signed on September 15, 1999. The Comision del Mercado de las
Telecomunicaciones (CMT), the Spanish telecommunications regulator, required
Telefonica, S.A. to offer the same terms to other Internet providers.
We also have a number of agreements with Telefonica S.A. or its
subsidiaries to provide web site content and/or Internet access to cable
customers for which we receive revenues. The amount of these revenues for the
years ended December 31, 1997, 1998 and 1999 were Euro 72, Euro 793 and Euro
1,478 thousands.
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<PAGE> 273
TERRA NETWORKS, S.A.
(TELEFONICA INTERACTIVA, S.A. UNTIL SEPTEMBER 7, 1999)
AND SUBSIDIARIES COMPOSING THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We also utilize services provided by Telefonica, S.A. and its subsidiaries,
such as the leasing of circuits, cash-management services and the obtaining of
reference information. Costs related to services provided by related parties for
the years ended December 31, 1997, 1998 and 1999 were Euro 1,022, Euro 3,930 and
Euro 12,561 thousands.
During 1999, we acquired computer hardware from a subsidiary or Telefonica,
S.A. for approximately Euros 1.5 million. The purchase price was based on the
fair value of these assets. The hardware is being amortized over a three year
period.
For those contracts currently in place, Terra Networks, S.A. believes that
the terms of these arrangements are at least as favorable as could be obtained
in an arm's length transaction between non-affiliated parties.
Terra Networks, S.A. does not believe that the loss of any of these
arrangements, individually or in the aggregate, would have a material effect on
our results of operations or financial condition.
X-56
<PAGE> 274
EXHIBIT I
GROUP COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS.
The contribution of the Group companies to consolidated reserves and losses
as of December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
----------------- ----------------- -----------------
TO TO TO TO TO TO
RESERVES LOSSES RESERVES LOSSES RESERVES LOSSES
-------- ------ -------- ------ -------- ------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
COMPANY, ACTIVITY AND PERCENTAGE OF OWNERSHIP
Terra Networks, S.A. Holding Company (100%).. -- -- -- -- 754,931 (5,968)
Telefonica Servicios y Contenidos por la Red,
S.A. (TSCR) Commercial activities through
network (100%)............................. 800 1,123 (322) 2,220 -- 19,861
Double-Click Iberoamerica, S.L. Advertising
development in Internet and other networks
(90%)...................................... 803 26 777 252 -- --
Terra Networks Chile, S.A. ISP and portal
Commercial activities (99%)................ 1,579 357 1,294 1,273 -- 8,961
Terra Interactiva de Contenidos, S.A.
Development of contents (100%)............. -- -- -- -- -- 4,153
Ordenamiento de Links Especializados, S.L.
(OLE) Development of Spanish Portal
(100%)..................................... -- -- -- -- -- 3,312
Terra Networks Guatemala, S.A. ISP
And portal (95%)........................... -- -- -- -- -- 126
Terra Networks Peru, S.A. ISP and Portal
(99,99%)................................... -- -- -- -- -- 2,500
Terra Networks USA, Inc and Subsidiaries ISP
and portal (100%).......................... -- -- -- -- -- 337
Terra Networks Argentina, S.A. ISP
And portal (99,99%)........................ -- -- -- -- -- 1,406
Terra Networks Mexico, S.A. de C.V.
And subsidiaries ISP and portal (100%)..... -- -- -- -- -- 9,592
Terra Networks Brasil, S.A. and subsidiaries
ISP and portal (99,99%).................... -- -- -- -- -- 37,064
CIERV, S.L. Design of communications products
(100%)..................................... -- -- -- -- -- 60
----- ----- ----- ----- ------- ------
TOTAL CONTRIBUTION........................... 3,182 1,506 1,749 3,745 754,931 81,404
===== ===== ===== ===== ======= ======
ISP: Internet Service Provider
</TABLE>
X-57
<PAGE> 275
EXHIBIT II
GOODWILL IN CONSOLIDATION
The detail of the balance of goodwill in consolidation, the related
accumulated amortization and the variations therein are as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
CONSOLIDATION 1996 ADDITIONS AMORTIZATION 1997 ADDITIONS
------------- ------------ --------- ------------ ------------ ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C>
CTC Internet's acquisition of REUNA'S
activity....................................... -- 3,099 (310) 2,789 --
Terra Networks, S.A. acquisition of OLE......... -- -- -- -- --
Terra Networks, S.A. acquisition of Double
Click, S.L..................................... -- -- -- -- --
Telefonica Interactiva Brasil, Ltda. Acquisition
of Terra Networks Brasil (formerly Nutec
Informatica, S.A.)............................. -- -- -- -- --
Terra Networks Brasi, acquisition of
subsidiaries................................... -- -- -- -- --
Terra Networks, S.A. acquisition of Terra
Networks Guatemala, S.A........................ -- -- -- -- --
Terra Networks, S.A. acquisition of CIERV,
S.L............................................ -- -- -- -- --
Terra Networks Argentina, S.A. acquisition of
Netgocios, S.A................................. -- -- -- -- --
Terra Networks Argentina , S.A. acquisition of
Donde Latinoamericana, S.A..................... -- -- -- -- --
Terra Networks, S.A. acquisition of Informacion
Selectiva, S.A................................. -- -- -- -- --
Informacion Selectiva, S.A. acquisition of
subsidiaries................................... -- -- -- -- --
--- ----- ---- ----- ---
TOTAL NET GOODWILL.............................. -- 3,099 (310) 2,789 --
=== ===== ==== ===== ===
<CAPTION>
BALANCE AT
TRANSLATION DECEMBER 31,
CONSOLIDATION AMORTIZATION DIFFERENCES 1998 ADDITIONS RETIREMENTS
------------- ------------ ----------- ------------ --------- -----------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C>
CTC Internet's acquisition of REUNA'S
activity....................................... (339) (162) 2,288 37,379 --
Terra Networks, S.A. acquisition of OLE......... -- -- -- 12,242
Terra Networks, S.A. acquisition of Double
Click, S.L..................................... -- -- -- 139 (139)
Telefonica Interactiva Brasil, Ltda. Acquisition
of Terra Networks Brasil (formerly Nutec
Informatica, S.A.)............................. -- -- -- 181,897 --
Terra Networks Brasi, acquisition of
subsidiaries................................... -- -- -- 10,392 --
Terra Networks, S.A. acquisition of Terra
Networks Guatemala, S.A........................ -- -- -- 3,305 --
Terra Networks, S.A. acquisition of CIERV,
S.L............................................ -- -- -- 11,996 --
Terra Networks Argentina, S.A. acquisition of
Netgocios, S.A................................. -- -- -- 6,102 --
Terra Networks Argentina , S.A. acquisition of
Donde Latinoamericana, S.A..................... -- -- -- 5,972 --
Terra Networks, S.A. acquisition of Informacion
Selectiva, S.A................................. -- -- -- 264,392 --
Informacion Selectiva, S.A. acquisition of
subsidiaries................................... -- -- -- 1,394 --
---- ---- ----- ------- ----
TOTAL NET GOODWILL.............................. (339) (162) 2,288 535,210 (139)
==== ==== ===== ======= ====
<CAPTION>
BALANCE AT
DECEMBER 31,
CONSOLIDATION AMORTIZATION 1999
------------- ------------ ------------
THOUSANDS OF EUROS
<S> <C> <C>
CTC Internet's acquisition of REUNA'S
activity....................................... (1,322) 38,345
Terra Networks, S.A. acquisition of OLE......... (1,836) 10,406
Terra Networks, S.A. acquisition of Double
Click, S.L..................................... -- --
Telefonica Interactiva Brasil, Ltda. Acquisition
of Terra Networks Brasil (formerly Nutec
Informatica, S.A.)............................. (18,191) 163,706
Terra Networks Brasi, acquisition of
subsidiaries................................... (120) 10,272
Terra Networks, S.A. acquisition of Terra
Networks Guatemala, S.A........................ (275) 3,030
Terra Networks, S.A. acquisition of CIERV,
S.L............................................ (907) 11,089
Terra Networks Argentina, S.A. acquisition of
Netgocios, S.A................................. (306) 5,796
Terra Networks Argentina , S.A. acquisition of
Donde Latinoamericana, S.A..................... (224) 5,748
Terra Networks, S.A. acquisition of Informacion
Selectiva, S.A................................. (5,473) 258,919
Informacion Selectiva, S.A. acquisition of
subsidiaries................................... -- 1,394
------- -------
TOTAL NET GOODWILL.............................. (28,654) 508,705
======= =======
</TABLE>
The goodwill generated through the acquisition of companies is recorded in
local currency. Such amounts have been recorded in the table above using the
translation methodology described in note 3-b to the consolidated financial
statements.
X-58
<PAGE> 276
TERRA NETWORKS, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
6/30/00
----------------------
(IN THOUSANDS OF EURO)
(UNAUDITED)
<S> <C>
ASSETS
Start-up costs.............................................. 83,931
Intangible assets (net)..................................... 116,390
Property, plant and equipment (net)......................... 67,942
Financial assets:
Holdings in companies carried by the equity method........ 13,294
Other long-term assets.................................... 14,644
Long-term tax receivable.................................. 142,299
---------
Total financial assets............................ 170,237
Goodwill.................................................... 510,393
Current assets:
Inventories............................................... 8,805
Accounts receivable from third parties, net............... 37,749
Accounts receivable from related companies................ 12,172
Prepayments............................................... 46,241
Tax receivables........................................... 49,755
Short-term financial investments.......................... 213,310
Cash...................................................... 28,188
---------
Total current assets.............................. 396,220
---------
TOTAL ASSETS...................................... 1,345,113
=========
</TABLE>
The accompanying Notes 1 to 5 are an integral part of these Consolidated
Financial Statements.
X-59
<PAGE> 277
TERRA NETWORKS, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
6/30/00
----------------------
(IN THOUSANDS OF EURO)
(UNAUDITED)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Capital stock............................................. 560,000
Paid in surplus........................................... 754,625
Reserves.................................................. (78,330)
Loss of the period........................................ (165,122)
---------
Total Shareholders' Equity................................ 1,071,173
Minority interests.......................................... 463
Long-term liabilities:
Long-term deferred tax liability.......................... 24,037
Other long-term liabilities............................... 17,560
---------
Total long-term liabilities....................... 41,597
Current liabilities:
Accounts payable to trade creditors....................... 133,209
Accounts payable to non-trade creditors................... 53,260
Accounts payable to related companies..................... 29,794
Accrued taxes payable..................................... 12,040
Other liabilities......................................... 3,577
---------
Total current liabilities......................... 231,880
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ 1,345,113
=========
</TABLE>
The accompanying Notes 1 to 5 are an integral part of these Consolidated
Financial Statements.
X-60
<PAGE> 278
TERRA NETWORKS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
6/30/99 6/30/00
------- --------
THOUSANDS OF EURO
(UNAUDITED)
<S> <C> <C>
Revenues:
Access.................................................... 5,169 45,395
Advertising............................................... 1,076 17,093
Other Revenues............................................ 2,110 20,011
------- --------
Total revenues.............................................. 8,355 82,499
Operating expenses:
Goods purchased........................................... (10,399) (57,811)
Personnel expenses........................................ (3,424) (36,521)
Depreciation and amortization............................. (763) (26,884)
Other operating expenses:
Advertising and marketing.............................. (5,948) (81,961)
Professional services.................................. (1,876) (22,504)
Other operating expenses............................... (3,784) (37,574)
------- --------
Total operating expenses before financial expenses and
goodwill amortization..................................... (26,194) (263,255)
------- --------
Operating loss.............................................. (17,839) (180,756)
Amortization of goodwill.................................... (3,227) (57,288)
Financial income (expense), net............................. (85) 321
------- --------
Loss from ordinary activities............................... (21,151) (237,723)
Equity share of loss affiliates, net........................ -- (4,789)
Extraordinary income (expense), net......................... 1 (486)
------- --------
Loss before tax and minority interest....................... (21,150) (242,998)
Corporate income tax credit................................. 4,109 76,158
Minority interest........................................... 1,725 1,718
------- --------
Net loss.................................................... (15,316) (165,122)
======= ========
</TABLE>
The accompanying Notes 1 to 5 are an integral part of these Consolidated
Financial Statements.
X-61
<PAGE> 279
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
(1) INTRODUCTION AND GENERAL INFORMATION
DESCRIPTION OF THE TERRA NETWORKS GROUP-
Terra Networks, S.A. and its subsidiaries and affiliates are an integrated
group of companies (the Terra Networks Group) that do business through the use
of the Internet (access ("ISP"), advertising, e-commerce, interactive services,
etc.).
Terra Networks, S.A. (formerly named Telefonica Interactiva, S.A.), was
formed on December 4, 1998, as a Spanish corporation for an unlimited duration.
Its registered office is in Madrid (Spain). Subsequent to the formation of Terra
Networks, S.A. by its parent company Telefonica, S.A., Telefonica contributed
certain investments it held in Internet businesses to Terra Networks, S.A.
The transfer of these investments from Telefonica, S.A. to Terra Networks
S.A. represents a reorganization of entities under common control. Accordingly,
although, Terra Networks, S.A. was legally formed on December 4, 1998, we have
prepared the accompanying consolidated financial statements as if we had owned
these investments from the dates that they were acquired by our parent company
Telefonica, S.A. For purposes of the accompanying consolidated financial
statements, we have recorded these transfers of investments among entities under
common control using the historical cost as if they occurred as of January 1,
1996.
On September 7, 1999, we changed our legal name from Telefonica
Interactiva, S.A. to Terra Networks, S.A.
Terra Networks, S.A. is listed on the Madrid, Barcelona, Bilbao and
Valencia Stock Exchanges and on the Nasdaq National Market. As of June 30, 2000,
its shareholders were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHAREHOLDER OWNERSHIP
----------- -------------
<S> <C>
Telefonica, S.A. ........................................... 66.64%
Bidasoa B.V. ............................................... 5.86%
Banco Bilbao Vizcaya Argentaria, S.A. ...................... 3.0%
Caja de Ahorros y Pensiones de Barcelona (La Caixa)......... 2.50%
Banco Zaragozano, S.A. ..................................... 2.50%
Infosearch Holdings, S.A. .................................. 1.76%
CTC Mundo, S.A. ............................................ 1.07%
Telefonica de Peru, S.A. ................................... 0.80%
International Discount Telecom. Corp. (IDT)................. 0.41%
Taetel, S.L. ............................................... 0.27%
Other shareholders.......................................... 15.19%
------
TOTAL....................................................... 100.00%
======
</TABLE>
The purpose of the holdings owned by Banco Zaragozano and Caja de Ahorros y
Pensiones de Barcelona (La Caixa) is to enable these entities to act as agents
in the Stock Option Plan for Terra Networks, S.A.'s employees.
Since its inception Terra Networks, S.A. has engaged mainly in the
acquisition and management of stockholdings in Internet Service Providers (ISPs)
and web portals in Spain, the United States and
X-62
<PAGE> 280
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
Latin America, in order to convert the Terra Networks Group into the leading
Internet Group in the Spanish- and Portuguese-speaking market. Specifically, as
of June 30, 2000, Terra Networks, S.A. had holdings in Spain, Mexico, Brazil,
the United States, Guatemala, Argentina, Venezuela, Uruguay, Peru and Chile,
providing Internet services under the Terra brand name in each of those
locations.
As described above, the activity of the Group is focused on the development
of different businesses related to the use of the Internet. This development is
still in an early stage and the Group has incurred losses through June 30, 2000.
The Group expects that it will continue to incur such losses in the immediate
future, reducing its shareholders' equity and increasing consequently the
financial resources required to fund its operations. The business plan prepared
by the Group for the next five years contemplates net income before the end of
this period, assuming the accomplishment of certain trends and hypotheses. It is
not possible to evaluate if those trends and hypotheses are going to be
accomplished and, consequently, what is going to be the future performance and
viability in the medium- and long-term of the Group.
(2) BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Terra Networks, S.A. 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 Terra Networks believes the disclosures in these financial statements
are adequate to make the information presented not misleading. 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.
(3) ACQUISITIONS AND FORMATIONS OF JOINT VENTURES
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) --
In January 2000, Terra Networks, S.A. entered into a protocol of intent
with BBVA to collaborate in the development of new Internet services and
applications. As part of this agreement, Terra Networks, S.A. agreed to take a
significant minority stake (20% which may be increased to 35%) in Uno-e Holding
which in turn holds a 100% stake in Uno-e Bank, the online bank being developed
by BBVA, and BBVA agreed to acquire 3% of our share capital from Telefonica, S.A
at market price.
In February 2000, Telefonica and BBVA entered into a strategic alliance
under which either Telefonica, S.A. or Terra Networks, S.A. may acquire up to
49% of Uno-e Holding and committed to participate in the international expansion
of online banking projects.
In March 2000, the proposed merger of Uno-e Bank and First-e Group plc to
create Uno First Group was announced. Terra Networks, S.A. and BBVA will own,
through Uno-e Holding, 67.5% of UnoFirst. BBVA will own 51% and Terra Networks,
S.A. will own the remaining 49% of Uno-e Holding. In July 2000, the parties
entered into the definitive contract with the incorporation of UnoFirst, to
proceed as previously agreed.
X-63
<PAGE> 281
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
Either First-e's current sole shareholder, Enba plc, an Irish e-finance
incubator company, or Enba's existing shareholders will own the remaining stake
of Uno First. Under the agreement, which is subject to certain conditions and
approvals, Terra Networks, S.A. and BBVA will contribute their interests in
Uno-e Bank to UnoFirst, subscribe to a 243 million Euro capital increase in
UnoFirst and acquire shares of First-e by an amount of 195 million Euro. Enba
will contribute its interests in First-e to UnoFirst.
Aremate.Com --
Terra Networks, S.A. has entered into a strategic alliance with the U.S.
company Aremate.com, Inc., the leading on-line auction company in Latin America,
whereby Terra acquired, a 30% stake in that company. In turn, Terra Networks,
S.A. through its subsidiary Terra Networks USA, Inc. has paid US$ 45 million to
Aremate.com Inc. in cash and has received an option to buy an additional
interest for US$ 10 million by January 2001 if Aremate.com has not previously
registered its shares in the United States. Under U.S. GAAP, no purchase price
has been assigned to this option as management believes that the value of this
option is inmaterial.
Chevere --
On March 8, 2000, the Company, acting through its affiliate Terra Networks
Venezuela, S.A., entered into an agreement with the Venezuelan company Dotcom
Publicidad, C.A. for the purchase of the portal "CHEVERE". This agreement also
involves the purchase of the commercial assets of Dotcom Publicidad, C.A.,
including the rights over the domains "CHEVERE.COM" and "CHEVERE.COM.VE" and
over the trademark "CHEVERE.
Telepizza --
On April 26, 2000 Terra Networks, S.A. and the company Tele Pizza, S.A.
have signed a Memorandum of Understanding for the joint development and
exploiting of trading through communication networks such as Internet and
telephony, of convenience products (books, video tapes, CD's, prepaid cards,
entertainment products, etc.) including their distribution and delivery within a
period ranging from one to twenty four hours.
The said activity would be carried out through the incorporation of a new
company 50% owned by each of the parties. The Memorandum of Understanding covers
the contribution by Terra Networks, S.A. of its knowledge on communication
networks and on Internet, and the contribution by Tele Pizza, S.A. of its
experience and know how in reception of orders, organization, storage, client
portfolio and direct marketing.
IDT --
On April 30, 2000 Terra Networks, S.A. signed an agreement with IDT
Corporation ("IDT") by which the company will acquire from IDT the 49% interest
it holds in Terra Networks Access Services (Terra's subsidiary that provides its
access provider business in the United States.) and the 10% interest it holds in
Terra Networks Interactive Services (Terra Networks's subsidiary that provides
its portal business in the United States). IDT will receive in exchange 3.75
million ordinary
X-64
<PAGE> 282
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
shares of Terra's capital stock, if the closing date is before July 31, 2000 or
4 million if the closing date is between August 1, 2000 and September 20, 2000.
LYCOS --
On May 16, 2000 the Board of Directors of Terra Networks, S.A. approved an
agreement with LYCOS, INC. ("Lycos") by virtue of which Terra Networks, S.A.
will acquire 100% of the shares in Lycos through a share capital increase with a
share exchange. The exact number of shares to be issued in the exchange shall be
determined by dividing $97.55 by the average closing price of Terra shares on
the Spanish Automated Quotation System (Sistema de Interconexion
Bursatil-Mercado Continuo), each closing price expressed in U.S. dollars, using
the noon buying rate of Euro for U.S. dollars as published by the Federal
Reserve Bank of New York, for the ten full trading days ending on the tenth
trading day prior to the share exchange, provided, however, that maximum and
minimum limits have been fixed for the share exchange in such a manner that if
the average quotation price is equal to or greater than US$ 68.06, the exchange
ratio shall be 1.433 Terra shares for each Lycos share, and if the average
quotation price is equal to or less than US$ 45.37, the exchange ratio shall be
2.15 Terra shares for each Lycos share.
After the merger, Telefonica, S.A. will hold approximately 31.8% to 40.6%
of Terra Networks (between 32.7% and 41.6% including 100% of the shares held by
affiliates of Telefonica, S.A.) depending on the final exchange formula. The
former shareholders of Lycos will hold between 41.6% and 51.6% of Terra
Networks. However, Lycos has committed in the Agreement and Plan of
Reorganization not to take any action, including issuing new Lycos shares, that
could reasonably be expected to result in its shareholders owning or having
voting rights in excess of 50% of Terra Lycos upon completion of the
combination. The majority shareholder of Lycos (CMGI) will hold approximately
between 4.2% and 5.7% of the resulting company.
This agreement is subject to certain covenants, conditions and termination
clauses described in the Agreement and Plan of Reorganization dated May 16,
2000. It is expected that all necessary approvals will be obtained and the
acquisition will close in the fourth quarter of 2000.
The President of Telefonica, S.A. will be the Executive Chairman of Terra
Networks and the Chief Executive Officer will be the current Chief Executive
Officer of Lycos, while three representatives of Lycos shall be joining Terra's
Board of Directors after the merger.
Bertelsmann Group --
Terra Networks, S.A. has entered into an agreement with Bertelsmann Group
whereby Bertelsmann commits to purchase Internet services from Terra-Lycos over
the next few years. Terra-Lycos will also gain access to Bertelsmann's catalogue
of books, music, television, film and other media content.
Telefonica Moviles --
Terra Networks, S.A. has reached an agreement for the incorporation of a
joint venture with Telefonica Moviles, S.A., with the latter holding 51% and
Terra Networks, S.A. holding 49%, which shall develop portals based on WAP
mobile technology.
X-65
<PAGE> 283
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
IOBOX OY --
On July 12, 2000, Terra Mobile, S.A., the joint venture 51% owned by
Telefonica Moviles, S.A. and 49% by Terra Networks, S.A. entered into a purchase
agreement whereby it acquires 100% of the Finnish company IOBOX OY, which
carries out technology and wireless services applications for mobiles.
La Ciudad --
On July 17, 2000, Terra Networks, acting through its affiliate Terra
Networks Colombia Holding, S.A., entered into an agreement with the main media
companies in Colombia for the purchase of the 65% share of the portal "LA
CIUDAD" as well as a global exclusive content provision agreement. With this
initiative Terra Networks will be in a position to offer the most comprehensive
range of local and international content (leisure, culture, economics, sport and
education) available in the country.
(4) CAPITAL INCREASE
On the General Meeting held on June 8, 2000, the Board of Directors of
Terra Networks, S.A. gave its authorization to carry out the following
transactions:
- Capital increase by means of the issuance of 35,483,871 new ordinary
shares with a face value of Euro 2 and an issue premium of Euro 60 per
share. These shares will be offered through rights offering to all
shareholders of record of Terra Networks in proportion to their current
shareholdings. To the extent that some or all of the rights remain
unexercised, Telefonica, S.A. has agreed to purchase the residual amount
of shares underlying the unexercised rights at a price of Euro 62 per
share.
- Regarding the acquisition of the 49% interest of Terra Networks Access
Services, LLTD. and the 10% interest in Terra Networks Interactive
Services, LLTD. (see note 3) Terra Networks, S.A. will increase its
capital by issuing 4,000,000 new ordinary shares with a face value of
Euro 2 and a minimum issue premium of Euro 9 per share. If the closing
date of this operation is before July 31, 2000, Terra Networks, S.A.
will deliver 3,750,000 ordinary shares. If the closing date of this
operation is after July 31, 2000 Terra Networks, S.A. will deliver
4,000,000 ordinary shares. In both cases these shares will be subscribed
and fully paid with contributions consisting of shares of the two
companies mentioned above.
- Regarding the acquisition of the 100% of the shares in LYCOS, INC. (see
note 3), there will be a capital increase issuing a maximum of
258,476,695 new ordinary shares, with a face value of euro 2 and a
minimum issue premium of Euro 9 per share. These shares will be
subscribed and fully paid with contributions consisting of "LYCOS,
INC.'s" shares.
- Issue of up to a maximum of 38,346,984 warrants for the subscription of
"Terra Networks, S.A.'s" shares, which will be exchanged for options on
LYCOS, INC's shares. Furthermore, in connection with the issue of
warrants, there will be a capital increase issuing a maximum of
82,446,016 new ordinary shares, with a face value of Euro 2 and a
minimum issue premium of Euro 9 per share.
X-66
<PAGE> 284
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
(5) DIFFERENCES BETWEEN SPANISH AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND OTHER REQUIRED DISCLOSURES
The consolidated financial statements of Terra Networks, S.A. were prepared
in accordance with generally accepted accounting principles in Spain ("Spanish
GAAP"), which differ in some respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). A reconciliation of net loss and
shareholder's equity from Spanish GAAP to U.S. GAAP is provided in this Note.
The most significant differences are as follows:
1. Research and development
In accordance with Spanish GAAP, research and development costs are
capitalized and amortized over a period not exceeding five years. Under U.S.
GAAP research and development costs for maintenance, services performed by
others, equipment and purchased intangibles that have no alternative future use
are expensed when acquired, incurred or constructed.
2. Accruals and deferrals
Different criteria are applied under Spanish and U.S. GAAP to accrue
certain items and, accordingly, related adjustments have to be made in the
reconciliation of net loss and shareholder's equity:
a) Capital increase expenses. In accordance with Spanish GAAP, expenses
associated with equity issuance are capitalized and amortized over five
years. Under U.S. GAAP capital increase expenses must be charged
against the gross proceeds of the new capital.
b) Start-up expenses. In accordance with Spanish GAAP, period expenses
incurred during the start-up of a business which will contribute to
obtain future revenues may be deferred and amortized over five years.
Under U.S. GAAP, start-up costs must be expensed as incurred.
3. Corporate income tax
In accordance with Spanish GAAP and with Corporate Income Tax Law 43/1995,
tax losses may be carried forward for ten years from the commencement of the tax
period following that in which the tax losses were incurred. However, under
Article 23.3 of said law, newly formed entities may calculate the period for the
offset from the first tax period when their taxable base is positive. Under
Spanish GAAP tax credits are only registered when there is true and total
certainty that these tax credits will be realized. Under U.S. GAAP, deferred tax
assets, including tax credits and carryforwards are recorded to the extent that
they are more likely than not to be realized.
Spanish GAAP permit the recognition of deferred tax assets, including those
arising from net operating loss carryforwards, if it can be demonstrated that
the deferred tax assets can be realized within a ten-year period from the date
on which the assets were generated. For June 30, 2000 financial statements, the
Group has recognized such tax assets under Spanish GAAP, since the business plan
prepared by management indicates that these assets will be realized within a
ten-year period.
X-67
<PAGE> 285
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
Under U.S. GAAP, deferred tax assets should be recognized if it is "more
likely than not" that these assets will be realized. In making a determination
of whether it is more likely than not that a deferred tax asset is realizable,
all available evidence, both positive and negative, should be considered.
Companies should look to both objective evidence, such as a company's operating
history, as well as subjective evidence, such as a company's budgets and
business plans, to determine whether a valuation allowance is needed. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified.
Under U.S. GAAP, reaching a conclusion that a valuation allowance is not
needed is difficult when there is significant objective negative evidence, such
as cumulative losses, in recent years. All of the companies in the Group have
incurred such losses in each tax reporting period since its inception. Moreover,
the Group does not have other objective, positive evidence such as existing
contracts or a firm sales backlog, that will produce more than enough taxable
income to realize the deferred tax asset based on existing sales prices and cost
structures. Based on this evidence, a valuation allowance would be provided in
full against the deferred tax assets related to the Group's net operating losses
under U.S. GAAP.
4. Consolidation method
Under Spanish GAAP, companies in which a holding of at least 20% if
unlisted and 3% if listed is owned are carried by the equity method; investments
in companies in which Terra Networks, S.A. owns less than 50% of the common
voting stock must be consolidated when such companies are considered under
Spanish GAAP to be controlled by Terra Networks, S.A. In general, under U.S.
GAAP, companies in which a holding of between 20% and 50% is owned are carried
by the equity method. During the six months ended June 30, 2000 and 1999, this
difference did not give rise to any material differences between US and Spanish
GAAP in shareholders' equity, net loss or any other balance sheet and statement
of operations caption.
5. Allocation of Purchase Price
The Group, under Spanish GAAP, has recorded the difference between the
purchase price of acquired companies such as Infosel, Nutec and Ole and the fair
value of the net assets acquired in these entities as goodwill. This goodwill is
being amortized over a period of five years beginning from the date of each
acquisition. Under U.S. GAAP, a portion or potentially all of this difference
would have been classified as an acquired intangible asset called customer and
web visitor base. However, as such clients and web visitor base would have been
amortized over the same period as the goodwill recorded under Spanish GAAP, no
adjustment between reported net income and shareholders' equity under Spanish
and U.S. GAAP arises.
6. Goodwill
Spanish GAAP requires that amounts paid to acquire companies in excess of
the fair value of the assets acquired (including identified intangible assets)
at their purchase date be accounted for as goodwill and amortized over a period
not exceeding 20 years. The Group amortizes its goodwill over its estimated
useful life of five years for Spanish GAAP. The life is appropriate under U.S.
GAAP.
X-68
<PAGE> 286
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
Subsequent to acquisition (for U.S. GAAP purposes), the Group evaluates
whether events and circumstances have occurred that indicate the remaining
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Group uses an estimate of undiscounted
cash flows from the underlying assets over the remaining life of those assets in
measuring whether the goodwill is recoverable. To the extent that undiscounted
cash flows are less than the carrying value of the goodwill, the Group will
record an impairment loss based on the difference between the fair value of the
goodwill (estimated using discounted cash flows) and its carrying value.
In April 1999, Terra Networks, S.A. acquired 100% of OLE from INFOSEARCH
HOLDINGS, S.A. for Euro 12.02 million in cash and agreed to sell INFOSEARCH
HOLDINGS, S.A. 4,928,000 shares for euro 20.8 million. The estimated fair value
of the shares to be sold was Euro 54.0 million. For U.S. GAAP purposes, the
difference between the fair value of the shares and the amount received from the
sale of Euro 33.2 million would be considered additional purchase price. This
additional consideration would result in the same amount of goodwill. For
Spanish GAAP purposes the shares sold would be recorded based on the amount of
cash received and would not be considered to be additional purchase price.
Goodwill from acquisitions from related parties --
On October 4, 1999, Terra Networks, S.A.'s subsidiary, Terra Networks Chile
Holding Limitada (formerly Telefonica Interactiva Chile Limitada), acquired from
CTC Mundo the 95% interest it owned of Proveedora de Servicios de Conectividad,
S.A. Terra Networks Chile Holding Limitada paid US$ 40 million in cash,
generating goodwill of Euro 39,667 thousands, which is being amortized over a
period of 60 months (5 years). As both CTC Mundo and Terra Networks, S.A. were
under common control of Telefonica, S.A. at the time of this transaction,
according to U.S. GAAP the acquisition of Proveedora de Servicios de
Conectividad, S.A. would be considered a reorganization of entities under common
control. Therefore, under U.S. GAAP, we would record Proveedora de Servicios de
Conectividad, S.A. at its historical cost basis and not recognize the goodwill
associated with the transaction.
On October 20, 1999, Terra Networks, S.A.'s subsidiary, Terra Networks
Peru, S.A. entered into contracts with Telefonica del Peru, S.A and Telefonica
Servicios Internet del Peru, S.A.C. that enabled it to commence operations in
the residential Internet segment. The main terms of the contracts were as
follows:
1. Telefonica del Peru, S.A. agrees to not provide directly or through
subsidiaries Internet services for residential users. The consideration
paid by Terra Networks, S.A. for the foregoing covenant not to compete
amounted to US$ 25 million, and this amount was recorded as an
intangible asset and is being amortized on a straight-line basis over
five years.
2. Telefonica Servicios Internet del Peru, S.A.C. transferred to Terra
Networks Peru, S.A. all its contracts with customers and the customer
database of the Internet Provider Centers and made available to the
latter the assets assigned to or obtained for the provision of Internet
services to residential customers. Terra Networks Peru, S.A. paid US$ 5
million in this
X-69
<PAGE> 287
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
connection, and this amount was recorded as an intangible asset and is
being amortized on a straight-line basis over five years.
3. Telefonica del Peru, S.A. undertakes to provide Terra Networks Peru,
S.A., for ten-year period the telecommunications services and cable
broadcasting distribution network required to carry out its business.
Terra Networks Peru, S.A. will pay fees for the use of this network at
rates equivalent to the most favorable terms offered to third party
customers by Telefonica del Peru, S.A.
4. Terra Networks Peru, S.A. undertakes to not offer directly or
indirectly Internet services to nonresidential customers, to not
provide telecommunications services that might compete with those of
Telefonica del Peru, S.A. and to use the telecommunications
infrastructures and services provided by Telefonica del Peru and its
subsidiaries.
As Telefonica del Peru, S.A., Telefonica Servicios Internet, S.A.C. and
Terra Networks, S.A. were under common control of Telefonica, S.A. at the time
of this transaction, in accordance with U.S. GAAP, the US $30 million in
payments would not be capitalized as intangible assets but would instead be
treated similar to dividends. However, the fees to be paid by Terra Networks
Peru, S.A. for the use of Telefonica del Peru, S.A.'s telecommunications
services and cable broadcasting distribution network over the next ten years
will be expensed as incurred.
7. Joint Venture with IDT
Terra Networks, S.A. formed a joint venture with IDT called Terra Networks
Access Services USA LLC. Upon formation of this venture, IDT contributed a
customer list containing approximately 46,000 users to the joint venture, while
Terra Networks, S.A. agreed to contribute up to US$ 30 million in cash during a
two year period following the formation of the joint venture. The timing and
extent of the contributions would be determined based on mutual arrangements
between Terra Networks S.A. and the joint venture. In exchange for these
contributions, IDT received a 49% interest in the joint venture while the Terra
Networks, S.A. received a 51% interest in the entity.
Under Spanish GAAP, the Group has reflected an intangible asset for the
customer list of US$28.8 million, with an offsetting obligation of the same
amount to the joint venture. Under U.S. GAAP, the customer list contributed to
the joint venture would be recorded at IDT's carrying basis for such list. This
amount was zero as of the date that the list was transferred to the joint
venture. Moreover, the joint venture would not reflect an obligation for funding
from the Terra Networks, S.A. until such time that the Terra Networks, S.A.
incurs a binding obligation to make such funding.
In addition, under Spanish GAAP, this investment has been consolidated as
Terra Networks, S.A. has a majority voting interest in this entity. However,
under U.S. GAAP, this investment cannot be consolidated since the minority
shareholders in the investment have substantial participative rights in the
joint venture. Accordingly, this investment would be recorded under the equity
method for U.S. GAAP purposes. This difference would not result in any
differences in reported net loss or shareholders' equity between U.S. GAAP and
Spanish GAAP.
X-70
<PAGE> 288
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
8. The following is a reconciliation of shareholders' equity and net loss from
Spanish GAAP to U.S. GAAP.
<TABLE>
<CAPTION>
6/30/00
---------
<S> <C>
SHAREHOLDERS' EQUITY PER SPANISH GAAP....................... 1,071,173
Deductions for U.S. GAAP purposes:
Research and development expenses......................... (156)
Start-up costs
Advertising............................................ (54,230)
Initial public offering................................ (29,701)
Goodwill arising from OLE acquisition (net)............... 24,912
Goodwill arising from Chile acquisition (net)............. (34,035)
Intangible asset arising from Peru acquisition
(net) -- check this based on my previous comment....... (27,046)
Valuation allowances on deferred tax assets............... (118,385)
Client list from IDT...................................... 3,029
---------
Total differences........................................... (235,612)
---------
SHAREHOLDERS' EQUITY PER U.S. GAAP.......................... 835,561
=========
</TABLE>
<TABLE>
<CAPTION>
6/30/99 6/30/00
----------- -----------
THOUSANDS OF EURO
<S> <C> <C>
NET LOSS PER SPANISH GAAP...................... (15,316) (165,122)
Reversal of amortization of start-up costs... 111 8,060
Additions to start-up costs (advertising).... (614) (40,888)
Additions to research and development
expenses.................................. -- (168)
Reversal of amortization of research and
development expenses...................... -- 259
Amortization of Goodwill OLE................. (3,324)
Amortization of Goodwill Chile............... (1,661) 3,931
Amortization of Intangible Asset Peru........ -- 3,119
Amortization Client List from IDT............ -- 3,007
Corporate income tax......................... (4,356) (76,136)
----------- -----------
NET LOSS PER U.S. GAAP......................... (21,836) (267,262)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE (U.S.
GAAP)........................................ (0.11) (0.95)
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING............ 194,085,972 280,000,000
----------- -----------
</TABLE>
Shareholders' rights and all dividend distributions are based on the
financial statements as reported for local Spanish statutory purposes by Terra
Networks, S.A.
X-71
<PAGE> 289
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
9. Comprehensive income
Comprehensive income is defined in FASB Concepts Statements No. 6 and SFAS
No. 130, "Reporting Comprehensive Income", as "the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners".
SFAS No. 130 describes the items that qualify as components of
comprehensive income, such as:
a. Foreign currency translation adjustments;
b. Gains and losses on foreign currency transactions that are designated
as, and are effective as, economic hedges of a net investment in a
foreign entity, commencing, as of the designation date;
c. Gains and losses on intercompany foreign currency transactions that are
of a long-term-investment nature (that is, settlement is not planned or
anticipated in the foreseeable future), when the entities to the
transaction are consolidated, combined, or accounted for by the equity
method in the reporting enterprise's financial statements;
d. A change in the market value of a futures contract that qualifies as a
hedge of an asset reported at fair value pursuant to FASB No. 115;
e. A net loss recognized pursuant to FASB No. 87 as an additional pension
liability not yet recognized as net periodic pension cost;
f. Unrealized holding gains and losses on available-for-sale securities;
g. Unrealized holding gains and losses that result from a debt security
being transferred into the available-for-sale category from the
held-to-maturity category;
h. Subsequent decreases (if not an other-than-temporary impairment) or
increases in the fair value of available-for-sale securities previously
written down as impaired.
For the six moths period ended June 30, 1999 and 2000, the only component
of comprehensive income (loss) besides net loss is the Group's foreign currency
translation adjustments related to its investments that have functional
currencies other than the Euro. The following represents the statement of
comprehensive income prepared using U.S. GAAP:
<TABLE>
<CAPTION>
6/30/99 6/30/00
------- --------
THOUSANDS OF EURO
<S> <C> <C>
NET LOSS PER U.S. GAAP................................. (21,836) (267,262)
Other comprehensive income (expense) --
Foreign currency translation adjustments............. 2,936 2,768
------- --------
COMPREHENSIVE LOSS..................................... (18,900) (264,494)
======= ========
</TABLE>
X-72
<PAGE> 290
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
10. Statement of cash flows
Spanish GAAP does not require the presentation of statements of cash flows.
For purposes of the statement of cash flows, the Group considers all highly
liquid debt instruments (or investments) purchased with an original maturity of
three months or less to be cash equivalents.
<TABLE>
<CAPTION>
6/30/99 6/30/00
-------- --------
THOUSANDS OF EURO
<S> <C> <C>
Net loss per Spanish GAAP............................. (15,316) (165,122)
-------- --------
Adjustments to reconcile net loss to net
Cash used in operating activities --
Depreciation and amortization.................. 763 26,884
Amortization of goodwill....................... 3,227 57,288
Minority interest in loss of consolidated
Subsidiaries................................ 1,725 1,718
Loss in Companies carried by the equity
method...................................... -- 4,789
Provisions of assets........................... -- 544
Other............................................ (223) --
Changes in operating assets and liabilities, net of
Effects from purchase of new investments --
(Increase) Decrease --
Inventory...................................... (1,444) (6,177)
Accounts receivable............................ (4,758) (52,709)
Prepaid taxes.................................. -- (75,582)
Other current assets........................... (280,484) --
Prepayments.................................... (165) (29,102)
Increase (Decrease) --
Trade creditors................................ 287,390 62,775
Non-trade creditors............................ (107) (5,716)
Other liabilities.............................. 4,005 19,367
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... (5,387) (161,043)
-------- --------
Cash flow from investing activities:
Cash paid for financial investments................. -- (10,299)
Acquisitions of businesses, net of cash acquired.... (199,923) (75,046)
Capital expenditures................................ (9,088) (75,452)
Payments for start-up costs......................... (533) (40,861)
Proceeds from disposals of fixed assets............. -- 1,815
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... (209,536) (199,843)
-------- --------
</TABLE>
X-73
<PAGE> 291
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
<TABLE>
<CAPTION>
6/30/99 6/30/00
-------- --------
THOUSANDS OF EURO
<S> <C> <C>
Cash flow from financing activities:
Proceeds from issuance of common stock.............. 24,573 --
Increase in other-long term liabilities............. 10,037 12,186
Contributions from minority interest owners......... 182,190 (2,556)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... 216,800 9,630
======== ========
Effects of exchange rate differences on cash and cash
equivalents......................................... -- 2,768
Net change in cash and cash equivalents............... 1,877 (348,488)
Cash and cash equivalents at beginning of period...... 148 589,986
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ 2,025 241,498
======== ========
</TABLE>
Cash and cash equivalents as of December 31, 1999 and June 30, 2000 include
amounts classified as short term investments under Spanish GAAP. Under U.S.
GAAP, these investments, which consist solely of current accounts maintained at
Telefonica Finanzas, S.A., would be considered cash equivalents as they are
highly liquid investments with original maturities of three months or less.
11. Earning Per Share
Basic earnings per share is calculated using income available to common
shareholders divided by the weighted average of common shares outstanding during
the year. Diluted earnings per share is similar to basic earnings per share
except that the weighted average of common shares outstanding is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued. For all periods
presented, the Company did not have any potentially dilutive securities.
Telefonica, S.A. converted accounts due from Terra Networks, S.A. into
share capital of Terra Networks, S.A. on September 7, 1999. Also on this date,
Telefonica, S.A. invested Euro 120.2 million in exchange for share capital of
Terra Networks, S.A. As the shares were issued at a price well below fair value,
these transactions are considered nominal transaction under SAB No. 98.
Accordingly, share amounts have been retroactively restated for purposes of
calculating earnings per share as if these issuances had occurred on January 1,
1997.
X-74
<PAGE> 292
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
12. Business segment data
The Group operates in some business segments, based on geographic regions
in which the Group conducts operations. These segments are consistent with the
way management analyses its businesses. The main figures by geographic region
for the six months ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
OTHER CONSOLIDATION
JUNE 1999 SPAIN BRAZIL MEXICO COUNTRIES ADJUSTMENTS TOTAL
--------- --------- ------- ------- --------- ------------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
Net loss of the segment....... 13,731 -- -- -- 1,585 15,316
Sales to clients.............. 3,442 -- -- 4,913 -- 8,355
Depreciation and amortization
expenses.................... 743 -- -- 20 -- 763
Amortization of goodwill...... 2,292 -- -- 97 838 3,227
Income tax credit............. 4,109 -- -- -- -- 4,109
Total assets.................. 335,154 235,320 -- 12,723 (70,083) 513,114
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOLIDATION
JUNE 2000 SPAIN BRAZIL MEXICO COUNTRIES ADJUSTMENTS TOTAL
--------- --------- ------- ------- --------- ------------- ---------
THOUSANDS OF EUROS
<S> <C> <C> <C> <C> <C> <C>
Net loss of the segment....... 138,071 74,538 31,955 52,320 (131,762) 165,122
Sales to clients.............. 23,296 27,763 22,093 14,510 (5,163) 82,499
Depreciation and amortization
expenses.................... 9,844 2,832 3,587 9,860 761 26,884
Amortization of goodwill...... -- 20,947 5,138 6,982 24,221 57,288
Income tax credit............. 73,983 (24) 13,247 1,405 (12,453) 76,158
Total assets.................. 1,535,088 228,924 146,438 248,764 (814,101) 1,345,113
</TABLE>
Interest revenue and expense for the Group or its segments were not
significant for the six months ended June 30, 1999 and 2000. Terra Networks,
S.A. had no significant non-cash expenses, other than depreciation and
amortization.
Accounting principles --
All transactions between segments are made at market prices or at prices
which have been approved, and published, by the regulatory authority.
The accounting principles used in accounting for the segments are the same
as those used in the consolidated financial statements. There are no
transactions between segments.
X-75
<PAGE> 293
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
Geographic distribution of sales for the period of six months ended as of
June 30, 1999 and 2000 was as follows:
<TABLE>
<CAPTION>
JUNE 1999 JUNE 2000
--------- ---------
THOUSANDS OF EUROS
<S> <C> <C>
SALES TO EXTERNAL CLIENTS:
Spain................................................. 3,325 10,366
Chile................................................. 2,920 4,159
Mexico................................................ -- 22,093
Brazil................................................ -- 27,486
United States......................................... -- 4,779
Peru.................................................. -- 339
Argentina............................................. -- 628
Guatemala............................................. -- 1,211
Venezuela............................................. -- 15
----- ------
6,245 71,076
----- ------
Sales to related parties.............................. 2,110 11,423
----- ------
TOTAL REVENUES........................................ 8,355 82,499
===== ======
</TABLE>
X-76
<PAGE> 294
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
The distribution of fixed assets and intangible assets at June 30, 2000 was
as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 2000
------------------
THOUSANDS OF EUROS
<S> <C>
PROPERTY PLANT AND EQUIPMENT (NET):
Spain..................................................... 16,787
Chile..................................................... 8,738
Mexico.................................................... 18,097
Brazil.................................................... 14,428
United States............................................. 4,495
Peru...................................................... 2,473
Argentina................................................. 2,588
Guatemala................................................. 239
Venezuela................................................. 58
Uruguay................................................... 39
-------
TOTAL..................................................... 67,942
=======
INTANGIBLE ASSETS (NET):
Spain..................................................... 23,770
Chile..................................................... 2,274
Mexico.................................................... 14,866
Brazil.................................................... 17,089
United States............................................. 28,903
Peru...................................................... 27,597
Argentina................................................. 1,440
Guatemala................................................. 26
Venezuela................................................. 425
-------
TOTAL..................................................... 116,390
=======
</TABLE>
13. Pro Forma Effect of Acquisitions
U.S. GAAP requires the disclosure of certain information about significant
acquisitions that occur during the periods for which financial statements are
presented.
X-77
<PAGE> 295
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
The following unaudited information presents the results of operations of
the Group as if the material acquisition of Telefonica Interactiva Brasil, OLE,
Informacion Selectiva, S.A. de C.V. (Infosel), had taken place at the beginning
of the period presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
---------------------
IN THOUSANDS
OF EUROS,
EXCEPT PER SHARE DATA
(UNAUDITED)
<S> <C>
Revenues................................................ 30,159
Net loss................................................ 72,832
Basic and diluted loss per share........................ (0,34)
</TABLE>
These unaudited results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the dates
indicated, or which may result in the future.
14. Classification Differences --
In the Spanish GAAP financial statements, amortization of goodwill is shown
separately in the consolidated statement of operations below operating loss. For
U.S. GAAP reporting purposes, amortization of goodwill is shown as a deduction
before operating income. The amount of goodwill amortization recorded as a
component of financial expenses under Spanish GAAP was Euro 57,288 and 3,227
thousand for the periods ended June 30, 2000 and 1999, respectively.
Under Spanish GAAP, certain income and expenses, such as those arising from
the disposition of fixed assets can be classified as extraordinary items. Under
US GAAP, these amounts would be classified as a component of operating income
(loss).
15. New accounting standards --
Accounting for Derivatives --
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting treatment.
SFAS No.133, as amended by SFAS No. 137 and SFAS No. 138, is effective for
fiscal years beginning after June 15, 2000. A company may also implement the
Statement as of the beginning of any fiscal quarter after issuance; however,
SFAS No. 133 cannot be applied retroactively. The Group
X-78
<PAGE> 296
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
plans to adopt SFAS No. 133 in 2001 but does not expect the impact of this new
statement to be material.
Web Site Development Costs --
The Emerging Issues Task Force (EITF) has recently issued EITF 00-2,
"Accounting for Web Site Development Costs." The Task Force has reached a
consensus that all costs associated with the planning of web site development
projects should be expensed as incurred, while costs incurred in the application
and development stage should generally be capitalized in accordance with
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," or other relevant pronouncements. Cost incurred in the operations
of the web site are generally expensed as incurred. The EITF has not yet reached
a consensus as to the accounting for the costs of developing and displaying
content or other information on a web site, but the Task Force plans further
discussion on this issue. EIFT 00-2 is effective for web site development costs
incurred for fiscal quarters beginning after June 30, 2000. As the Group's
current policy is substantially consistent with the consensuses reached in EITF
00-2, the Group does not expect that the issuance of this pronouncement will
have a material effect on its financial condition or results of operations.
The majority of the Group's software and software related expenditures
relate to the development and maintenance of its portal. Under Spanish GAAP and
U.S. GAAP, internal and external costs incurred in the planning or conceptual
development of the Group's portal are expensed as incurred. Once the planning or
conceptual development of a web site enhancement project has been achieved, and
the project has reached the application or development stage, the following
costs are capitalized as intangible assets:
- external direct costs of materials and services used in the project,
- payroll and payroll-related costs for employees who are directly
associated with and who devote time to the project (to the extent of the
time spent directly on the project) and
- interest cost incurred in the development of the project, if material.
Training and routine maintenance costs are expensed as incurred. Costs
incurred that result in enhancements or additional functionality to the web site
are capitalized in accordance with the policy described above.
During the periods ended June 30, 2000 and 1999, most of our costs are
charged to the profit and loss as expenses relating to web site development.
Those costs primarily relate to the purchase of content or rental fees paid to
our suppliers. These costs have been not capitalized and would be unable to be
capitalized under EITF 00-2.
16. Barter Transactions --
Emerging Issues Task Force ("EITF") 99-17, "Accounting for Advertising
Barter Transactions" provides accounting guidance for barter transactions
involving a nonmonetary exchange of advertising. Generally, such barter
transactions should only be recorded as revenues and cost to the extent that the
fair value of the advertising surrendered in the transaction is determinable
based on a company's historical practice of receiving cash for similar
advertising provided to buyers unrelated to
X-79
<PAGE> 297
TERRA NETWORKS, S.A. AND SUBSIDIARIES COMPOSING
THE TERRA NETWORKS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
As of June 30, 2000 and for the six months ended June 30, 2000 and 1999
(in thousands of euros unless otherwise stated)
the counterparty in the transaction. In addition, if an entity engages in
advertising barter transactions for which the fair value is not determinable
within the limits of EITF 99-17, no revenues or costs should be recorded, but
information regarding the volume and type of advertising surrendered and
received (such as the number of equivalent pages, the number of minutes, or the
overall percentage of advertising volume) should be disclosed for each income
statement period presented.
The fair value of the Group's barter transactions, which are very limited,
cannot be determined in accordance with the provisions of EITF 99-17 and
therefore, the Group has not recorded any revenues or costs related to these
transactions. Additionally, the volume of advertising transactions was not
significant for the six months ended June 30, 2000 and 1999, both for displaying
and for surrendering advertising.
17. Related Party Transactions --
Terra Networks, S.A. has entered or expects to enter into a number of
agreements with its parent company, Telefonica S.A. and its subsidiary or
affiliated companies. The most significant contract involves a fee that
Telefonica Data Espana, S.A. pays to Terra Networks, S.A. for the Internet
traffic that Terra Networks, S.A. captures for Telefonica Data. This contract
was signed on September 15, 1999. The Comision del Mercado de las
Telecomunicaciones (CMT), the Spanish telecommunications regulator, required
Telefonica, S.A. to offer the same terms to other Internet providers.
We also have a number of agreements with Telefonica S.A. or its
subsidiaries to provide web site content and/or Internet access to cable
customers for which we receive revenues. The amount of these revenues for the
six months ended June 30, 1999, and 2000 were Euro 1,268 and Euro 9,869.
We also utilize services provided by Telefonica, S.A. and its subsidiaries,
such as the leasing of circuits, call center, cash-management services and the
obtaining of reference information. Costs related to services provided by
related parties for the six months ended June 30, 1999 and 2000 were Euro 7,193
and Euro 19,821.
As of June 1999, we acquired computer hardware from a subsidiary or
Telefonica, S.A. for approximately Euro 1,500. The purchase price was based on
the fair value of these assets. The hardware is being amortized over a three
year period.
For those contracts currently in place, Terra Networks, S.A. believes that
the terms of these arrangements are at least as favorable as could be obtained
in an arm's length transaction between non-affiliated parties.
Terra Networks, S.A. does not believe that the loss of any of these
arrangements, individually or in the aggregate, would have a material effect on
our results of operations or financial condition.
X-80
<PAGE> 298
INDEX TO LYCOS, INC. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ X-82
Consolidated Balance Sheets as of July 31, 2000 and 1999.... X-83
Consolidated Statements of Operations for the Years Ended
July 31, 2000, 1999 and 1998.............................. X-84
Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss) for the Years Ended July 31,
2000, 1999 and 1998....................................... X-85
Consolidated Statements of Cash Flows for the Years Ended
July 31, 2000, 1999 and 1998.............................. X-86
Notes to Consolidated Financial Statements.................. X-87
</TABLE>
X-81
<PAGE> 299
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lycos, Inc.:
We have audited the accompanying consolidated balance sheets of Lycos, Inc.
as of July 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for each of the years in the three year period ended July 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lycos, Inc. at July 31, 2000 and 1999, and the results of its operations and
cash flows for each of the years in the three year period ended July 31, 2000,
in conformity with generally accepted accounting principles in the United States
of America.
KPMG LLP
Boston, Massachusetts
August 15, 2000
X-82
<PAGE> 300
LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JULY 31,
2000 1999
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 640,064 $166,506
Accounts receivable, less allowance for doubtful accounts
of $7,070 and $2,442 at July 31, 2000 and 1999,
respectively........................................... 29,197 25,830
Electronic commerce and other receivable.................. 67,531 71,843
Prepaid expenses and other current assets................. 5,147 8,783
---------- --------
Total current assets.............................. 741,939 272,962
---------- --------
Property and equipment, less accumulated depreciation....... 10,689 7,726
Electronic commerce and other receivable.................... 32,109 48,029
Investments................................................. 419,898 48,001
Intangible assets, less accumulated amortization............ 544,812 505,682
Other assets................................................ 2,997 7,399
---------- --------
Total assets...................................... $1,752,444 $889,799
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- current.................................. $ 6,396 $ 2,949
Accounts payable.......................................... 4,455 2,055
Accrued expenses.......................................... 57,491 22,637
Deferred revenues......................................... 93,906 64,016
---------- --------
Total current liabilities......................... 162,248 91,657
Deferred tax liability...................................... 76,255 138
Notes payable............................................... 2,011 2,600
Deferred revenues........................................... 34,216 55,934
---------- --------
112,482 58,672
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized,
none issued or outstanding............................. -- --
Common stock, $.01 par value; 300,000 shares authorized,
112,496 shares at July 31, 2000 and 100,312 shares at
July 31, 1999 issued and outstanding................... 1,125 1,003
Additional paid-in capital................................ 1,522,169 815,706
Deferred compensation..................................... (818) (75)
Accumulated deficit....................................... (71,746) (92,751)
Treasury stock, at cost, 1,923 shares at July 31, 2000 and
1,815 shares at July 31, 1999.......................... (4,356) (3,286)
Accumulated other comprehensive income.................... 31,340 18,873
---------- --------
Total stockholders' equity........................ 1,477,714 739,470
---------- --------
Total liabilities and stockholders' equity........ $1,752,444 $889,799
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
X-83
<PAGE> 301
LYCOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JULY 31, JULY 31, JULY 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Advertising............................................. $191,653 $ 96,459 $ 42,854
Electronic commerce and other........................... 99,297 42,081 14,292
-------- -------- --------
Total revenues.................................. 290,950 138,540 57,146
Cost of revenues.......................................... 52,800 29,273 12,758
-------- -------- --------
Gross profit.................................... 238,150 109,267 44,388
Operating expenses:
Research and development................................ 47,352 26,963 9,724
In process research and development..................... -- -- 17,280
Sales and marketing..................................... 148,768 79,325 35,251
General and administrative.............................. 31,781 17,528 5,883
Amortization of intangible assets....................... 134,063 52,428 7,614
-------- -------- --------
Total operating expenses........................ 361,964 176,244 75,752
-------- -------- --------
Operating loss............................................ (123,814) (66,977) (31,364)
Interest income, net...................................... 23,398 6,273 3,050
Minority interest and other, net.......................... (2,263) -- --
Equity share of losses in affiliates, net................. (32,407) (1,360) --
Gain on sale of investments............................... 270,237 10,120 --
-------- -------- --------
Income (loss) before income taxes......................... 135,151 (51,944) (28,314)
Provision for income taxes................................ 114,146 138 --
-------- -------- --------
Net income (loss)......................................... $ 21,005 $(52,082) $(28,314)
======== ======== ========
Basic net income (loss) per share......................... $ 0.20 $ (0.59) $ (0.44)
======== ======== ========
Diluted net income (loss) per share....................... $ 0.19 $ (0.59) $ (0.44)
======== ======== ========
Weighted average shares used in computing basic net income
(loss) per share........................................ 105,211 88,960 64,144
======== ======== ========
Weighted average shares used in computing diluted net
income (loss) per share................................. 111,695 88,960 64,144
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
X-84
<PAGE> 302
LYCOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK OTHER
---------------- PAID-IN COMPENSATION ACCUMULATED ---------------- COMPREHENSIVE
SHARES AMOUNT CAPITAL AMOUNT DEFICIT SHARES AMOUNT INCOME
------- ------ ---------- ------------ ----------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 31, 1997.......... 57,464 $ 574 $ 49,461 $(185) $(12,355) -- -- --
Comprehensive income (loss):
Net loss.......................... -- -- -- -- (28,314) -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale
securities.....................
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 17 -- 66 -- -- -- -- --
Cancellation of stock options...... -- -- (23) 23 -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 4,094 41 3,201 -- -- 1,339 (468) --
Issuance of common stock in
connection with exercise of
warrants.......................... 415 4 1,359 -- -- 38 (114) --
Issuance of common stock in
connection with strategic
investments....................... 602 6 7,877 -- -- -- -- --
Issuance of common stock and
warrants in connection with
acquisitions...................... 8,298 84 104,766 -- -- 40 (403) --
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 9,350 94 111,098 -- -- -- -- --
Issuance of common stock in
connection with services
rendered.......................... 21 -- 300 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 46 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 1998.......... 80,261 803 278,105 (116) (40,669) 1,417 (985) --
Comprehensive income (loss):
Net loss.......................... -- -- -- -- (52,082) -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $12,582.......... $ 28,993
Less: Reclassification
adjustment for gains included
in net loss.................... (10,120)
--------
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 19 -- 247 -- -- -- -- --
Issuance of non-qualified stock
options........................... -- -- 30 (30) -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 3,120 31 15,512 -- -- 398 (2,301) --
Tax benefit of stock option
exercises......................... -- -- 12,582 -- -- -- -- --
Issuance of common stock in
connection with acquisitions...... 13,307 133 495,317 -- -- -- -- --
Issuance of common stock of
subsidiary........................ 3,605 36 13,913 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 71 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 1999.......... 100,312 1,003 815,706 (75) (92,751) 1,815 (3,286) 18,873
Comprehensive income (loss):
Net income........................ -- -- -- -- 21,005 -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $8,318........... 12,467
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 12 -- 414 -- -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 3,425 34 46,898 -- -- 108 (1,070) --
Issuance of common stock in
connection with exercise of
warrants.......................... 12 -- 126 -- -- -- -- --
Issuance of common stock and
warrants in connection with
acquisitions...................... 1,911 19 115,812 (818) -- -- -- --
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 6,163 62 455,556 -- -- -- -- --
Tax benefit of stock option
exercises......................... -- -- 45,983 -- -- -- -- --
Issuance of common stock in
connection with strategic
investments....................... 661 7 41,674 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 75 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 2000.......... 112,496 $1,125 $1,522,169 $(818) $(71,746) 1,923 $(4,356) $ 31,340
======= ====== ========== ===== ======== ===== ======= ========
<CAPTION>
COMPREHENSIVE
TOTAL INCOME (LOSS)
---------- -------------
<S> <C> <C>
BALANCES AT JULY 31, 1997.......... $ 37,495
Comprehensive income (loss):
Net loss.......................... (28,314) $(28,314)
Other comprehensive income (loss):
Unrealized gains on
available-for-sale
securities..................... --
--------
Comprehensive income (loss).... $(28,314)
========
Issuance of common stock in
connection with ESPP.............. 66
Cancellation of stock options...... --
Issuance of common stock in
connection with exercise of stock
options........................... 2,774
Issuance of common stock in
connection with exercise of
warrants.......................... 1,249
Issuance of common stock in
connection with strategic
investments....................... 7,883
Issuance of common stock and
warrants in connection with
acquisitions...................... 104,447
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 111,192
Issuance of common stock in
connection with services
rendered.......................... 300
Amortization of deferred
compensation...................... 46
----------
BALANCES AT JULY 31, 1998.......... 237,138
Comprehensive income (loss):
Net loss.......................... (52,082) $(52,082)
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $12,582..........
Less: Reclassification
adjustment for gains included
in net loss.................... 18,873 18,873
--------
Comprehensive income (loss).... $(33,209)
========
Issuance of common stock in
connection with ESPP.............. 247
Issuance of non-qualified stock
options........................... --
Issuance of common stock in
connection with exercise of stock
options........................... 13,242
Tax benefit of stock option
exercises......................... 12,582
Issuance of common stock in
connection with acquisitions...... 495,450
Issuance of common stock of
subsidiary........................ 13,949
Amortization of deferred
compensation...................... 71
----------
BALANCES AT JULY 31, 1999.......... 739,470
Comprehensive income (loss):
Net income........................ 21,005 $ 21,005
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $8,318........... 12,467 12,467
--------
Comprehensive income (loss).... $ 33,472
========
Issuance of common stock in
connection with ESPP.............. 414
Issuance of common stock in
connection with exercise of stock
options........................... 45,862
Issuance of common stock in
connection with exercise of
warrants.......................... 126
Issuance of common stock and
warrants in connection with
acquisitions...................... 115,013
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 455,618
Tax benefit of stock option
exercises......................... 45,983
Issuance of common stock in
connection with strategic
investments....................... 41,681
Amortization of deferred
compensation...................... 75
----------
BALANCES AT JULY 31, 2000.......... $1,477,714
==========
</TABLE>
See accompanying notes to consolidated financial statements.
X-85
<PAGE> 303
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
JULY 31, JULY 31, JULY 31,
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 21,005 $(52,082) $(28,314)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Amortization of deferred compensation................... 75 71 47
Amortization of intangible assets....................... 134,063 52,428 7,614
Depreciation............................................ 2,676 3,549 1,525
Allowance for doubtful accounts......................... 4,628 1,234 654
Gain on sale of investments............................. (270,237) (10,120) --
Equity share of losses in affiliates.................... 32,407 1,360 --
In process research and development..................... -- -- 17,280
Issuance of common stock for services rendered.......... -- -- 300
Deferred taxes.......................................... 76,117 138 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (7,651) (7,281) (4,778)
Electronic commerce and other fees receivable........... 20,232 (68,111) (42,046)
Prepaid expenses........................................ 3,696 (1,580) (1,593)
Other assets............................................ 6,998 (3,273) (2,895)
Accounts payable........................................ (2,236) (5,771) 854
Accrued expenses........................................ 23,794 (9,209) 8,343
Deferred revenues....................................... 7,425 60,433 40,450
Other liabilities....................................... -- (37) (29)
--------- -------- --------
Net cash provided by (used in) operating activities......... 52,992 (38,251) (2,588)
--------- -------- --------
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (3,408) (1,915) (1,187)
Sale of investments......................................... 200 12,159 --
Cash acquired through (paid for) acquisitions, net.......... (31,577) 21,751 2,541
Investment in affiliates.................................... (73,802) (5,120) (992)
--------- -------- --------
Net cash provided by (used in) investing activities......... (108,587) 26,875 362
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of stock, net of offering costs...... 455,618 13,857 111,224
Proceeds from exercise of stock options..................... 84,598 15,543 3,299
Proceeds from issuance of common stock under Employee Stock
Purchase Plan............................................. 414 247 66
Proceeds from exercise of warrants.......................... 126 -- 1,250
Repayments of notes payable................................. (10,533) (3,443) --
Cash used to repurchase treasury stock...................... (1,070) (2,302) (468)
--------- -------- --------
Net cash provided by financing activities................... 529,153 23,902 115,371
--------- -------- --------
Net increase in cash and cash equivalents................... 473,558 12,526 113,145
Cash and cash equivalents at beginning of year.............. 166,506 153,980 40,835
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 640,064 $166,506 $153,980
========= ======== ========
Schedule of non-cash financing and investing activities:
Issuance of common stock in connection with
acquisitions............................................ $ 115,013 $495,450 $104,447
Assets and liabilities recognized in connection with
acquisitions:
Accounts receivable................................... 183 8,643 209
Prepaid expenses...................................... 16 1,302 23
Property and equipment................................ 2,004 5,318 1,996
Developed technology.................................. -- -- 12,331
Goodwill and other intangible assets.................. 126,700 479,322 72,827
Marketable securities................................. -- 5,950 --
Other assets.......................................... 2,491 774 --
Accounts payable...................................... 1,469 2,830 810
Accrued expenses...................................... 5,399 17,869 1,858
Notes payable......................................... 7,448 8,219 --
Deferred revenues..................................... -- 1,946 93
Issuance of common stock in connection with strategic
investments............................................. $ 41,681 -- $ 7,882
</TABLE>
See accompanying notes to consolidated financial statements.
X-86
<PAGE> 304
LYCOS, INC.
NOTES TO 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 other services. The
Company's fiscal year end is July 31.
The 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 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.
Merger with Terra Networks, S.A.
On May 16, 2000, Lycos and Terra Networks, S.A. ("Terra Networks"), entered
into an agreement and plan of reorganization to combine and create Terra Lycos
(the "Combination"). As part of the Combination, each issued and outstanding
share of Lycos common stock will be converted into Terra Networks American
Depositary Shares ("Terra Networks ADSs") representing a number of ordinary
shares of Terra Networks (or if the applicable Lycos stockholder elects, into a
number of Terra Networks ordinary shares in account entry form instead of Terra
Networks ADSs) equal to the Exchange Ratio. The Exchange Ratio shall be equal to
(1) $97.55 divided by (2) the U.S. dollar equivalent of the average closing
price of Terra Networks ordinary shares on the Spanish Continuous Market
Exchange for the ten full Spanish Continuous Market Exchange trading days ending
on the tenth Spanish Continuous Market Exchange trading day prior to the
completion of the Combination. However, if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or greater than $68.06,
the exchange ratio shall be 1.433, and if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or less than $45.37,
the exchange ratio shall be 2.150.
In connection with the Combination, Terra Networks, Lycos and Telefonica,
S.A., Terra Networks' majority owner ("Telefonica"), entered into a rights
offering agreement (the "Rights Offering"). Pursuant to the Rights Offering,
Terra Networks will make a rights offering prior to the Combination whereby it
will issue to its shareholders rights to purchase Terra Networks ordinary shares
for an aggregate of $2.0 billion at a price per share of $56.13, which was the
closing price of Terra Networks ordinary shares on May 16, 2000. Under the
Rights Offering, Telefonica has agreed to subscribe for all shares not
subscribed for by other shareholders. On September 15, 2000 the Rights Offering
was completed and all of the shares were subscribed at a per share price of
$56.13.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Combination and following the Rights Offering, Lycos
stockholders are expected to own between 37.5% and 51.6% of the shares of Terra
Lycos. However, Lycos has agreed in the agreement and plan of reorganization not
to take any action, including issuing new Lycos shares, that could reasonably be
expected to result in its shareholders owning or having voting power in excess
of 50% of Terra Lycos upon completion of the combination. Telefonica is expected
to own between 33.6% and 43.5% of Terra Lycos after the Combination. The
Combination is expected to be accounted for by Terra Networks as an acquisition
under the purchase method of accounting for business combinations.
The Combination is expected to be completed during the fourth quarter of
calendar year 2000 and is subject to customary closing conditions, including
approval by stockholders of Lycos and receipt of all necessary regulatory
approvals. There can be no assurance such approvals will be obtained.
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. Electronic commerce 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.
Cost of Revenues
Cost of revenues specifically attributable to advertising, electronic
commerce and other revenues are not separately identifiable and therefore are
not separately disclosed in the consolidated statements of operations.
Deferred Revenues
Deferred revenues are comprised of 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, 2000 and 1999, the Company had no investments with maturities greater than
three months.
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,
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 three to five years. At July
31, 2000 and 1999, the balance of developed technology, trade names and other
intangible assets, net of accumulated amortization was $45.3 million and $17.8
million, 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 three to five 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, 2000 and 1999
the balance of goodwill, net of accumulated amortization, was $499.5 million and
$487.9 million, 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.
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
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. The provision for income taxes relates
primarily to deferred taxes recorded on the gain from the initial public
offering of Lycos Europe, as discussed in Note 2.
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 $23.4 million, $11.8 million, and $5.7 million for the
years ended July 31, 2000, 1999, and 1998, 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 consolidated 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 20%
of their annual compensation to the Plan. The Company matches employee
contributions at a rate of one-half of the first six percent of compensation
deferred. For the years ended July 31, 2000, 1999, and 1998 the Company's
contributions amounted to approximately $440,000, $230,000, and $87,000,
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 $9.4 million, $1.2 million, and
$654,000 in 2000, 1999, and 1998, respectively. No single customer accounted for
greater than 10% of total revenues during the years ended July 31, 2000, 1999,
and 1998.
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LYCOS, INC.
NOTES TO 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, 2000, 1999, and 1998 were approximately $2.6 million, $2.0 million, and $2.6
million, respectively.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, accounts payable, accrued expenses, notes payable and deferred
revenues, approximate their fair market values as of July 31, 2000 and 1999. 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.
The components of comprehensive income (loss), net of tax, are as follows
(in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JULY 31,
-------------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Net income (loss).................................. $21,005 $(52,082) $(28,314)
Unrealized gain on available-for-sale securities... 12,467 28,993 --
Less: Reclassification adjustment for gains
included in net income (loss).................... -- (10,120) --
------- -------- --------
Comprehensive income (loss)........................ $33,472 $(33,209) $(28,314)
======= ======== ========
</TABLE>
Accumulated other comprehensive income consists of the unrealized gains on
available-for-sale securities, net of tax, as presented on the accompanying
consolidated balance sheets.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and Diluted Net Income (Loss) per Share.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and, if
dilutive, common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the treasury stock method). For
the year ended July 31, 2000, common equivalent shares approximated 6.5 million
shares and related to shares issuable upon the exercise of stock options. During
the year ended July 31 1999 and 1998, options to purchase common shares were not
included in the computation because they were antidilutive.
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
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. 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 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 does
not expect there to be a material 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of calendar 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on its
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" -- an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
applies prospectively to new stock option awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000. Application of FIN 44 did
not have a material impact on the Company's financial position or its results of
operations for the year ended July 31, 2000.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000.
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
The cost of marketable securities carried at fair value was $80.3 million
and $11.8 million at July 31, 2000 and 1999, respectively. These investments had
a fair value of $137.3 million and $48.0 million at July 31, 2000 and 1999,
respectively. Gross unrealized gains and losses relating to securities held as
available-for-sale for the year ended July 31, 2000 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Gross unrealized gains...................................... $60,661 $33,118
Gross unrealized losses..................................... (39,876) (1,663)
------- -------
Net unrealized gains...................................... $20,785 $31,455
======= =======
</TABLE>
Proceeds from the sale of marketable securities available for sale were
$12.2 million in the year ended July 31, 1999. Gross realized gains included in
net loss were $10.1 million in the year ended July 31, 1999. Sales of marketable
securities were not material in the years ended July 31, 2000 or 1998.
Joint Ventures
In May 1997, the Company established Lycos Europe, N.V. ("Lycos Europe") as
the basis for a joint venture agreement with Bertelsmann Internet Services
("Bertelsmann") to create localized versions of the Lycos search and navigation
service throughout Europe. The joint venture initially was 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.
During March 2000, Lycos Europe completed an initial public offering on the
German Neuer Markt stock exchange which raised approximately $625 million, net
of offering costs. As a result of the offering, the Company's percentage
ownership in Lycos Europe was reduced to approximately 43.8% from 50% and the
Company recognized a one-time gain of $270 million. At July 31, 2000 the
Company's carrying value of Lycos Europe, which is recorded in investments on
the balance sheet, is $246 million. The fair value of the Company's investment
in Lycos Europe, based on the quoted trading price, was approximately $766
million at July 31, 2000. The investment is accounted for under the equity
method. For the year ending July 31, 2000, Lycos' share of the net loss was
$24.1 million. For the year ending July 31, 1999 and 1998, Lycos' share of the
net loss of Lycos Europe was not material.
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, the country's largest Internet Service
Provider. During November 1999 the Company invested $14.5 million in Lycos Japan
in exchange for convertible bonds and warrants issued by Lycos Japan. This
investment followed Lycos' initial investment of $1 million in April 1998. Also
during November 1999,
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's joint venture partner, Sumitomo Corporation, invested an
additional $14.5 million in Lycos Japan in exchange for convertible bonds. A new
partner, Kadokawa Publishing Co., Ltd. also joined the joint venture via an
investment of $7.3 million in exchange for common stock and convertible bonds.
As a result of the additional investments and new partner, the Company's
ownership of the joint venture changed to approximately 37% and, assuming full
conversion of the convertible bonds and warrants, the Company's ownership would
be approximately 44.7%. The investment is accounted for under the equity method.
For the year ending July 31, 2000 and 1999, Lycos' share of the net loss of
Lycos Japan KK was approximately $6.2 million and $1.0 million, respectively.
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. Lycos' ownership in the joint
venture is approximately 43.2%. The investment is accounted for under the equity
method. For the year ending July 31, 2000, Lycos' share of the net loss was not
material. For the year ending July 31, 1999, Lycos' share of the net loss was
approximately $360,000.
During 2000 the Company invested $25 million in Lycos Asia, a joint venture
owned 50% by Lycos and 50% owned by Singapore Telecommunications Limited, a
telecommunications provider in Singapore. The Company accounts for this
investment under the equity method of accounting. For the year ending July 31,
2000, Lycos' share of the net loss of Lycos Asia was approximately $4.9 million.
In February 2000, the Company announced the formation of a new Internet
joint venture in Canada, "Sympatico-Lycos", to provide expanded Internet
resources for the business-to-consumer marketplace in Canada. Under the terms of
the agreement, Bell ActiMedia contributed $25 million in cash and certain
on-line assets, including Internet portal Sympatico. Lycos' ownership in the
joint venture is 29%. Lycos contributed its technologies and brands in exchange
for a royalty, which is based on certain milestones achieved by Sympatico-Lycos.
Separately, Bell ActiMedia and Lycos signed a $40 million three-year
distribution agreement under which Bell ActiMedia products and services will be
promoted to users who access the Lycos Network from Canada. For the year ending
July 31, 2000, Lycos' share of the net loss was not material.
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, 2000 the Company has provided $2.9 million of its $10 million commitment to
the Fund.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Computers, equipment & purchased software................... $17,032 $15,734
Furniture and fixtures...................................... 2,017 1,637
Leasehold improvements...................................... 2,739 2,986
------- -------
21,788 20,357
Less accumulated depreciation............................... (11,099) (12,631)
------- -------
$10,689 $ 7,726
======= =======
</TABLE>
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 (in thousands):
<TABLE>
<S> <C>
In process research and development......................... $ 7,200
Developed technology, goodwill and other intangible
assets.................................................... 52,220
Other assets, principally cash and equipment................ 3,634
Liabilities assumed......................................... (1,604)
-------
$61,450
=======
</TABLE>
Accumulated amortization on intangible assets was $25.7 million and $15.2
million at July 31, 2000 and 1999, respectively.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 (in thousands):
<TABLE>
<S> <C>
In process research and development......................... $ 9,080
Developed technology, goodwill and other intangible
assets.................................................... 30,108
Other assets, principally cash and equipment................ 1,085
Liabilities assumed......................................... (857)
-------
$39,416
=======
</TABLE>
Accumulated amortization on intangible assets was $13.5 million and $7.5
million at July 31, 2000 and 1999, 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 (in thousands):
<TABLE>
<S> <C>
In process research and development......................... $1,000
Goodwill and other intangible assets........................ 2,831
Property and equipment...................................... 50
Liabilities assumed......................................... (300)
------
$3,581
======
</TABLE>
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated amortization on intangible assets was $1.2 million and $637,000
at July 31, 2000 and 1999.
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.
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, 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.
The purchase price of WhoWhere? was allocated as follows (in thousands):
<TABLE>
<S> <C>
Goodwill and other intangible assets........................ $161,322
Other assets, principally cash and equipment................ 8,118
Liabilities assumed......................................... (10,381)
--------
$159,059
========
</TABLE>
Accumulated amortization on intangible assets was $63.3 million and $30.9
million at July 31, 2000 and 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. 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.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price of Wired was allocated as follows (in thousands):
<TABLE>
<S> <C>
Goodwill and other intangible assets........................ $268,000
Other assets, principally cash and equipment................ 38,915
Liabilities assumed......................................... (16,017)
--------
$290,898
========
</TABLE>
Accumulated amortization on intangible assets was $58.1 million and $4.5
million at July 31, 2000 and 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. No payments have
been made as of July 31, 2000.
The purchase price of IMDI was allocated as follows (in thousands):
<TABLE>
<S> <C>
Goodwill and other intangible assets........................ $50,000
Other assets, principally cash and equipment................ 78
Liabilities assumed......................................... (1,090)
-------
$48,988
=======
</TABLE>
Accumulated amortization on intangible assets was $10 million at July 31,
2000 and insignificant 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
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net Revenues:
Lycos.............................................. $289,869 $135,521 $ 56,060
Gamesville......................................... 3,081 3,019 1,086
Eliminations....................................... (2,000) -- --
-------- -------- --------
$290,950 $138,540 $ 57,146
======== ======== ========
Net Income (Loss):
Lycos.............................................. $ 24,243 $(52,044) $(28,440)
========
Gamesville......................................... (3,238) (38) 126
-------- -------- --------
$ 21,005 $(52,082) $(28,314)
======== ======== ========
</TABLE>
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger") with Quote.com, Inc., a California corporation ("Quote")
in a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote became a wholly-owned subsidiary of the Company.
As a result, all outstanding shares of common stock and preferred stock of Quote
were converted into an aggregate 1,346,630 shares of common stock of the
Company. Additionally, the Company converted all outstanding Quote stock options
and warrants into approximately 239,000 Lycos options and warrants.
The acquisition of Quote 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 Quote are included with
those of the Company for periods subsequent to the date of acquisition.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Developed technology, goodwill and other intangible
assets.................................................... $ 77,000
Other assets, principally cash.............................. 6,269
Liabilities assumed......................................... (14,166)
--------
$ 69,103
========
</TABLE>
Accumulated amortization on intangible assets was $12.8 million at July 31,
2000.
Acquisition of Valent Software Corporation, Inc.
In December 1998, the Company entered into an agreement with Valent
Software Corporation ("Valent") pursuant to which the Company invested $2
million of cash in Valent. Valent provides the infrastructure and tools to link
online clubs. In exchange for the $2 million, the Company received 191,667
shares of Valent Series C preferred stock representing approximately a 16.7%
interest in Valent and an option to acquire all of the remaining outstanding
capital stock of Valent.
In January 2000, the Company exercised its option to acquire all of the
remaining outstanding capital stock of Valent. On February 2, 2000 the Company
completed the closing of the merger and
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Valent became a wholly-owned subsidiary of the Company. As a result, all
outstanding shares of common stock and preferred stock of Valent were converted
into an aggregate 564,045 shares of common stock of the Company. Additionally,
the Company converted all outstanding Valent stock options and warrants into
40,129 Lycos options and warrants.
The acquisition of Valent 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 Valent are included with
those of the Company for periods subsequent to the date of acquisition.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Developed technology, goodwill and other intangible
assets.................................................... $49,700
Other assets................................................ 16
Liabilities assumed......................................... (150)
-------
$49,566
=======
</TABLE>
Accumulated amortization on intangible assets was $8.3 million at July 31,
2000.
Acquisition of Metrosplash, Inc.
On June 20, 2000, the Company entered into an agreement to acquire
Metrosplash, Inc. ("Metrosplash"), owner of Matchmaker.com, a leading personal
classifieds site. On July 31, 2000 the Company completed the acquisition and
Metrosplash became a wholly-owned subsidiary of the Company. As a result, all
outstanding shares of common stock and preferred stock of Metrosplash were
purchased by the Company in cash plus the assumption of debt for approximately
$45 million. Additionally, the Company converted certain outstanding Metrosplash
stock options into approximately 29,401 Lycos options.
The acquisition of Metrosplash 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 Metrosplash are
included with those of the Company for periods subsequent to the date of
acquisition.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Developed technology, goodwill and other intangible
assets.................................................... $ 46,500
Other assets................................................ 778
Liabilities assumed......................................... (14,012)
--------
$ 33,266
========
</TABLE>
Accumulated amortization on intangible assets was not significant at July
31, 2000.
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 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.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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<PAGE> 319
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined that there was no technology which would qualify for in-process
research and development.
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., Quote, Valent and Metrosplash assets to serve as a
basis for allocation of purchase price. It was determined that intangible assets
consisted of developed technology and trade names. 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, IMDI, Quote, Valent and
Metrosplash as if the acquisitions had occurred as of the beginning of fiscal
2000 and 1999, 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, IMDI, Quote, Valent and Metrosplash constituted
a single entity during such period.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED JULY 31,
-----------------------------
2000 1999
---------- -----------
(UNAUDITED AND IN THOUSANDS)
<S> <C> <C>
Revenues................................................ $305,130 $ 181,474
Net loss................................................ $(38,908) $(197,518)
Basic and diluted net income (loss) per share........... $ (0.37) $ (2.17)
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
2000 1999
-------- --------
<S> <C> <C>
Compensation and benefits................................... $12,931 $ 7,430
Content and webhosting fees................................. 12,143 915
Professional fees........................................... 10,686 5,199
Royalties................................................... 6,999 2,047
Advertising................................................. 5,390 1,644
Other....................................................... 9,342 5,402
------- -------
$57,491 $22,637
======= =======
</TABLE>
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<PAGE> 320
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2006. Future noncancelable minimum
payments as of July 31, 2000 under these leases for each fiscal year end are as
follows:
<TABLE>
<S> <C>
2001........................................................ $21,258
2002........................................................ 18,539
2003........................................................ 6,089
2004........................................................ 2,099
2005 and thereafter......................................... 2,202
-------
$50,187
=======
</TABLE>
Rent expense under non-cancelable operating leases was $23.4 million, $12.1
million, and $5.1 million for the years ended July 31, 2000, 1999 and 1998,
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 Offerings
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 Securities and Exchange Commission ("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.
On January 25, 2000, the Company completed a secondary offering of its
common stock in which 6,000,000 shares of the Company's common stock were sold
under a registration statement filed with the SEC. Proceeds to the Company were
$443.5 million, net of offering costs. In February 2000, the Underwriters
exercised an option to purchase 163,000 additional shares of common stock,
resulting in additional proceeds to the Company of $12 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
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<PAGE> 321
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000 was
1.5 years.
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, 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
----------
Granted................................................... -- --
Exercised................................................. (248,984) 0.54
Terminated................................................ (140,640) 2.36
----------
Outstanding at July 31, 2000................................ 1,282,984 $1.86
==========
Exercisable at July 31, 2000................................ 1,122,040 $1.94
==========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding under the 1995 Plan at July 31, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
1995 STOCK OPTION PLAN OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
------------------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.58 324,288 1.2 $0.01 227,344 $0.01
$2.40 - $2.40 873,696 1.5 $2.40 865,696 $2.40
$2.84 - $3.97 85,000 2.7 $3.41 29,000 $3.42
--------- ---------
1,282,984 1,122,040
========= =========
</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.
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 June 27, 1997, the
Company's Board of Directors voted to authorize an
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
2000, was 8.5 years.
A summary of option activity under the 1996 Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ---------
<S> <C> <C>
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
----------
Granted................................................... 9,836,300 43.29
Exercised................................................. (2,513,663) 17.16
Terminated................................................ (6,004,871) 25.93
----------
Outstanding at July 31, 2000................................ 22,408,390 $34.80
==========
Exercisable at July 31, 2000................................ 3,184,762 $33.06
==========
</TABLE>
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<PAGE> 323
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding under the 1996 Plan at July 31, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
1996 STOCK OPTION PLAN OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
------------------------ -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 3.94 1,058,658 6.4 $ 2.62 328,382 $ 2.53
$ 3.95 - $ 5.38 1,189,607 6.9 $ 4.38 338,207 $ 4.38
$ 5.39 - $12.50 1,517,234 7.5 $ 9.76 237,300 $ 9.92
$12.51 - $25.00 3,487,536 7.8 $14.34 528,955 $14.51
$25.01 - $35.00 4,720,890 8.9 $32.38 116,640 $28.05
$35.01 - $45.00 2,736,626 9.4 $39.06 154,931 $42.28
$45.01 - $55.00 3,175,163 8.8 $48.02 738,740 $46.94
$55.01 - $65.00 1,585,176 9.5 $61.74 28,875 $63.62
$65.01 - $75.00 2,814,500 8.8 $66.28 712,732 $65.38
$75.01 - $85.38 123,000 9.4 $83.28 -- --
---------- ---------
22,408,390 3,184,762
========== =========
</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, 2000 was approximately 7.6
years.
A summary of option activity under the 1995 Tripod Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS 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
--------
</TABLE>
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<PAGE> 324
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding at July 31, 1999................................ 120,198 0.31
--------
Granted................................................... -- --
Exercised................................................. (52,222) 0.31
Terminated................................................ (20,167) 0.31
Outstanding at July 31, 2000................................ 47,809 $0.31
========
Exercisable at July 31, 2000................................ 19,699 $0.31
--------
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 Tripod Stock Option Plan at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
TRIPOD 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
----------------------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.25 - $0.38 47,446 7.7 $0.31 19,699 $0.31
$0.39 - $1.00 363 0.3 $0.77 -- --
------ ------
47,809 19,699
====== ======
</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, 2000 was
approximately 5.9 and 6.8 years, respectively.
A summary of option activity under the 1995 WiseWire Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding at April 30, 1998............................... 420,548 $1.34
Granted................................................... -- --
Exercised................................................. (126,048) 1.01
Terminated................................................ (54,192) 3.19
--------
</TABLE>
X-107
<PAGE> 325
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
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
--------
Granted................................................... -- --
Exercised................................................. (16,154) 1.79
Terminated................................................ (25,762) 2.01
--------
Outstanding at July 31, 2000................................ 25,698 $1.64
--------
Exercisable at July 31, 2000................................ 14,376 $1.68
========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 WiseWire Stock Option Plan at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
WISEWIRE 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE AT JULY 31, 2000 PRICE
----------------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.50 - $ 1.00 18,706 5.8 $0.67 12,320 $0.67
$2.50 - $26.88 6,992 5.9 $4.25 2,056 $7.78
------ ------
25,698 14,376
====== ======
</TABLE>
A summary of option activity under the 1996 WiseWire Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS 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
-------
Granted................................................... -- --
Exercised................................................. (10,000) 6.68
Terminated................................................ -- --
-------
Outstanding at July 31, 2000................................ 172 $6.68
=======
Exercisable at July 31, 2000................................ 172 $6.68
=======
</TABLE>
X-108
<PAGE> 326
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 2000, the stock options outstanding under the 1996 WiseWire
Stock Option Plan have an exercise price of $6.68 and a weighted average
contractual life of 6.8 years.
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 Plan at July 31, 2000 was approximately 7.5 years.
A summary of option activity under the 1995 WhoWhere? Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS 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
---------
Granted................................................... -- --
Exercised................................................. (244,000) 5.12
Terminated................................................ (146,796) 5.41
Outstanding at July 31, 2000................................ 223,098 $7.20
=========
Exercisable at July 31, 2000................................ 122,696 $7.62
=========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 WhoWhere? Stock Option Plan at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
WHOWHERE 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE AT JULY 31, 2000 PRICE
----------------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $ 0.50 12,002 6.6 $ 0.46 10,332 $ 0.46
$0.51 - $ 6.55 72,164 7.5 $ 2.56 26,532 $ 2.37
$6.56 - $13.10 138,932 7.5 $10.19 85,832 $10.11
------- -------
223,098 122,696
======= =======
</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
X-109
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ten years from the date of grant. The weighted-average exercise price for these
shares was $4.36 at July 31, 2000. The total weighted-average contractual life
of options outstanding at July 31, 2000 was approximately 8.9 years.
A summary of option activity under the Gamesville Stock Option Plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS 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
--------
Granted................................................... 182,405 4.39
Exercised................................................. (208,727) 3.90
Terminated................................................ (196,261) 4.39
--------
Outstanding at July 31, 2000................................ 102,823 $4.36
========
Exercisable at July 31, 2000................................ 5,409 $4.24
========
</TABLE>
The following table summarizes information about stock options outstanding
under Gamesville Stock Option Plans at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
GAMESVILLE STOCK OPTION OUTSTANDING AT LIFE EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 (YEARS) PRICE JULY 31, 2000 PRICE
----------------------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$2.20 1,458 3.9 $2.20 364 $2.20
$4.39 101,365 9.0 $4.39 5,045 $4.39
------- -----
102,823 5,409
======= =====
</TABLE>
Quote.com Stock Option Plan
In connection with the acquisition of Quote.com, the Company assumed the
Quote.com Stock Option Plan under which incentive stock options to purchase
common stock may be granted to employees and nonqualified stock options to
purchase common stock may be granted to officers, employees, directors,
consultants and advisors. Options granted under the Stock Option Plan generally
vest over a period of four years from date of grant. All unvested options
outstanding on the one year anniversary of the acquisition of Quote.com by Lycos
will fully accelerate. Option grants under this plan expire ten years from the
date of grant. The weighted average exercise price for these shares was $11.03
at July 31, 2000. The total weighted-average contractual life of options
outstanding at July 31, 2000 was approximately 8.2 years.
X-110
<PAGE> 328
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the Quote.com Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding at December 6, 1999............................. 216,190 $ 8.37
Granted................................................... -- --
Exercised................................................. (164,556) 7.51
Terminated................................................ (3,441) 11.88
--------
Outstanding at July 31, 2000................................ 48,193 $11.03
========
Exercisable at July 31, 2000................................ 17,020 $ 9.14
========
</TABLE>
The following table summarizes information about stock options outstanding
under the Quote.com Stock Option Plan at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
QUOTE.COM STOCK OPTION OUTSTANDING AT LIFE EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 (YEARS) PRICE JULY 31, 2000 PRICE
----------------------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$3.62-$3.62 451 6.1 $ 3.62 363 $ 3.62
$6.51-$6.51 1,176 6.9 $ 6.51 740 $ 6.51
$7.23-$7.23 31,003 7.9 $ 7.23 12,765 $ 7.23
$7.96-$7.96 5,089 8.6 $ 7.96 1,159 $ 7.96
$21.70-$21.70 8,265 8.9 $21.70 1,651 $21.70
$35.45-$35.45 2,209 9.1 $35.45 342 $35.45
------ ------
48,193 17,020
====== ======
</TABLE>
Valent Stock Option Plan
In connection with the acquisition of Valent, the Company assumed Valent's
Stock Option Plan under which incentive stock options to purchase common stock
may be granted to employees and nonqualified stock options to purchase common
stock may be granted to officers, employees, directors, consultants and
advisors. Options granted under the Stock Option Plan generally vest over a
period of four years from date of grant and expire ten years from the date of
grant. The weighted average exercise price for these shares was $2.77 at July
31, 2000. The total weighted-average contractual life of options outstanding at
July 31, 2000 was approximately 8.5 years.
X-111
<PAGE> 329
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the Valent Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
<S> <C> <C>
Outstanding at February 2, 2000............................. 40,129 $6.14
Granted................................................... -- --
Exercised................................................. (9,093) 1.88
Terminated................................................ (4,749) 1.97
------ -----
Outstanding at July 31, 2000................................ 26,287 $8.36
====== =====
Exercisable at July 31, 2000................................ 2,624 $2.77
====== =====
</TABLE>
The following table summarizes information about stock options outstanding
under the Valent Stock Option Plan at July 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
VALENT STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
----------------------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.95-$3.14 646 7.9 $ 1.58 646 $ 1.58
$3.15-$3.16 9,496 8.1 $ 3.16 1,978 $ 3.16
$3.17-$3.95 9,814 8.5 $ 3.95 -- --
$3.96-$23.69 6,331 9.0 $23.69 -- --
------ ------
26,287 2,624
====== ======
</TABLE>
Metrosplash, Inc. Incentive Stock Plan
In connection with the acquisition of Metrosplash Inc., the Company assumed
the Matchmaker.com Incentive Stock Plan under which incentive stock options to
purchase common stock may be granted to employees, officers and directors and
nonqualified stock options to purchase common stock may be granted to officers,
employees, directors, consultants and advisors. Options granted under the
Incentive Stock Plan generally vest over periods of one to four years from date
of grant and expire ten years from the date of grant. There were 29,601 options
outstanding in this plan as of July 31, 2000 and 2,171 were exercisable. The
weighted average exercise price for these shares was $5.98 at July 31, 2000. The
total weighted-average contractual life of options outstanding at July 31, 2000
was approximately 9.2 years.
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. In addition, an amendment to the Plan
was approved in December 1999 allowing the Board of Directors to grant periodic
option grants from time to time to non-employee directors. 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
X-112
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 270,000 options had been granted at exercise prices ranging
from $2.88 to $57.50 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 recorded deferred compensation for the difference between
the grant price and the estimated fair value of certain of the Company's stock
options granted in connection with acquisitions, in accordance with Statement of
Financial Accounting Standards Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation". The deferred compensation 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 years ended
July 31, 2000, 1999 and 1998 was approximately $75,000, $71,000, and $46,000
respectively.
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, 2000,
1999 and 1998 would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------------------ ------------------------------
NET INCOME DILUTED INCOME NET INCOME DILUTED INCOME
(LOSS) (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Year ended July 31, 2000.......... $ 21,005 $ 0.19 $ (98,432) $(0.94)
Year ended July 31, 1999.......... $(52,082) $(0.59) $(133,617) $(1.51)
Year ended July 31, 1998.......... $(28,314) $(0.44) $ (35,449) $(0.55)
</TABLE>
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 2000, 1999 and 1998; volatility of 96% for 2000, 115% for 1999
and 100% for 1998; dividend yield of 0% for 2000, 1999 and 1998; weighted
average risk-free interest rate of 6.0% in 2000, 6.0% in 1999 and 5.5% in 1998.
X-113
<PAGE> 331
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average grant date fair values of options granted in 2000, 1999 and
1998 were $30.58, $8.24 and $2.44, respectively.
8. INCOME TAXES
The provision for income taxes reflected in the consolidated statements of
operation consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------
2000 1999 1998
-------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $29,553 $-- $ --
State................................................. 8,112 -- --
-------- ---- ----
37,665 -- --
Deferred:
Federal............................................... 60,007 138 --
State................................................. 16,474 -- --
-------- ---- ----
76,481 138 --
-------- ---- ----
$114,146 $138 $ --
======== ==== ====
</TABLE>
Substantially all of the Company's current tax liability is offset by the
tax benefit of employee stock options.
The actual tax expense for 2000, 1999 and 1998 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,
-------------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed expected tax expense (benefit)............ $ 45,951 $(17,660) $(9,626)
State income taxes, net of federal benefit......... 16,227 -- --
Nondeductible amounts and other differences:
In process research and development.............. -- -- 5,875
Goodwill and other intangible asset
amortization.................................. 45,581 16,881 2,301
Tax on conversion of S Corporation to C
Corporation................................... -- 138 --
S Corporation earnings not taxed................. -- -- (43)
Other............................................ 420 91 85
Change in valuation allowance for deferred taxes
allocated to income tax expense.................. 5,967 688 1,408
-------- -------- -------
$114,146 $ 138 $ --
======== ======== =======
</TABLE>
X-114
<PAGE> 332
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 2000 and 1999 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,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis of developed technology............... $ 8,443 $ 5,259
Financial basis in excess of income tax basis of
available-for-sale securities.......................... 20,893 12,582
Financial basis in excess of income tax basis of gain on
Lycos Europe........................................... 80,328 --
-------- --------
Total deferred liabilities.................................. 109,664 17,841
-------- --------
Deferred tax assets:
Deferred Revenue.......................................... 422 2,086
Reserves.................................................. 7,028 4,977
Tax in excess of book basis for differences in equity
investments............................................ (2,380) (2,410)
Net operating losses and credit carryforwards............. 87,788 57,050
Basis difference in equity loss........................... 6,130 --
Other..................................................... 1,846 2,501
-------- --------
Total gross deferred tax assets............................. 100,834 64,204
Less valuation allowance.................................... (67,425) (46,501)
-------- --------
Net deferred tax asset...................................... 33,409 17,703
-------- --------
Net deferred income tax liability........................... $ 76,255 $ 138
======== ========
</TABLE>
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 $67.4 million and $46.5 million for July 31, 2000 and
1999 respectively, have been established for deferred tax assets.
At July 31, 2000, the Company had approximately $230.6 million 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, 2000,
$29.8 million of the Company's deferred tax assets and the valuation allowance
pertain 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.
The deferred tax assets and related valuation allowance of approximately $37.1
million relate to certain operating loss carryforwards resulting from the
exercise of employee stock options,
X-115
<PAGE> 333
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 expense.
The Company's deferred tax liability relates solely to the difference in
basis of acquired assets as well as the tax effects of unrealized gains of
available-for-sale securities and the tax effects of the gain of the Lycos
Europe investment. 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, Lycos, 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 $1.25 million. 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.
During 2000, the Company entered into certain agreements in connection with
its joint ventures whereby the Company licensed certain of its technology and
tradenames to its joint venture partners. For the year ended July 31, 2000 the
company recognized advertising revenue of $417,000, $38,000 and $1,944,000 from
license agreements with Lycos Bertelsmann, Lycos Japan KK and Lycos Canada,
respectively. For the year ended July 31, 2000 the company recognized electronic
commerce revenue of $2,083,000, $188,000 and $1,944,000 from license agreements
with Lycos Bertelsmann, Lycos Japan KK and Lycos Canada, respectively.
10. LITIGATION
In November 1999 and July 2000, Fleming W. Reynolds, Sr., Trustee of AIWF
Trust, a former shareholder of WiseWire Corporation, filed related lawsuits 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 these lawsuits, subsequently consolidated,
Reynolds 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
X-116
<PAGE> 334
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock in Lycos common stock, which amounts to approximately 748,000
shares of Lycos common stock. Lycos believes that the allegations in these
complaints are without merit and intends to contest them vigorously. In August
2000, Reynolds, as Trustee of AIWF Trust, filed a separate lawsuit in Chancery
Court, Sussex County, Delaware, seeking a declaration that AIWF Trust is
entitled to 748,000 shares of Lycos and an injunction of the combination with
Terra Networks until a determination regarding its shares has been made. Lycos
believes that the allegations in this complaint are without merit and intends to
contest them vigorously. Lycos filed a counterclaim for a determination of the
number of shares to which AIWF Trust is entitled. The Chancery Court has set
trial for this matter for October 2000. 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.
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant to
which, among other things, Lycos would have been merged into a subsidiary of USA
Networks. In May 1999, the parties to the proposed transaction terminated the
merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle County,
by shareholders of the Company allegedly on behalf of all common stockholders of
the Company. The complaints request, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and fees, including
attorneys' fees. Although the proposed merger has since been terminated, the
suits have not been dismissed. Lycos believes that the allegations in the
complaints are without merit and intends to contest them vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities law through alleged misrepresentations and omissions relating to the
announced transaction with USA Networks. The consolidated complaint seeks an
unspecified award of damages. Lycos believes that the allegations in the
consolidated complaint are without merit and intends to contest them vigorously.
A motion to dismiss the consolidated complaint is pending.
In July 2000, Lycos filed a lawsuit in Superior Court for Middlesex County,
Commonwealth of Massachusetts, against TJ Motorsports, Inc. (d/b/a Tyler Jet
Motorsports), Burl Outlaw and ISM Motorsports Corp. seeking a declaratory
judgment that Lycos had fulfilled all its contractual obligations in connection
with a sponsorship agreement between Lycos and TJ Motorsports, the owner and
operator of a NASCAR Winston cup race car. Subsequently, in July 2000, Tyler
Jet, L.L.C. (an entity allegedly related to TJ Motorsports) and TeamXtreme
Racing, L.L.C. filed suit against Lycos in United States District Court for the
Eastern District of Texas, Lufkin Division, seeking damages for breach of
contract and fraudulent inducement in connection with the above-referenced
sponsorship agreement and an earlier sponsorship agreement between TeamXtreme
Racing and Lycos. Plaintiffs in the Texas action seek actual damages of $15
million and punitive damages of $100 million. Lycos believes that plaintiffs'
allegations in the Texas action are without merit and intends to contest them
vigorously.
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 such actions will not materially affect the
financial position, results of operation or cash flows of the Company.
X-117
<PAGE> 335
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT (UNAUDITED)
On September 20, 2000, Lycos Europe signed an agreement to acquire all of
the outstanding share capital of Spray Network N.V. ("Spray") in exchange for
the issuance of 84,300,000 shares of Lycos Europe. Spray is a private company
incorporated in the Netherlands and operates an internet new media company that
offers a branded network of media, commerce and communication products and
services throughout Europe. Under the terms of the agreement, Lycos Europe also
may issue up to an additional 10,000,000 shares to certain Spray shareholders in
exchange for cash consideration of 100 million euro. As a result of the
transaction, Spray shareholders will own approximately 29.26% of Lycos Europe's
outstanding share capital and Lycos' equity ownership in Lycos Europe will be
reduced from 43.86% to 31.03% of the total outstanding share capital assuming
the issuance of 94,300,000 shares.
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial information for
the years ended July 31, 2000 and 1999. The operating results for any given
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 2000 QUARTER ENDED FISCAL 1999 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.............. $55,858 $68,575 $78,603 $87,914 $25,139 $31,115 $35,838 $46,448
Gross profit................ 43,860 55,732 64,839 73,720 19,784 24,542 28,561 36,380
Net income (loss)........... (30,919) (30,995) 122,410 (39,490) (3,576) (13,813) (13,220) (21,473)
Net income (loss) per share:
Basic..................... $ (.31) $ (.31) $ 1.11 $ (.36) $ (.04) $ (.16) $ (.15) $ (.22)
Diluted................... $ (.31) $ (.31) $ 1.05 $ (.36) $ (.04) $ (.16) $ (.15) $ (.22)
</TABLE>
X-118
<PAGE> 336
ANNEX A
<PAGE> 337
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
TERRA NETWORKS, S.A.,
LYCOS, INC.
AND
LYCOS VIRGINIA, INC.
DATED AS OF SEPTEMBER 20, 2000
<PAGE> 338
TABLE OF CONTENTS
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I
THE REINCORPORATION MERGER
1.1 The Reincorporation Merger.................................. A-1
1.2 Reincorporation Effective Time.............................. A-1
1.3 Effects of the Reincorporation Merger....................... A-2
1.4 Conversion of Shares........................................ A-2
1.5 Options..................................................... A-2
1.6 Articles of Incorporation................................... A-2
1.7 ByLaws...................................................... A-3
1.8 Tax and Accounting Consequences............................. A-3
1.9 Board of Directors; Management.............................. A-3
ARTICLE II
THE SHARE EXCHANGE
2.1 The Share Exchange.......................................... A-3
2.2 Exchange Effective Time..................................... A-3
2.3 Effects of the Share Exchange............................... A-3
2.4 Exchange of Lycos Virginia Common Stock..................... A-3
2.5 Terra Capital Stock......................................... A-4
2.6 Options..................................................... A-4
2.7 Tax and Accounting Consequences............................. A-5
2.8 Articles of Incorporation................................... A-5
ARTICLE III
THE EXCHANGE OF SHARES
3.1 Terra to Make Shares Available.............................. A-5
3.2 Exchange of Shares.......................................... A-5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LYCOS
4.1 Corporate Organization...................................... A-7
4.2 Capitalization.............................................. A-8
4.3 Authority; No Violation..................................... A-9
4.4 Consents and Approvals...................................... A-9
4.5 SEC Reports and Financial Statements........................ A-10
4.6 Broker's Fees............................................... A-11
4.7 Absence of Certain Changes or Events........................ A-11
4.8 Legal Proceedings........................................... A-11
4.9 Taxes and Tax Returns....................................... A-11
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
4.10 Employees................................................... A-12
4.11 Compliance with Applicable Law.............................. A-13
4.12 Certain Contracts........................................... A-13
4.13 Environmental Liability..................................... A-14
4.14 State Takeover Laws......................................... A-14
4.15 Intellectual Property; Proprietary Rights; Employee
Restrictions................................................ A-15
4.16 Insurance................................................... A-16
4.17 Opinions.................................................... A-16
4.18 Lycos Information........................................... A-16
4.19 Lycos Virginia.............................................. A-16
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TERRA
5.1 Corporate Organization...................................... A-17
5.2 Capitalization.............................................. A-17
5.3 Authority; No Violation..................................... A-18
5.4 Consents and Approvals...................................... A-19
5.5 SEC Reports and Financial Statements........................ A-20
5.6 Broker's Fees............................................... A-20
5.7 Absence of Certain Changes or Events........................ A-21
5.8 Legal Proceedings........................................... A-21
5.9 Taxes and Tax Returns....................................... A-21
5.10 Employees................................................... A-22
5.11 Compliance with Applicable Law.............................. A-22
5.12 Certain Contracts........................................... A-22
5.13 Environmental Liability..................................... A-23
5.14 Intellectual Property; Proprietary Rights; Employee
Restrictions................................................ A-23
5.15 Insurance................................................... A-24
5.16 Opinions.................................................... A-24
5.17 Terra Information........................................... A-24
5.18 Telefonica Ownership........................................ A-25
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 Conduct of Businesses Prior to the Effective Time........... A-25
6.2 Lycos Forbearances.......................................... A-25
6.3 Terra Forbearances.......................................... A-26
6.4 Taxes....................................................... A-27
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Regulatory Matters.......................................... A-28
7.2 Access to Information....................................... A-29
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
7.3 Shareholders' and Terra Board Approvals..................... A-29
7.4 Affiliates.................................................. A-30
7.5 Stock Exchange Listing...................................... A-30
7.6 Employee Benefit Plans...................................... A-30
7.7 Indemnification; Directors' and Officers' Insurance......... A-30
7.8 Additional Agreements....................................... A-31
7.9 Advice of Changes........................................... A-31
7.10 Exemption from Liability Under Section 16(b)................ A-31
7.11 Reasonable Best Efforts..................................... A-32
7.12 Acquisition Proposals....................................... A-32
7.13 Board of Directors.......................................... A-32
7.14 Capital Increase............................................ A-33
7.15 Transfer Taxes.............................................. A-33
7.16 Employee Stock Purchase Plan................................ A-33
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligation to Effect the
Reincorporation Merger and the Share Exchange............... A-33
8.2 Conditions to Obligations of Lycos.......................... A-34
8.3 Conditions to Obligations of Terra.......................... A-35
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 Termination................................................. A-35
9.2 Effect of Termination....................................... A-36
9.3 Amendment................................................... A-37
9.4 Extension; Waiver........................................... A-37
ARTICLE X
GENERAL PROVISIONS
10.1 Closing..................................................... A-38
10.2 Nonsurvival of Representations, Warranties and Agreements... A-38
10.3 Expenses.................................................... A-38
10.4 Notices..................................................... A-38
10.5 Interpretation.............................................. A-39
10.6 Counterparts; Effectiveness................................. A-39
10.7 Entire Agreement............................................ A-39
10.8 Governing Law............................................... A-39
10.9 Publicity................................................... A-40
10.10 Assignment; Third Party Beneficiaries....................... A-40
10.11 Submission to Jurisdiction; Waivers......................... A-40
</TABLE>
iii
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
10.12 Enforcement of Agreement.................................... A-40
10.13 Waiver of Jury Trial........................................ A-41
Exhibit 6.5 -- Form of Affiliate Letter Addressed to Terra
</TABLE>
iv
<PAGE> 342
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
SECTION PAGE NO.
--------- --------
<S> <C> <C>
Acquisition Proposal........................................ 7.12 A-32
Agreement................................................... Recitals A-1
Authorized Agent............................................ 10.11(b) A-40
Board Reports............................................... 7.1(b) A-28
CERCLA...................................................... 4.13 A-14
Closing..................................................... 10.1 A-38
Closing Date................................................ 10.1 A-38
Code........................................................ Recitals A-1
Commercial Registry......................................... 2.3 A-3
Confidentiality Agreement................................... 7.2(b) A-29
Depositary.................................................. 3.1 A-5
Depositary Agreement........................................ 2.4 A-3
DGCL........................................................ 1.1 A-1
ERISA....................................................... 4.10(a) A-12
ESPP........................................................ 7.16 A-33
Exchange Act................................................ 4.5(b) A-10
Exchange Agent.............................................. 3.1 A-5
Exchange Effective Time..................................... 2.2 A-3
Exchange Fund............................................... 3.1 A-5
Exchange Ratio.............................................. 2.4 A-3
F-4......................................................... 4.4 A-9
Governmental Entity......................................... 4.4 A-9
HSR Act..................................................... 4.4 A-9
IRS......................................................... 4.9(a) A-11
Liens....................................................... 4.2(b) A-8
Lycos....................................................... Recitals A-1
Lycos 1999 10-K............................................. 4.5(b) A-10
Lycos Benefit Plans......................................... 4.10(a) A-12
Lycos Board................................................. Recitals A-1
Lycos Capital Stock......................................... 4.2(a) A-8
Lycos Common Certificate.................................... 1.4(b) A-2
Lycos Common Stock.......................................... 1.4(a) A-2
Lycos Contract.............................................. 4.12(a) A-13
Lycos Disclosure Schedule................................... 4.1 A-7
Lycos DRIP.................................................. 4.2(a) A-8
Lycos Employees............................................. 7.6(a) A-30
Lycos ERISA Affiliate....................................... 4.10(a) A-12
Lycos ESPP.................................................. 4.2(a) A-8
Lycos Insiders.............................................. 7.10 A-31
Lycos Preferred Stock....................................... 4.2(a) A-8
</TABLE>
v
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<TABLE>
<CAPTION>
SECTION PAGE NO.
--------- --------
<S> <C> <C>
Lycos Rights................................................ 4.2(a) A-8
Lycos SEC Reports........................................... 4.5 A-10
Lycos Stock Plans........................................... 4.2(a) A-8
Lycos Stockholder Approval.................................. 4.3(a) A-9
Lycos Stockholder Meeting................................... 7.3(a) A-29
Lycos Virginia.............................................. Recitals A-1
Lycos Virginia Articles..................................... 1.6 A-2
Lycos Virginia By-Laws...................................... 1.7 A-3
Lycos Virginia Certificate.................................. 2.1 A-3
Lycos Virginia Common Certificates.......................... 1.4(b) A-2
Lycos Virginia Common Stock................................. 1.4(a) A-2
Material Adverse Effect..................................... 4.1(a) A-7
New Benefit Plans........................................... 7.6(a) A-30
Nasdaq...................................................... 5.4 A-19
NSEC........................................................ 5.4 A-19
Prospectus.................................................. 5.4 A-19
Proxy Statement............................................. 4.4 A-9
Reincorporation Effective Time.............................. 1.2 A-1
Reincorporation Merger...................................... Recitals A-1
Representatives............................................. 7.12 A-32
Requisite Regulatory Approvals.............................. 8.1(c) A-33
Restraints.................................................. 8.1(e) A-33
SCL......................................................... 2.1 A-3
SCME........................................................ 2.4 A-3
Section 16 Information...................................... 7.10 A-31
Securities Act.............................................. 4.5 A-10
Share Exchange.............................................. Recitals A-1
Shareholder Transfer Tax.................................... 7.15 A-33
Spanish GAAP................................................ 5.5(b) A-20
Subsidiary.................................................. 4.1(a) A-7
Surviving Corporation....................................... 1.1 A-1
Tax......................................................... 4.9(c) A-12
Taxes....................................................... 4.9(c) A-12
Termination Fee............................................. 9.2(b) A-36
Terra....................................................... Recitals A-1
Terra ADSs.................................................. 2.4 A-3
Terra Articles.............................................. 5.1(a) A-17
Terra Average Price......................................... 2.4 A-3
Terra Board................................................. Recitals A-1
Terra By-Laws............................................... 5.1(a) A-17
Terra Capital Stock......................................... 5.2(a) A-17
</TABLE>
vi
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<TABLE>
<CAPTION>
SECTION PAGE NO.
--------- --------
<S> <C> <C>
Terra Common Stock.......................................... 1.4(a) A-2
Terra Contract.............................................. 5.12(a) A-22
Terra Disclosure Schedule................................... ARTICLE V A-17
Terra Employment Benefit Plans.............................. 5.10 A-22
Terra Registration Statement................................ 5.5(b) A-20
Terra Rights................................................ 5.2(a) A-17
Terra Rights Agreement...................................... 1.4(a) A-2
Terra SEC Reports........................................... 5.5 A-20
Terra Shareholder Approval.................................. 5.3(a) A-18
Terra Shares................................................ 5.2(a) A-17
Terra Stock Plans........................................... 5.2(a) A-17
Transfer Tax................................................ 7.15 A-33
VSCA........................................................ Recitals A-1
</TABLE>
vii
<PAGE> 345
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION, dated as of
September 20, 2000 (this "AGREEMENT"), among Terra Networks, S.A., a company
organized under the laws of the Kingdom of Spain ("TERRA"), Lycos, Inc., a
Delaware corporation ("LYCOS") and Lycos Virginia, Inc., a Virginia corporation
and a wholly-owned subsidiary of Lycos ("LYCOS VIRGINIA").
W I T N E S S E T H :
WHEREAS, the Boards of Directors of each of Terra (the "TERRA BOARD"),
Lycos (the "LYCOS BOARD") and Lycos Virginia (the "LYCOS VIRGINIA BOARD") have
approved the strategic business combination transaction provided for herein in
which Lycos will, subject to the terms and conditions set forth herein, merge
with and into Lycos Virginia, with Lycos Virginia surviving such merger (the
"REINCORPORATION MERGER"), which shall be immediately followed by a statutory
share exchange pursuant to the Virginia Stock Corporation Act (the "VSCA") such
that Lycos Virginia will become a wholly-owned subsidiary of Terra (the "SHARE
EXCHANGE" and, together with the Reincorporation Merger, the "REORGANIZATION");
WHEREAS, it is the intent of the parties hereto that, for U.S. federal
income tax purposes, each of the Reincorporation Merger and the Share Exchange
shall constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"), and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Sections 354 and
361 of the Code;
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Share Exchange result in no gain recognition to the shareholders of Lycos
Virginia pursuant to Section 367(a) of the Code;
WHEREAS, Terra and Lycos entered into an Agreement and Plan of
Reorganization, dated as of May 16, 2000 (the "ORIGINAL AGREEMENT"), providing
for the Reorganization on the terms and subject to the conditions set forth
therein;
WHEREAS, Terra and Lycos desire to include Lycos Virginia as a party to the
Original Agreement, and Lycos Virginia desires to become a party thereto; and
WHEREAS, Terra and Lycos desire to amend and restate the Original Agreement
as provided in this Agreement and, upon satisfaction of the condition specified
in Section 10.6, the Original Agreement will be so amended and restated;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE REINCORPORATION MERGER
1.1 The Reincorporation Merger. Subject to the terms and conditions of
this Agreement, in accordance with the General Corporation Law of Delaware (the
"DGCL") and the VSCA, at the Reincorporation Effective Time (as defined in
Section 1.2), Lycos shall merge with and into Lycos Virginia. Lycos Virginia
shall be the surviving corporation (the "SURVIVING CORPORATION") in the
Reincorporation Merger and shall continue its corporate existence under the laws
of the Commonwealth of Virginia. Upon consummation of the Reincorporation
Merger, the separate corporate existence of Lycos shall terminate.
1.2 Reincorporation Effective Time. The Reincorporation Merger shall
become effective in accordance with the Plan of Merger set forth in Annex B
hereto on the Closing Date (as defined in
A-1
<PAGE> 346
Section 10.1) at the time that is specified in the certificate of merger
relating to the Reincorporation Merger issued by the Virginia State Corporation
Commission (the "REINCORPORATION EFFECTIVE TIME").
1.3 Effects of the Reincorporation Merger. At and after the
Reincorporation Effective Time, the Reincorporation Merger shall have the
effects set forth in the DGCL and the VSCA.
1.4 Conversion of Shares. (a) At the Reincorporation Effective Time, by
virtue of the Reincorporation Merger and without any action on the part of
Lycos, Lycos Virginia or any holder of common stock, par value $0.01 per share,
of Lycos ("LYCOS COMMON STOCK"), (i) each share of Lycos Common Stock issued and
outstanding immediately prior to the Reincorporation Effective Time shall be
converted into one share of common stock, par value $0.01 per share, of Lycos
Virginia ("LYCOS VIRGINIA COMMON STOCK"), (ii) each share of Lycos Common Stock
held in the treasury of Lycos immediately prior to the Reincorporation Effective
Time shall be cancelled and (iii) each share of Lycos Virginia Common Stock
issued and outstanding immediately prior to the Reincorporation Effective Time
shall be cancelled.
(b) All of the shares of Lycos Common Stock converted into shares of Lycos
Virginia Common Stock pursuant to Section 1.4(a) shall no longer be outstanding
and shall automatically be canceled and shall cease to exist as of the
Reincorporation Effective Time, and each certificate previously representing any
such shares ("LYCOS COMMON CERTIFICATE") shall thereafter represent, without the
requirement of any exchange thereof, that number of shares of Lycos Virginia
Common Stock into which such shares of Lycos Common Stock represented by such
Lycos Common Certificate have been converted pursuant to Section 1.4(a) (such
certificates following the Reincorporation Merger, the "LYCOS VIRGINIA COMMON
CERTIFICATES").
1.5 Options. Lycos and Lycos Virginia shall take all requisite action
such that, at the Reincorporation Effective Time, each option granted by Lycos
to purchase shares of Lycos Common Stock that is outstanding and unexercised
immediately prior thereto shall cease to represent a right to acquire shares of
Lycos Common Stock and shall be converted automatically into an option to
purchase a number of shares of Lycos Virginia Common Stock equal to the number
of shares of Lycos Common Stock subject to such option immediately prior to the
Reincorporation Effective Time at an exercise price per share of Lycos Virginia
Common Stock equal to the exercise price per share of Lycos Common Stock in
effect immediately prior to the Reincorporation Effective Time and otherwise
subject to the terms of the Lycos Stock Plans (as defined in Section 4.2) under
which such options were issued and the agreements evidencing grants thereunder
(including accelerated vesting provisions under such agreements evidencing
grants thereunder or under any employment agreements between employees of Lycos
and Lycos). The adjustment provided herein with respect to any options that are
"incentive stock options" (as defined in Section 422 of the Code) shall be and
is intended to be effected in a manner which is consistent with Section 424(a)
of the Code. The duration and other terms of the new option shall be the same as
the original option except that all references to Lycos shall be deemed to be
references to Lycos Virginia. Notwithstanding anything to the contrary herein,
each option granted by Lycos to a non-employee director prior to the
Reincorporation Effective Time shall be fully vested, to the extent not already
vested, as of the Reincorporation Effective Time.
1.6 Articles of Incorporation. Subject to the terms and conditions of
this Agreement, at the Reincorporation Effective Time, the Articles of
Incorporation of Lycos Virginia (the "LYCOS VIRGINIA ARTICLES") in effect
immediately prior to the Reincorporation Merger shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable law (it being understood and agreed that the Lycos
Virginia Articles shall be substantially consistent with the Restated
Certificate of Incorporation of Lycos as in effect immediately prior to the
Reincorporation Effective Time with such changes as are (a) required by the VSCA
and (b) otherwise as proposed by Terra and not reasonably objected to by Lycos).
The Lycos Virginia Articles shall provide that authorization of a share exchange
pursuant to Section 13.1-718 of the
A-2
<PAGE> 347
VSCA shall require the approval of a majority of all of the votes entitled to be
cast on such matter by holders of Lycos Virginia Common Stock.
1.7 ByLaws. Subject to the terms and conditions of this Agreement, at the
Reincorporation Effective Time, the Bylaws of Lycos Virginia (the "LYCOS
VIRGINIA BY-LAWS") in effect immediately prior to the Reincorporation Merger
shall be the Bylaws of the Surviving Corporation until thereafter amended in
accordance with applicable law (it being understood and agreed that the Lycos
Virginia By-Laws shall be substantially consistent with the Restated By-Laws of
Lycos as in effect immediately prior to the Reincorporation Effective Time with
such changes as are (a) required by the VSCA and (b) otherwise as proposed by
Terra and not reasonably objected to by Lycos).
1.8 Tax and Accounting Consequences. It is intended that the
Reincorporation Merger shall constitute a "reorganization" within the meaning of
Section 368(a) of the Code and that this Agreement shall constitute a "plan of
reorganization" for the purposes of Sections 354 and 361 of the Code.
1.9 Board of Directors; Management. The directors and officers of Lycos
immediately prior to the Reincorporation Effective Time shall be the directors
and officers of Lycos Virginia, each to hold office in accordance with the Lycos
Virginia Articles until their respective successors are duly elected or
appointed and qualified.
ARTICLE II
THE SHARE EXCHANGE
2.1 The Share Exchange. Subject to the terms and conditions of this
Agreement, in accordance with the VSCA and the Spanish Corporation Law of 1989
(Texto Refundido de la Ley de Sociedades Anonimas) (the "SCL"), at the Exchange
Effective Time, pursuant to the provisions of Section 13.1-721 of the VSCA,
Lycos Virginia shall become a wholly owned subsidiary of Terra through the
exchange of each outstanding share of Lycos Virginia Common Stock for a number
of Terra Shares (as defined in Section 5.2) (such shares to be issued in the
form of Terra ADSs (as defined in Section 2.4) except as otherwise provided in
Section 2.4) determined in accordance with Section 2.4(a). The separate
corporate existence of each of Lycos Virginia and Terra shall continue following
the Share Exchange.
2.2 Exchange Effective Time. The Share Exchange shall become effective
(the "EXCHANGE EFFECTIVE TIME") in accordance with the Plan of Share Exchange
set forth in Annex A hereto on the Closing Date at the time that is specified in
the certificate of share exchange relating to the Share Exchange issued by the
Virginia State Corporation Commission and that Terra receives the Lycos Virginia
Certificate in exchange for the Terra Shares being issued pursuant to Section
2.3(a). As used in this Agreement, "LYCOS VIRGINIA CERTIFICATE" shall mean the
certificate representing the shares of Lycos Virginia Common Stock being
received by Terra pursuant to the terms hereof.
2.3 Effects of the Share Exchange. At and after the Exchange Effective
Time, the Share Exchange shall have the effects set forth in the VSCA. The Share
Exchange shall be effected in accordance with Articles 153(a) and 155 of the SCL
by the Terra Board's execution of the approval of the shareholders of Terra to
increase the share capital of Terra against a contribution in kind (Aumento con
aportaciones no dinerarias) and shall be registered pursuant to the Deed of
Capital Increase with the Commercial Registry (Registro Mercantil) for the
Province of Barcelona (the "COMMERCIAL REGISTRY"). The Deed of Capital Increase
shall be delivered to the Settlement and Clearing System, for the new shares to
be registered in the name of the Depositary (as defined below), and to the
Spanish Stock Exchange, for the admission authorization of the Terra Shares to
be listed.
2.4 Exchange of Lycos Virginia Common Stock. Subject to Section 3.2(e),
at the Exchange Effective Time, by virtue of the Share Exchange and without any
action on the part of Lycos Virginia
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<PAGE> 348
or any holder of Lycos Virginia Common Stock, each share of Lycos Virginia
Common Stock issued and outstanding immediately prior to the Exchange Effective
Time shall be exchanged for that number of shares of Terra Capital Stock (as
defined in Section 5.2) determined by dividing (i) $97.55 by (ii) the average
closing price (rounded to the nearest thousandth of a dollar, or if there shall
not be a nearest thousandth, the next higher thousandth) of Terra Shares (the
"TERRA AVERAGE PRICE") on the Continuous Market Exchange (Systema de
Interconexion Bursatil-Mercado Continuo) (the "SCME") for the ten full SCME
trading days ending on the tenth SCME trading day prior to the Closing Date
(excluding the Closing Date), each closing price expressed in U.S. dollars using
the noon buying rate of Euros for U.S. dollars as reported by the U.S. Federal
Reserve as of each day on which such average closing price is measured (such
quotient, as it may be adjusted as provided herein, the "EXCHANGE RATIO");
provided, however, that if the Terra Average Price is equal to or greater than
$68.06, the Exchange Ratio shall be 1.433, and if the Terra Average Price is
equal to or less than $45.37, the Exchange Ratio shall be 2.150. The Terra
Shares to be issued in exchange for the shares of Lycos Virginia Common Stock
exchanged hereunder shall be registered in the name of the Depositary by the
Settlement and Clearing System and then delivered (x) in the form of American
depositary shares representing Terra Shares ("TERRA ADSS"), and such Terra ADSs
shall be issued in accordance with the Depositary Agreement, dated as of
November 15, 1999, by and between Terra, Citibank, N.A., as depositary, and the
holders of Terra ADSs (as such agreement may be amended to deposit the Terra
Shares being issued pursuant hereto and to deliver the Terra ADSs being
delivered hereto) or a depositary agreement to be entered into after the date of
this Agreement in form and substance not reasonably objected to by Lycos (the
"DEPOSITARY AGREEMENT") or (y) if and to the extent elected by any holder in the
manner provided in Section 3.2(b), in the form of Terra Shares, in account entry
form, rather than Terra ADSs. Following the Exchange Effective Time, each Lycos
Virginia Common Certificate exchanged for Terra Shares pursuant to this Section
2.4 shall cease to represent shares of Lycos Virginia Common Stock and shall
thereafter represent only the right to receive (i) a receipt issued in
accordance with the Depositary Agreement representing the number of whole Terra
ADSs or such number of Terra Shares in account entry form and (ii) cash in lieu
of fractional Terra ADSs or Terra Shares, in each case, into which the shares of
Lycos Virginia Common Stock represented by such Lycos Virginia Common
Certificate have been converted pursuant to this Section 2.4 and Section 3.2(e),
respectively. Certificates previously representing shares of Lycos Virginia
Common Stock shall be exchanged for receipts representing whole Terra ADSs or
Terra Shares in account entry form and cash in lieu of fractional Terra ADSs
Terra Shares issued and paid in consideration therefor upon the surrender of
such Lycos Virginia Common Certificates in accordance with Section 3.2, without
any interest thereon. If, prior to the Exchange Effective Time, the outstanding
shares of Terra Capital Stock, Lycos Common Stock or Lycos Virginia Common Stock
shall have been changed into or exchanged for a different number or kind of
shares or securities as a result of a merger, consolidation or other business
combination, of a reorganization, recapitalization or reclassification, or of a
stock dividend, stock split, reverse stock split or other similar change in
capitalization, an appropriate and proportionate adjustment shall be made to the
Exchange Ratio to provide to the stockholders of Lycos the same economic effect,
including any premiums, as contemplated by this Agreement prior to such event.
2.5 Terra Capital Stock. At and after the Effective Time, each share of
Terra Capital Stock issued and outstanding immediately prior to the Closing Date
shall remain an issued and outstanding share of Terra Capital Stock and shall
not be affected by the Share Exchange.
2.6 Options. (a) Lycos and Lycos Virginia shall take all requisite action
such that, immediately prior to the Exchange Effective Time, each option granted
by Lycos Virginia to purchase shares of Lycos Virginia Common Stock that is
outstanding and unexercised (which options shall consist solely of options
issued pursuant to Section 1.5 hereof) shall be transferred to Terra and Terra
shall issue as of the Exchange Effective Time, in exchange therefor, an option
to purchase Terra ADSs in an amount and at an exercise price determined as
provided below (and otherwise subject to terms substantially identical to the
Lycos Stock Plans and the agreements evidencing grants thereunder).
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(b) The number of Terra ADSs to be subject to the new option shall be equal
to the product of the number of shares of Lycos Virginia Common Stock subject to
the original option and the Exchange Ratio, provided that any fractional Terra
ADS resulting from such multiplication shall be rounded to the nearest whole
share.
(c) The exercise price per Terra ADS under the new option shall be equal
to the exercise price per share of Lycos Virginia Common Stock under the
original option divided by the Exchange Ratio, provided that such exercise price
shall be rounded to the nearest whole cent.
(d) The adjustment provided herein with respect to any options that are
"incentive stock options" (as defined in Section 422 of the Code) shall be and
is intended to be effected in a manner that is consistent with Section 424(a) of
the Code. The duration and other terms of the new option shall be the same as
the original option, except that all references to Lycos or Lycos Virginia shall
be deemed to be references to Terra.
2.7 Tax and Accounting Consequences. It is intended that the Share
Exchange shall constitute a "reorganization" within the meaning of Section
368(a) of the Code and not result in gain recognition to the shareholders of
Lycos Virginia pursuant to Section 367(a) of the Code, and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Sections 354 and
361 of the Code.
2.8 Articles of Incorporation. Lycos Virginia and Terra, as the sole
shareholder of Lycos Virginia following the Exchange Effective Time, shall take
such actions required under the VSCA to amend the Lycos Virginia Articles in
effect immediately prior to the Exchange Effective Time to change the name of
Lycos Virginia to "Lycos, Inc." immediately following the Exchange Effective
Time.
ARTICLE III
EXCHANGE OF SHARES
3.1 Terra to Make Shares Available. Promptly following the Exchange
Effective Time, Terra shall provide (i) Citibank, N.A., as depositary (or to
such other depositary as Terra may select and which shall not be reasonably
objected to by Lycos) (the "DEPOSITARY"), the Terra Shares being issued in the
form of Terra ADSs in accordance with this Article III and cash in lieu of any
fractional Terra Shares, and the Depositary shall deposit with a bank or trust
company appointed by Lycos (which shall pay all fees of such bank or trust
company) and not reasonably objected to by Terra (the "EXCHANGE AGENT"), for the
benefit of the holders of Lycos Virginia Common Certificates, for exchange in
accordance with this Article III, receipts representing the Terra ADSs, and cash
in lieu of any fractional Terra ADSs and (ii) to the Exchange Agent, the Terra
Shares being issued in account entry form in accordance with this Article III
and cash in lieu of any fractional Terra Shares, for the benefit of the holders
of Lycos Virginia Common Certificates, for exchange in accordance with this
Article III, the Terra Shares in account entry form and cash in lieu of any
fractional Terra Shares (such cash, receipts for Terra ADSs and Terra Shares in
account entry form, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "EXCHANGE FUND"), to be issued
pursuant to Section 2.3 and paid pursuant to Section 3.2(a) in exchange for
outstanding shares of Lycos Virginia Common Stock.
3.2 Exchange of Shares. (a) As soon as practicable after the Exchange
Effective Time, and in no event later than five business days thereafter, the
Exchange Agent shall mail to each holder of record of one or more Lycos Virginia
Common Certificates (i) a letter of transmittal, which shall specify that
delivery shall be effected, and risk of loss and title to the Lycos Virginia
Common Certificates shall pass, only upon delivery of the Lycos Virginia Common
Certificates to the
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Exchange Agent), and which letter of transmittal shall include a form of
election by which each such holder may elect to receive all or any part of the
Terra ADSs to which such holder is entitled in the form of Terra Shares in
account entry form, rather than in the form of Terra ADSs (such Terra Shares or
Terra ADSs to be received by a holder pursuant to this Agreement being referred
to as "Terra Stock") and (ii) instructions for use in effecting the surrender of
the Lycos Virginia Common Certificates in exchange for receipts representing the
Terra ADSs or Terra Shares in account entry form and any cash in lieu of
fractional shares for which the shares of Lycos Virginia Common Stock
represented by such Lycos Virginia Common Certificate or Lycos Virginia Common
Certificates shall have been exchanged pursuant to this Agreement. Upon proper
surrender of a Lycos Virginia Common Certificate or Lycos Virginia Common
Certificates for exchange and cancellation to the Exchange Agent, together with
such properly completed letter of transmittal, duly executed, the holder of such
Lycos Virginia Common Certificate or Lycos Virginia Common Certificates shall be
entitled to receive in exchange therefor, as applicable, (i) a receipt
representing that number of whole Terra ADSs or Terra Shares in account entry
form to which such holder of Lycos Virginia Common Stock shall have become
entitled pursuant to the provisions of Article II and (ii) a check representing
the amount of any cash in lieu of fractional shares that such holder has the
right to receive in respect of the Lycos Virginia Common Certificate or Lycos
Virginia Common Certificates surrendered pursuant to the provisions of this
Article III. No interest will be paid or accrued on any cash in lieu of
fractional shares or on any unpaid dividends and distributions payable to
holders of Certificates. Upon proper surrender of a Lycos Virginia Common
Certificate or Lycos Virginia Common Certificates for exchange and cancellation
to the Exchange Agent, the Exchange Agent shall contribute such certificates to
Terra for Terra's Board of Directors to execute the Capital Increase against
such contribution in kind. The Deed of Capital Increase shall be registered
pursuant to the Deed of Capital Increase with the Commercial Registry and
delivered to the Settlement and Clearing System, for the new shares to be
registered in the name of the Exchange Agent who will then issue Terra Stock.
(b) No dividends or other distributions declared with respect to Terra
Stock shall be paid to the holder of any unsurrendered Lycos Virginia Common
Certificate until the holder thereof shall surrender such Lycos Virginia Common
Certificate in accordance with this Article III. After the surrender of a Lycos
Virginia Common Certificate in accordance with this Article III, the record
holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, that theretofore had become payable
with respect to Terra Stock represented by such Certificate.
(c) If any receipt representing Terra ADSs or Terra Shares in account entry
form are to be issued in a name other than that in which the Lycos Virginia
Common Certificate or Lycos Virginia Common Certificates surrendered in exchange
therefor is or are registered, it shall be a condition of the issuance thereof
that the Lycos Virginia Common Certificate or Lycos Virginia Common Certificates
so surrendered shall be properly endorsed (or accompanied by an appropriate
instrument of transfer) and otherwise in proper form for transfer, and that the
person requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the issuance of a receipt
representing Terra ADSs or Terra Shares in account entry form in any name other
than that of the registered holder of the Lycos Virginia Common Certificate or
Lycos Virginia Common Certificates surrendered, or required for any other
reason, or shall establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable.
(d) After the Exchange Effective Time, there shall be no transfers on the
stock transfer books of Lycos Virginia of the shares of Lycos Virginia Common
Stock that were issued and outstanding immediately prior to the Exchange
Effective Time. If, after the Exchange Effective Time, Lycos Virginia Common
Certificates are presented for transfer to the Exchange Agent, they shall be
cancelled and exchanged for receipts representing Terra ADSs or Terra Shares in
account entry form as provided in this Article III.
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(e) Notwithstanding anything to the contrary contained herein, no receipts
or scrip representing fractional Terra ADS or Terra Shares in account entry form
shall be issued upon the surrender for exchange of Lycos Virginia Common
Certificates, no dividend or distribution with respect to Terra Stock shall be
payable on or with respect to any fractional share, and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a shareholder of Terra. In lieu of the issuance of any such fractional share,
Terra shall pay to each former shareholder of Lycos Virginia who otherwise would
be entitled to receive such fractional share an amount in cash determined by
multiplying (i) the Terra Average Price by (ii) the fraction of a Terra ADS or
Terra Share (rounded to the nearest thousandth when expressed in decimal form)
to which such holder would otherwise be entitled to receive pursuant to Section
2.3.
(f) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of Lycos Virginia for 12 months after the Exchange Effective Time
shall be paid to Terra. Any former shareholders of Lycos Virginia who have not
theretofore complied with this Article III shall thereafter look only to Terra
for payment of the Terra Stock, cash in lieu of any fractional shares and any
unpaid dividends and distributions on the Terra Stock deliverable in respect of
each share of Lycos Virginia Common Stock, as the case may be, such shareholder
holds as determined pursuant to this Agreement, in each case, without any
interest thereon. Notwithstanding the foregoing, none of Lycos, Lycos Virginia,
Terra, the Exchange Agent or any other person shall be liable to any former
holder of shares of Lycos Virginia Common Stock for any amount delivered in good
faith to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(g) In the event any Lycos Virginia Common Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Lycos Virginia Common Certificate to be lost, stolen or
destroyed and, if reasonably required by Terra, the posting by such person of a
bond in such amount as Terra may determine is reasonably necessary as indemnity
against any claim that may be made against it with respect to such Lycos
Virginia Common Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Lycos Virginia Common Certificate the receipt
representing Terra ADSs or Terra Shares in account entry form as provided
pursuant to this Agreement and any cash in lieu of fractional shares deliverable
in respect thereof pursuant to this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LYCOS
Except as disclosed in the Lycos disclosure schedule delivered to Terra on
May 16, 2000 (the "LYCOS DISCLOSURE SCHEDULE"), Lycos hereby represents and
warrants to Terra, as of May 16, 2000, except for the representations and
warranties made in Section 4.19 which are made as of the Closing Date, as
follows:
4.1 Corporate Organization. (a) Lycos is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Lycos has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not and would not reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect (as defined below) on Lycos. As used
in this Agreement, the term "MATERIAL ADVERSE EFFECT"means, with respect to
Lycos, Terra or the Surviving Corporation, as the case may be, a material
adverse effect on (i) the business, results of operations or financial condition
of such party and its Subsidiaries taken as a whole or (ii) the ability of such
party to timely consummate the transactions contemplated hereby; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of any change, event, occurrence, condition or effect relating to (a) the United
States, Spanish or global economy or securities markets
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in general, (b) the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby or the announcement thereof or (c) such
party's industry in general and not specifically relating to Lycos or Terra, as
the case may be, or its respective Subsidiaries (as defined below). As used in
this Agreement, the word "SUBSIDIARY," when used with respect to any party,
means any corporation, partnership, limited liability company or other
organization, whether incorporated or unincorporated, which is consolidated with
such party for financial reporting purposes, and shall include, with respect to
Lycos, Lycos Virginia. True and complete copies of the Lycos Certificate and the
Lycos By-Laws, in each case, as in effect as of May 16, 2000, have previously
been made available by Lycos to Terra.
(b) Each Lycos Subsidiary (i) is duly organized and validly existing under
the laws of its jurisdiction of organization, (ii) is duly qualified to do
business and in good standing in all jurisdictions (whether federal, state,
local or foreign) where its ownership or leasing of property or the conduct of
its business requires it to be so qualified and in which the failure to be so
qualified would have a Material Adverse Effect on Lycos and (iii) has all
requisite corporate power and authority to own or lease its properties and
assets and to carry on its business as now conducted.
4.2 Capitalization. (a) The authorized capital stock of Lycos consists of
(i) 300,000,000 shares of Lycos Common Stock, of which, as of May 15, 2000,
112,192,815 shares were issued and outstanding and 2,024,799 shares were held in
treasury, and (ii) 5,000,000 shares of preferred stock, par value $0.01 per
share (the "LYCOS PREFERRED STOCK" and together with the Lycos Common Stock, the
"LYCOS CAPITAL STOCK"), of which no shares are issued or outstanding as of May
16, 2000. All of the issued and outstanding shares of Lycos Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof. As of May 16, 2000, except as described in this Section 4.2(a) and
except pursuant to the terms of options issued pursuant to the Lycos Stock Plans
(as defined below), Lycos does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Lycos Capital
Stock or any other equity securities of Lycos or any securities representing the
right to purchase or otherwise receive any shares of Lycos Capital Stock
(collectively, the "LYCOS RIGHTS"). As of May 16, 2000, Lycos had outstanding
warrants providing for the issuance of 18,000 shares of Lycos Common Stock. As
of May 15, 2000, no shares of Lycos Capital Stock were reserved for issuance,
except for 913,595 shares of Lycos Common Stock reserved for issuance in
connection with the Lycos, Inc. 1996 Employee Stock Purchase Plan (the "LYCOS
ESPP") and 14,514,427 shares of Lycos Common Stock reserved for issuance upon
the exercise of stock options pursuant to the Lycos, Inc. 1995 Stock Option
Plan, Lycos, Inc. 1996 Stock Option Plan, Lycos, Inc. 2000 Stock Option Plan,
Lycos, Inc. 1996 Non-Employee Director Stock Option Plan, 1995 Tripod Stock
Option Plan, 1995 WiseWire Stock Option Plan, 1996 WiseWire Stock Option Plan or
1995 WhoWhere? Stock Option Plan (the "LYCOS STOCK PLANS"). From May 15, 2000 to
and including May 16, 2000, Lycos has not issued any shares of its capital stock
or any securities convertible into or exercisable or exchangeable for any shares
of its capital stock. As of May 16, 2000, there are no outstanding bonds,
debentures, notes or other indebtedness or other securities of Lycos having the
right to vote (or convertible into, or exchangeable or exercisable for,
securities having the right to vote) on any matters on which stockholders of
Lycos may vote. There are no voting, sale, transfer or other similar agreements
to which Lycos is a party with respect to the Lycos Capital Stock or any other
securities of Lycos that are convertible into or exchangeable or exercisable for
shares of the Lycos Capital Stock. In any event, the maximum number of shares of
Lycos Virginia Common Stock that will be outstanding (on a fully diluted basis)
at the Exchange Effective Time shall be not more than 158,568,703.
(b) As of May 16, 2000, Lycos owns, directly or indirectly, all of the
issued and outstanding shares of capital stock and other equity ownership
interests of each of the Lycos Subsidiaries, free and clear of any liens,
pledges, charges, encumbrances and security interests whatsoever ("LIENS"), and
all of such shares and equity ownership interests are duly authorized and
validly issued and are
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fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. No Lycos Subsidiary has or is
bound by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of capital stock or any other equity security of such Subsidiary or any
securities representing the right to purchase or otherwise receive any shares of
capital stock or any other equity security of such Subsidiary. There are no
voting, sale, transfer or other similar agreements to which any Lycos Subsidiary
is a party with respect to its capital stock or any other securities of it that
are convertible or exchangeable into or exercisable for shares of the capital
stock of any Lycos Subsidiary. Section 4.2(b) of the Lycos Disclosure Schedule
sets forth a list as of May 16, 2000 of all material investments of Lycos in
corporations, joint ventures, partnerships, limited liability companies and
other entities other than its Subsidiaries.
4.3 Authority; No Violation. (a) Lycos has full corporate power and
authority to execute and deliver this Agreement and upon receipt of the Lycos
Stockholder Approval (as defined below) will have full corporate power and
authority to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved by unanimous vote of the Board of
Directors of Lycos. The Board of Directors of Lycos has directed that this
Agreement and the transactions contemplated hereby be submitted to Lycos's
stockholders for adoption at a special meeting of such stockholders and, except
for the adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Lycos Common Stock (the "LYCOS STOCKHOLDER
APPROVAL"), no other corporate proceedings on the part of Lycos are necessary to
approve this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Lycos and
(assuming due authorization, execution and delivery by Terra) constitutes a
valid and binding obligation of Lycos, enforceable against Lycos in accordance
with its terms.
(b) Neither the execution and delivery of this Agreement by Lycos nor the
consummation by Lycos of the transactions contemplated hereby, nor compliance by
Lycos with any of the terms or provisions hereof, will (i) violate any provision
of the Lycos Certificate or Lycos By-Laws or any provision of any comparable
organizational documents of any Lycos Subsidiary (ii) assuming that the consents
and approvals referred to in Section 4.4 are duly obtained, (x) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to Lycos, any of its Subsidiaries or any of their
respective properties or assets or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of Lycos or any of its Subsidiaries under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Lycos or any of its
Subsidiaries is a party, or by which they or any of their respective properties
or assets may be bound or affected, except (in the case of clause (ii) above)
for such violations, conflicts, breaches or defaults which, either individually
or in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on Lycos.
4.4 Consents and Approvals. Except for (i) the filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT")
and the expiration or termination of any applicable waiting period and the
filing of a notification with the European Commission under Council Regulation
(EEC) No. 4064/89 or similar antitrust filings or notifications in other
jurisdictions, as applicable, (ii) the filing with the Securities and Exchange
Commission (the "SEC") of the proxy statement (the "PROXY STATEMENT") in
definitive form relating to the special meeting of Lycos's stockholders to be
held in connection with this Agreement and the transactions contemplated hereby
and the filing and declaration of effectiveness of the registration statement of
Terra on Form F-4 (the "F-4") in which the Proxy Statement will be included as a
prospectus of Terra, and any filings
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required under applicable state securities or "blue sky" laws, (iii) the filing
of the certificate of merger and other appropriate merger documents as required
by the DGCL and the filing of the articles of merger and articles of share
exchange and other appropriate merger and share exchange documents required by
the VSCA and the issuance by the Virginia State Corporation Commission of the
certificate of merger and certificate of share exchange pursuant to the VSCA and
(iv) the Lycos Stockholder Approval, no consents or approvals of or filings or
registrations with any court, administrative agency or commission or other
governmental or regulatory authority or instrumentality (each a "GOVERNMENTAL
ENTITY"), or of or with any third party, are necessary in connection with the
execution and delivery by Lycos of this Agreement and the consummation by Lycos
and Lycos Virginia of the transactions contemplated hereby and compliance by
Lycos with any of the provisions hereof other than those the failure of which to
obtain or make have not had and would not reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect on Lycos.
4.5 SEC Reports and Financial Statements. (a) Lycos and its subsidiaries
have filed with the SEC all forms, reports, schedules, registration statements
and definitive proxy statements required to be filed by them with the SEC since
August 1, 1998 (as amended since the time of their filing and prior to May 16,
2000, collectively, the "LYCOS SEC REPORTS") and has heretofore made available
to Terra complete and correct copies of all such forms, reports, schedules,
registration statements, and proxy statements. As of their respective dates, the
Lycos SEC Reports complied in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended, including the rules and regulations
of the SEC promulgated thereunder (the "EXCHANGE ACT"), or the Securities Act of
1933, as amended, including the rules and regulations of the SEC promulgated
thereunder (the "SECURITIES ACT") applicable, as the case may be, to such Lycos
SEC Reports, and none of the Lycos SEC Reports contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(b) Lycos has previously made available to Terra copies of the
consolidated balance sheet of Lycos and its Subsidiaries as of July 31, for each
of the fiscal years 1997, 1998 and 1999, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the fiscal years
1997 through 1999, inclusive, as reported in Lycos's Annual Report on Form 10-K
for the fiscal year ended July 31, 1999 (the "LYCOS 1999 10-K") filed with the
SEC under the Exchange Act in each case accompanied by the audit report of KPMG
LLP, independent public accountants with respect to Lycos. The July 31, 1999
consolidated balance sheet of Lycos (including the related notes, where
applicable) included in the Lycos 1999 10-K fairly presents in all material
respects the consolidated financial position of Lycos and its Subsidiaries as of
the date thereof, and the other financial statements referred to in this Section
4.5(b) (including the related notes, where applicable) fairly present in all
material respects the results of the consolidated operations and changes in
stockholders' equity and cash flows of Lycos and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto; and each of
such statements (including the related notes, where applicable) has been
prepared in all material respects in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP") consistently applied during the periods
involved, except, in each case, as indicated in such statements or in the notes
thereto. Except as fully reflected or reserved against in the July 31, 1999
consolidated balance sheet of Lycos (including the related notes, where
applicable) included in the Lycos 1999 10-K, since July 31, 1999 through to and
including May 16, 2000, neither Lycos nor any of its subsidiaries has incurred
any liabilities or obligations of any nature whatsoever (absolute, accrued,
fixed, contingent or otherwise), other than liabilities incurred in the ordinary
course of business consistent with past practice since the date of such balance
sheet and which have not had and would not reasonably be expected to have a
Material Adverse Effect on Lycos. The books and records of Lycos and its
Subsidiaries have been, and are being, maintained in all material respects in
accordance with U.S.
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GAAP and any other applicable legal and accounting requirements and reflect only
actual transactions.
4.6 Broker's Fees. Neither Lycos nor any Lycos Subsidiary nor any of
their respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, except
Credit Suisse First Boston, whose fees and expenses will be paid by Lycos.
4.7 Absence of Certain Changes or Events. (a) Except as publicly
disclosed in Lycos SEC Reports filed prior to May 16, 2000, since July 31, 1999
up to and including May 16, 2000, no event or events have occurred that have had
or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on Lycos.
(b) Except as publicly disclosed in Lycos SEC Reports filed prior to May
16, 2000, from July 31, 1999 to May 16, 2000, Lycos and its Subsidiaries have
carried on their respective businesses in all material respects in the ordinary
course.
(c) From July 31, 1999 to May 16, 2000, neither Lycos nor any of its
Subsidiaries has (i) except for normal increases for employees (other than
officers subject to the reporting requirements of Section 16(a) of the Exchange
Act) made in the ordinary course of business consistent with past practice or as
required by applicable law, increased the wages, salaries, compensation,
pension, or other fringe benefits or perquisites payable to any executive
officer, employee, or director from the amount thereof in effect as of July 31,
1999, granted any severance or termination pay, entered into any contract to
make or grant any severance or termination pay, or paid any bonus, in each case,
other than the customary year-end bonuses for fiscal 1998 and 1999 in amounts
consistent with past practice and other than agreements expressly contemplated
by or permitted under this Agreement, (ii) granted any stock appreciation rights
or granted any rights to acquire any shares of its capital stock to any
executive officer, director or employee, in each case, other than grants to
employees (other than officers subject to the reporting requirements of Section
16(a) of the Exchange Act) made in the ordinary course of business consistent
with past practice under the Lycos Stock Plans and other than grants expressly
contemplated by or permitted under this Agreement or (iii) suffered any strike,
work stoppage, slow-down, or other labor disturbance.
4.8 Legal Proceedings. (a) Except as publicly disclosed in Lycos SEC
Reports filed prior to the date hereof, as of May 16, 2000, neither Lycos nor
any of its Subsidiaries is a party to any, and there are no pending or, to the
best of Lycos's knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory investigations of any
nature against Lycos or any of its Subsidiaries or challenging the validity or
propriety of the transactions contemplated by this Agreement as to which, in any
such case, there is a reasonable probability of an adverse determination and
which, if adversely determined, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Lycos.
(b) As of May 16, 2000, there is no injunction, order, judgment, decree or
regulatory restriction imposed upon Lycos, any of its Subsidiaries or the assets
of Lycos or any of its Subsidiaries that has had, or would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Lycos or the Surviving Corporation.
4.9 Taxes and Tax Returns. (a) Each of Lycos and its Subsidiaries has
duly filed all U.S. federal, state, local, and foreign information returns and
Tax returns required to be filed by it on or prior to May 16, 2000 and has duly
paid or made provisions for the payment of all Taxes which have been incurred by
it or are due from it to U.S. federal, state, local, and foreign taxing
authorities on or prior to May 16, 2000 (including, without limitation, if and
to the extent applicable, those due in respect of its properties, income,
business, capital stock, franchises, licenses, sales and payrolls) other than
(i) Taxes which are not yet delinquent or are being contested in good faith and
have not been finally determined, or (ii) information returns, Tax returns,
Taxes or other governmental charges
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as to which the failure to file, pay or make provision for would not reasonably
be expected to, either individually or in the aggregate, have a Material Adverse
Effect on Lycos. The federal income Tax returns of Lycos and its Subsidiaries
are being examined by the Internal Revenue Service (the "IRS") for the fiscal
years ended on July 31, 1996, 1997 and 1998 and no liabilities with respect to
deficiencies are reasonably expected to be asserted as a result of such
examination other than deficiencies that would not reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect on
Lycos. To Lycos's knowledge, there are no material disputes pending with respect
to, or claims asserted for, Taxes or assessments upon Lycos or any of its
Subsidiaries for which Lycos does not have adequate reserves other than
disputes, claims, assessments or inadequacies that would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Lycos.
(b) Except for actions expressly contemplated by Articles I, II, III and
VII of this Agreement, neither Lycos nor any of its Subsidiaries has taken or
agreed to take any action, or intends or plans to take any action or knows of
any agreement, plan or intention to take any action that is reasonably likely to
(i) prevent either of the Reincorporation Merger and the Share Exchange from
constituting a reorganization described in Section 368(a) of the Code or (ii)
result in gain recognition to the shareholders of Lycos Virginia pursuant to
Section 367(a) of the Code.
(c) As used in this Agreement, the term "TAX" or "TAXES" means all
Spanish, U.S. federal, state, province, local, and foreign income, excise, gross
receipts, gross income, ad valorem, profits, gains, property, capital, sales,
transfer, use, value-added, payroll, employment, severance, withholding, duties,
intangibles, franchise, backup withholding, and other taxes, charges, levies or
like assessments together with all penalties and additions to tax and interest
thereon.
(d) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by Lycos or any of its
Subsidiaries under any contract, plan, program, arrangement or understanding in
effect prior to the Exchange Effective Time would be reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Lycos.
4.10 Employees. (a) The Lycos Disclosure Schedule sets forth a true and
complete list of each material employee or director benefit or compensation
plan, arrangement or agreement, and all material bonus, incentive, deferred
compensation, vacation, stock purchase, stock option, severance, employment,
change of control or fringe benefit plan, program or agreement that is
maintained, or contributed to, as of May 16, 2000 (the "LYCOS BENEFIT PLANS") by
Lycos, any of its Subsidiaries or by any trade or business, whether or not
incorporated (a "LYCOS ERISA AFFILIATE"), all of which together with Lycos would
be deemed a "single employer" within the meaning of Section 4001 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(b) Lycos has heretofore made available to Terra true and complete copies
of each of the Lycos Benefit Plans and certain related documents, including, but
not limited to, (i) the actuarial report for such Lycos Benefit Plan (if
applicable) for each of the last two years, (ii) the most recent annual report
(Form 5500 Series) and accompanying schedule and (iii) the most recent
determination letter from the IRS (if applicable) for such Lycos Benefit Plan.
(c) Except as have not or would not reasonably be expected to result,
individually or in the aggregate, in a Material Adverse Effect on Lycos, (i)
each of the Lycos Benefit Plans has been operated and administered in all
respects in compliance with applicable laws, including, but not limited to,
ERISA and the Code, (ii) each of the Lycos Benefit Plans intended to be
"qualified" within the meaning of Section 401 (a) of the Code is so qualified
and is listed on the Lycos Disclosure Schedule, and there are no existing
circumstances or any events that have occurred that are reasonably likely to
adversely affect the qualified status of any such Lycos Benefit Plan, (iii) with
respect to each Lycos Benefit Plan that is subject to Title IV of ERISA, the
present value of accrued benefits under such Lycos Benefit Plan, based upon the
actuarial assumptions used for funding purposes in the most recent actuarial
report prepared by such Lycos Benefit Plan's actuary with respect to such Lycos
Benefit Plan, did not, as of its latest valuation date, exceed the then current
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value of the assets of such Lycos Benefit Plan allocable to such accrued
benefits, (iv) no Lycos Benefit Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured), with respect to
current or former employees or directors of Lycos or its Subsidiaries beyond
their retirement or other termination of service, other than (A) coverage
mandated by applicable law, (B) death benefits or retirement benefits under any
"employee pension plan" (as such term is defined in Section 3(2) of ERISA), (C)
deferred compensation benefits accrued as liabilities on the books of Lycos or
its Subsidiaries or (D) benefits the full cost of which is borne by the current
or former employee or director (or his beneficiary), (v) no liability under
Title IV of ERISA has been incurred by Lycos, its Subsidiaries or any Lycos
ERISA Affiliate that has not been satisfied in full, and no condition exists
that presents a material risk to Lycos, its Subsidiaries or any Lycos ERISA
Affiliate of incurring a liability thereunder, (vi) no Lycos Benefit Plan is or
was a "multiemployer plan" (as such term is defined in Section 3(37) and Section
4001(a)(3) of ERISA) or a "multiple employer plan" (as such term is defined in
Section 4063 of ERISA), (vii) all contributions or other amounts payable by
Lycos or its Subsidiaries as of the Reincorporation Effective Time with respect
to each Lycos Benefit Plan in respect of current or prior plan years have been
paid or accrued in accordance with U.S. GAAP and Section 412 of the Code, (viii)
none of Lycos, its Subsidiaries or, to the knowledge of Lycos, any other person,
including any fiduciary, has engaged in a transaction in connection with which
Lycos, its Subsidiaries or any Lycos Benefit Plan is reasonably likely to be
subject to either a material civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of
the Code, and (ix) to the best knowledge of Lycos there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Lycos Benefit Plans or any trusts related
thereto and (ix) each Lycos Benefit Plan that is an employee welfare benefit
plan under Section 3(1) of ERISA is either unfunded or is funded through an
insurance company contract and is not a "welfare benefit fund" as defined in
Section 419 of the Code.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (either alone or in
conjunction with any other event) (i) except as set forth in a report prepared
by Ernst & Young LLP, which has been provided to Terra prior to the date hereof,
result in any payment (including, without limitation, severance, unemployment
compensation, "excess parachute payment" (within the meaning of Section 280G of
the Code), forgiveness of indebtedness or otherwise) becoming due to any
director or any employee of Lycos or any of its affiliates from Lycos or any of
its affiliates under any Lycos Benefit Plan or otherwise, (ii) increase any
benefits otherwise payable under any Lycos Benefit Plan or (iii) result in any
acceleration of the time of payment or vesting of any such benefits.
(e) Except as have not or would not reasonably be expected to result,
individually or in the aggregate, in a Material Adverse Effect on Lycos, all
Lycos Benefit Plans subject to the laws of any jurisdiction outside of the
United States (i) have been maintained in accordance with all applicable
requirements, (ii) if they are intended to qualify for special tax treatment
meet all requirements for such treatment, and (iii) if they are intended to be
funded and/or book-reserved are fully funded and/or book reserved, as
appropriate, based upon reasonable actuarial assumptions.
4.11 Compliance with Applicable Law. Except as publicly disclosed in
Lycos SEC Reports filed prior to May 16, 2000, Lycos and each of its
Subsidiaries hold all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their respective businesses under and pursuant to
each, and have complied in all respects with and are not in default in any
material respect under any, applicable law, statute, order, rule, regulation,
policy and/or guideline of any Governmental Entity relating to Lycos or any of
its Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default has not had and would
not reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect on Lycos.
4.12 Certain Contracts. (a) As of May 16, 2000, neither Lycos nor any of
its Subsidiaries is a party to or bound by any contract, arrangement, commitment
or understanding (whether written or
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oral) (i) with respect to the employment of any directors, officers or
employees, other than in the ordinary course of business consistent with past
practice, (ii) which, upon the consummation or stockholder approval of the
transactions contemplated by this Agreement will (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from Terra, Lycos, the Surviving
Corporation, or any of their respective Subsidiaries to any officer or employee
thereof, (iii) which is a "material contract" (as such term is defined in Item
601(b)(10) of Regulation S-K of the SEC) to be performed after May 16, 2000 that
has not been filed or incorporated by reference in the Lycos SEC Reports, (iv)
which materially restricts the conduct of any line of business by Lycos or upon
consummation of the Reincorporation Merger will materially restrict the business
of the Surviving Corporation or Terra, (v) with or to a labor union or guild
(including any collective bargaining agreement) or (vi) (including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan) any of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the occurrence of any stockholder
approval or the consummation of any of the transactions contemplated by this
Agreement, or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement. Lycos has
previously made available to Terra true and correct copies of all employment and
deferred compensation agreements in effect as of May 16, 2000 which are in
writing and to which Lycos or any of its Subsidiaries is a party. Each contract,
arrangement, commitment or understanding of the type described in this Section
4.12(a), whether or not set forth in the Lycos Disclosure Schedule, is referred
to herein as a "LYCOS CONTRACT," and neither Lycos nor any of its Subsidiaries
knows of, or has received notice of, any violation of the above by any of the
other parties thereto which has had or would reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect on Lycos.
(b) (i) As of May 16, 2000, each Lycos Contract is valid and binding on
Lycos or any of its Subsidiaries, as applicable, and in full force and effect,
(ii) Lycos and each of its Subsidiaries has in all material respects performed
all obligations required to be performed by it to date under each Lycos
Contract, except where such noncompliance would not reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect on
Lycos, and (iii) no event or condition exists which constitutes or, after notice
or lapse of time or both, will constitute, a material default on the part of
Lycos or any of its Subsidiaries under any such Lycos Contract, except where
such default, either individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on Lycos.
4.13 Environmental Liability. There are no legal, administrative,
arbitral or other proceedings, claims, actions, causes of action, private
environmental investigations or remediation activities or governmental
investigations of any nature seeking to impose, or that could reasonably result
in the imposition, on Lycos of any liability or obligation arising under common
law or under any local, state or federal environmental statute, regulation or
ordinance including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), pending
or threatened against Lycos, which liability or obligation, either individually
or in the aggregate, has had or would reasonably be expected to have a Material
Adverse Effect on Lycos. To the knowledge of Lycos, there is no reasonable basis
for any such proceeding, claim action or governmental investigation that would
impose any liability or obligation that could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect on Lycos.
Lycos is not subject to any agreement, order, judgment, decree, letter or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any liability or obligation with respect to the foregoing
that will have or would reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect on Lycos.
4.14 State Takeover Laws. The Board of Directors of Lycos has approved
the transactions contemplated by this Agreement for purposes of Section 203 of
the DGCL such that the restrictions contained in Section 203 of the DGCL will
not apply to this Agreement or any of the transactions contemplated hereby.
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4.15 Intellectual Property; Proprietary Rights; Employee
Restrictions. (a) All Intellectual Property Rights used by Lycos or its
Subsidiaries in their respective businesses are owned by Lycos or such
Subsidiaries by operation of law, have been validly assigned to Lycos or such
Subsidiaries or Lycos otherwise has the right to use such Intellectual Property
Rights in its business as currently conducted except for such failures that
would not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on Lycos. Lycos or one of its Subsidiaries
has exclusive ownership of or a license to use all Intellectual Property Rights
used by Lycos or its Subsidiaries in Lycos's business as presently conducted,
including all other registered Intellectual Property Rights used in connection
with or contained in all versions of Lycos's World Wide Web sites and all
licenses, assignments and releases of Intellectual Property Rights of others
without which Lycos or its Subsidiaries could not offer the services they
currently offer or has obtained any licenses, releases or assignments reasonably
necessary to use all third parties' Intellectual Property Rights in works
embodied in its services, except, for such failures as, either individually or
in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on Lycos. The business activities or products of Lycos
as of May 16, 2000 do not infringe any Intellectual Property Rights of others,
except as have not had and would not reasonably be expected to have a Material
Adverse Effect on Lycos. To its knowledge, as of May 16, 2000 Lycos has not
received any notice or other claim from any person asserting that any of Lycos's
present activities infringe or may infringe any Intellectual Property Rights of
such person, except for such notices or claims which, either individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on Lycos.
(b) Except as have not had and would not reasonably be expected to have a
Material Adverse Effect on Lycos, (i) Lycos has the right to use all trade
secrets, customer lists, hardware designs, programming processes, software and
other information required for its services or its business as presently
conducted or contemplated; (ii) Lycos has taken all reasonable measures to
protect and preserve the security and confidentiality of its trade secrets and
other confidential information; (iii) all employees and consultants of Lycos or
its Subsidiaries involved in the design, review, evaluation or development of
products or Intellectual Property Rights have executed nondisclosure and
assignment of inventions agreements to protect the confidentiality of Lycos's
trade secrets and other confidential information and to vest in Lycos exclusive
ownership of such Intellectual Property Rights; (iv) to the knowledge of Lycos,
all trade secrets and other confidential information of Lycos are not part of
the public domain or knowledge, nor, to the knowledge of Lycos, have they been
misappropriated by any person having an obligation to maintain such trade
secrets or other confidential information in confidence for Lycos; (v) to the
knowledge of Lycos, no employee or consultant of Lycos or any of its
Subsidiaries has used any trade secrets or other confidential information of any
other person in the course of their work for Lycos or any such Subsidiary.
(c) To the knowledge of Lycos, no university, government agency (whether
federal or state) or other organization sponsored research and development
conducted by Lycos or any of its Subsidiaries or has any claim of right to or
ownership of or other encumbrance upon any of the Intellectual Property Rights
of Lycos, except for such claims or other encumbrances that would not reasonably
be expected to have a Material Adverse Effect on Lycos. Lycos is not aware of
any infringement by others of its copyrights or other Intellectual Proprietary
Rights in any of its technology or services, or any violation of the
confidentiality of any of its proprietary information, except for such
infringement and violations that would not reasonably be expected to have a
Material Adverse Effect on Lycos. To Lycos's knowledge, Lycos is not making
unlawful use of any confidential information or trade secrets of any past or
present employees of Lycos or any of its Subsidiaries, except for such use that
would not reasonably be expected to have a Material Adverse Effect on Lycos,
except for such infringement and violations that would not reasonably be
expected to have a Material Adverse Effect on Lycos. For the purposes of this
Section 4.15, and except where the context otherwise requires, Intellectual
Property Rights also includes any and all intellectual property rights,
licenses, databases, computer programs and other computer software user
interfaces, know-how, trade secrets, customer lists, proprietary technology,
processes and formulae, source code,
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object code, algorithms, architecture, structure, display screens, layouts,
development tools, instructions, templates, marketing materials created by Lycos
or its Subsidiaries, inventions, trade dress, logos and designs.
4.16 Insurance. Lycos and its Subsidiaries have in effect insurance
coverage with reputable insurers or are self-insured, which in respect of
amounts, premiums, types and risks insured, constitutes reasonably adequate
coverage against all risks customarily insured against by companies and their
subsidiaries comparable in size and operations to Lycos and its Subsidiaries
which are engaged in Lycos's industry.
4.17 Opinions. Prior to May 16, 2000, Lycos has received an opinion from
Credit Suisse First Boston to the effect that as of the date thereof and based
upon and subject to the matters set forth therein, the Exchange Ratio is fair to
the stockholders of Lycos from a financial point of view. Such opinion has not
been amended or rescinded as of May 16, 2000.
4.18 Lycos Information. The information relating to Lycos and its
Subsidiaries that is provided by Lycos or its representatives for inclusion in
the Proxy Statement, the F-4, the Prospectus and any supplements thereto and any
circulars or documents issued to shareholders, employees or debenture holders of
Terra or in any other document filed with any other regulatory agency in
connection herewith, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances in which they are made, not misleading. The Proxy Statement
(except for such portions thereof that relate only to Terra or any of its
Subsidiaries) will comply with the provisions of the Exchange Act and the rules
and regulations thereunder.
4.19 Lycos Virginia. (a) Since the date of its incorporation, Lycos
Virginia has not engaged in any activities other than in connection with or
contemplated by this Agreement. The execution, delivery and performance by Lycos
Virginia of this Agreement and the consummation by Lycos Virginia of the
transactions contemplated hereby are within the corporate powers of Lycos
Virginia and have been duly authorized by all necessary corporate action. This
Agreement constitutes a valid and binding agreement of Lycos Virginia. The Lycos
Virginia Board has approved and adopted this Agreement, the Reincorporation
Merger and the Share Exchange. Lycos, as the sole shareholder of Lycos Virginia,
has approved this Agreement, including the related Plan of Share Exchange, the
Reincorporation Merger and the Share Exchange and has waived any right to
dissent from the Share Exchange for all purposes of Section 13.1-729 et seq. of
the VSCA. The Lycos Virginia Board has approved the transactions contemplated by
this Agreement for purposes of Sections 13.1-725 et seq. and 13.1-728.1 et seq.
of the VSCA such that the provisions of such sections will not apply to this
Agreement or any of the transactions contemplated hereby and Section 13.1-728.1
et seq. will not apply thereto by virtue of Lycos Virginia being a party to this
Agreement.
(b) Neither the execution and delivery of this Agreement by Lycos Virginia
nor the consummation by Lycos Virginia of the transactions contemplated hereby,
nor compliance by Lycos Virginia with any of the terms or provisions hereof,
will (i) violate any provision of the Lycos Virginia Articles or Lycos Virginia
By-Laws (ii) assuming that the consents and approvals referred to in Section 4.4
are duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Lycos Virginia, any of
its Subsidiaries or any of their respective properties or assets or (y) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of Lycos Virginia or any of its Subsidiaries under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Lycos
Virginia or any of its Subsidiaries is a party, or by which they or any of their
respective properties or assets may be bound or affected, except (in the case of
clause (ii) above) for such violations, conflicts, breaches or defaults which,
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either individually or in the aggregate, have not had and would not reasonably
be expected to have a Material Adverse Effect on Lycos.
(c) Except for (i) the filings required under the HSR Act and the
expiration or termination of any applicable waiting period and the filing of a
notification with the European Commission under Council Regulation (EEC) No.
4064/89 or similar antitrust filings or notifications in other jurisdictions, as
applicable, (ii) the filing with the SEC of the Proxy Statement in definitive
form relating to the special meeting of Lycos's stockholders to be held in
connection with this Agreement and the transactions contemplated hereby and the
filing and declaration of effectiveness of the F-4 in which the Proxy Statement
will be included as a prospectus of Terra, and any filings required under
applicable state securities or "blue sky" laws, (iii) the filing of the
certificate of merger and other appropriate merger documents as required by the
DGCL and the filing of the articles of merger and articles of share exchange and
other appropriate merger and share exchange documents required by the VSCA and
the issuance by the Virginia State Corporation Commission of the certificate of
merger and certificate of share exchange pursuant to the VSCA and (iv) the Lycos
Stockholder Approval, no consents or approvals of or filings or registrations
with any Governmental Entity, or of or with any third party, are necessary in
connection with the execution and delivery by Lycos Virginia of this Agreement
and the consummation by Lycos Virginia of the transactions contemplated hereby
and compliance by Lycos Virginia with any provisions hereof other than those the
failure of which to obtain or make have not had and would not reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Lycos.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF TERRA
Except as set forth in the disclosure schedule delivered by Terra to Lycos
concurrently herewith (the "TERRA DISCLOSURE SCHEDULE"), Terra hereby represents
and warrants, as of May 16, 2000, to Lycos as follows:
5.1 Corporate Organization. (a) Terra is a corporation duly organized,
validly existing and in good standing under the laws of the Kingdom of Spain.
Terra has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have and would not reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect on Terra. True and complete
copies of the Articles of Incorporation of Terra (escritura de constitucion)
(the "TERRA ARTICLES") and the Revised Bylaws of Terra (estatutos) (the "TERRA
BY-LAWS"), in each case, as in effect as of May 16, 2000, have previously been
made available by Terra to Lycos.
(b) Each Terra Subsidiary (i) is duly organized and validly existing under
the laws of its jurisdiction of organization, (ii) is duly qualified to do
business and in good standing in all jurisdictions (whether federal, state,
local or foreign) where its ownership or leasing of property or the conduct of
its business requires it to be so qualified and in which the failure to be so
qualified would have or would reasonably be expected to have a Material Adverse
Effect on Terra, and (iii) has all requisite corporate power and authority to
own or lease its properties and assets and to carry on its business as now
conducted.
5.2 Capitalization. (a) As of May 15, 2000, the authorized share capital
of Terra consists solely of 560,000,000 Euros represented by 280,500,000
ordinary shares ("TERRA SHARES" or "TERRA CAPITAL STOCK"). All of the issued and
outstanding shares of Terra Capital Stock have been duly authorized and validly
issued and are fully paid and nonassessable, with no personal liability
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attaching to the ownership thereof. Except as provided by the SCL, no shares of
Terra Capital Stock are entitled to preemptive rights, and assuming adoption of
the resolution regarding preemptive rights referred to in Section 5.3, such
preemptive rights do not apply to the transactions contemplated hereby. As of
May 16, 2000, except as described in this Section 4.2(a) and except pursuant to
the terms of options issued pursuant to the Terra Employee Stock Option Plan
(the "TERRA STOCK PLANS"), Terra does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Terra
Capital Stock or any other equity securities of Terra or any securities
representing the right to purchase or otherwise receive any shares of Terra
Capital Stock (collectively the "TERRA RIGHTS"). As of May 15, 2000, no shares
of Terra Capital Stock were reserved for issuance, except for 14,000,000 shares
of Terra Common Stock reserved for issuance upon exercise of the options issued
pursuant to the Terra Employee Stock Option Plan. From May 15, 2000, to and
including May 16, 2000, Terra has not issued any shares of its capital stock or
any securities convertible into or exercisable for any shares of its capital
stock. As of May 16, 2000, there are no outstanding bonds, debentures, notes or
other indebtedness or other securities of Terra having the right to vote (or
convertible into, or exchangeable or exercisable for, securities having the
right to vote) on any matters on which stockholders of Terra may vote. There are
no voting, sale, transfer or other similar agreements to which Terra is a party
with respect to the capital stock of Terra or any other securities of Terra that
are convertible or exchangeable into or exercisable for shares of the capital
stock of Terra.
(b) Terra owns, directly or indirectly, all of the issued and outstanding
shares of capital stock or other equity ownership interests of each of the Terra
Subsidiaries, free and clear of any Liens, and all of such shares or equity
ownership interests are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No Terra Subsidiary has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary. There are no voting,
sale, transfer or other similar agreements to which any Terra Subsidiary is a
party with respect to the capital stock of such Subsidiary or any other
securities of any such Subsidiary that are convertible or exchangeable into or
exercisable for shares of the capital stock of any Terra Subsidiary. Section
5.2(b) of the Terra Disclosure Schedule sets forth a list as of May 16, 2000 of
the material investments of Terra in corporations, joint ventures, partnerships,
limited liability companies and other entities other than its Subsidiaries.
5.3 Authority; No Violation. (a) Terra has full corporate power and
authority to execute and deliver this Agreement and upon receipt of the Terra
Shareholder Approval (as defined below) will have full corporate power and
authority to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly approved by unanimous vote of each of the
Board of Directors of Terra. The Board of Directors of Terra has proposed to
call the Terra Shareholder Meeting to seek the approval of the shareholders of
Terra for the delegation in favor of the Terra Board to approve the capital
increase required in connection with the Share Exchange, including approval in
accordance with Section 159 of the SCL of a resolution abolishing the preemptive
rights of Terra shareholders to subscribe for the shares of Terra Common Stock
being issued in the Share Exchange, which approval shall require the affirmative
vote of the holders of a majority of the outstanding shares of Terra Common
Stock present in person or represented by proxy at a duly constituted meeting of
Terra shareholders at which meeting, if on first call, a quorum of at least
one-half of the issued share capital is present or represented by proxy or, if
on second call, a quorum of at least one-quarter of the issued share capital is
present or represented by proxy (provided, however, if, on second call, less
than one-half of the issued share capital is present or represented by proxy,
the matters being voted upon must be adopted by at least two-thirds of the share
capital present or represented at such meeting) ("TERRA SHAREHOLDER APPROVAL"),
no other corporate proceedings on the part of Terra
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is necessary to approve this Agreement and to consummate the transactions
contemplated hereby other than the resolution of the Terra Board approving the
Capital Increase against contribution in kind of the shares of Lycos Virginia
Common Stock. The affirmative vote of the shares of Terra Capital Stock held by
Telefonica, S.A. ("TELEFONICA") are sufficient to obtain the Terra Shareholder
Approval. Neither a withdrawal or a modification of the Terra Board's
recommendation relating to this Agreement or any of the transactions
contemplated hereby will affect (i) Terra's obligation or ability to call or
convene the meeting of its shareholders referred to above or (ii) Telefonica's
obligation to vote its shares of Terra Capital Stock in favor of the approval of
the matters set forth in the second sentence of this Section 5.3. This Agreement
has been duly and validly executed and delivered by Terra and (assuming due
authorization, execution and delivery by Lycos) constitutes a valid and binding
obligation of Terra, enforceable against Terra in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Terra nor the
consummation by Terra of the transactions contemplated hereby, nor compliance by
Terra with any of the terms or provisions hereof, will (i) violate any provision
of the Terra Articles or By-Laws or (ii) assuming that the consents and
approvals referred to in Section 5.4 are duly obtained, (x) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Terra or any of Terra's Subsidiaries or any of their respective
properties or assets or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the creation of any Lien
upon any of the respective properties or assets of Terra or Terra's Subsidiaries
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Terra or any of Terra's Subsidiaries is a party, or by which
they or any of their respective properties or assets may be bound or affected,
except (in the case of clause (ii) above) for such violations, conflicts,
breaches or defaults which, either individually or in the aggregate, would not
have and would not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on Terra.
5.4 Consents and Approvals. Except for (i) the filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), the expiration or termination of any applicable waiting period, and the
filing of a notification with the European Commission under Council Regulation
(EEC) No. 4064/89 or similar antitrust filings or notifications in other
jurisdictions, as applicable, (ii) the filing with the SEC of the Proxy
Statement and declaration of effectiveness of the F-4 in which the Proxy
Statement will be included as a prospectus, and any filings required under
applicable state securities or "blue sky" laws, (iii) the filing of the articles
of share exchange and other appropriate documents as required by the VSCA and
the issuance by the Virginia State Corporation Commission of the certificate of
share exchange pursuant to the VSCA, (iv) receipt of the Terra Shareholder
Approval, (v) the registration with and verification by the National Securities
Exchange Commission of Spain (Comision Nacional del Mercado de Valores) (the
"NSEC") of a prospectus (folleto) relating to the Share Exchange (the
"PROSPECTUS"), (vi) the filing of the Deed of execution of the Capital Increase
against contribution in kind declaring that the capital increase has been
subscribed by the Lycos Virginia Stockholders, the filing of the necessary
auditors' report and the filing of the necessary report of the expert designated
by the Commercial Registry relating to the fair value of the assets acquired by
Terra in the Share Exchange (vi) the authorization of the listing of Terra
Shares on the SCME by the NSEC and the Managing Companies of the Spanish Stock
Exchanges and (viii) the filing with and approval of the Nasdaq National Market
(the "NASDAQ") to authorize the quotation of the ADSs on such market, no
consents or approvals of or filings or registrations with any Governmental
Entity or of or with any third party are necessary in connection with the
execution and delivery by Terra of this Agreement and the consummation by Terra
of the transactions contemplated hereby and compliance by Terra with any of the
provisions hereof other than those the failure of which to obtain or make have
not had and would not reasonably be expected to have a Material Adverse Effect
on Terra.
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5.5 SEC Reports and Financial Statements. (a) Terra has filed with the
SEC all forms, reports, schedules, registration statements and definitive proxy
statements required to be filed by them with the SEC since the date of its
initial public offering (as amended since the time of their filing and prior to
May 16, 2000, and together with the Terra Registration Statement (as defined
below) collectively, the "TERRA SEC REPORTS") and has heretofore made available
to Lycos complete and correct copies of all such forms, reports, schedules,
registration statements, and proxy statements. As of their respective dates, the
Terra SEC Reports (including, but not limited to, any financial statements or
schedules included or incorporated by reference therein) complied in all
material respects with the requirements of the Exchange Act or the Securities
Act applicable, as the case may be, to such Terra SEC Reports, and none of the
Terra SEC Reports contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
(b) Terra has previously made available to Lycos copies of the
consolidated balance sheet of Terra and its Subsidiaries for the year ended
December 31, 1999, for the six months ended June 30, 1999, and for the fiscal
years ended December 31, 1997 and 1998, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for such periods, as
previously provided by Terra to Lycos (in the case of information as of or for
December 31, 1999) and (for all other information) as reported in Terra's
Registration Statement No. 333-89997 on Form F-1 filed with the SEC on October
29, 1999, as amended (the "TERRA REGISTRATION STATEMENT"), in each case
accompanied by the audit report of Arthur Andersen, independent public
accountants with respect to Terra. The December 31, 1999 consolidated balance
sheet of Terra (including the related notes, where applicable) included in the
Terra Registration Statement fairly presents in all material respects the
consolidated financial position of Terra and its Subsidiaries as of the date
thereof, and the other financial statements referred to in this Section 5.5(b)
(including the related notes, where applicable) fairly present in all material
respects the results of the consolidated operations and changes in stockholders'
equity and consolidated financial position of Terra and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Spanish Stock Exchange, the CNMV and the
SEC with respect thereto; and each of such statements (including the related
notes, where applicable) has been prepared in all material respects in
accordance with Spanish generally accepted accounting principles ("SPANISH
GAAP") consistently applied during the periods involved, except, in each case,
as indicated in such statements or in the notes thereto. The related notes
reconciling to U.S. GAAP the consolidated net income and shareholders' equity of
Terra and its Subsidiaries comply in all material respects with the requirements
of the SEC applicable to such reconciliation. Except as fully reflected or
reserved against in the December 31, 1999 consolidated balance sheet of Terra
(including the related notes, where applicable) included in the Terra
Registration Statement, since December 31, 1999 through to and including May 16,
2000, neither Terra nor any of its Subsidiaries has incurred any liabilities or
obligations of any nature whatsoever (absolute, accrued, fixed, contingent or
otherwise), other than liabilities incurred in the ordinary course of business
consistent with past practice since the date of such balance and which have not
had and would not reasonably be expected to have a Material Adverse Effect on
Terra. The books and records of Terra and its Subsidiaries have been, and are
being, maintained in all material respects in accordance with Spanish GAAP and
any other applicable legal and accounting requirements and reflect only actual
transactions.
5.6 Broker's Fees. Neither Terra nor any of its Subsidiaries, nor any of
their respective officers or directors, has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement except
Lazard Freres & Co., whose fees and expenses will be paid by Terra.
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5.7 Absence of Certain Changes or Events. (a) Except as publicly
disclosed in Terra SEC Reports filed prior to May 16, 2000, since December 31,
1999, no event or events have occurred that have had or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Terra.
(b) Except as publicly disclosed in Terra SEC Reports filed prior to May
16, 2000, from December 31, 1999, to May 16, 2000, Terra and its Subsidiaries
have carried on their respective businesses in all material respects in the
ordinary course.
(c) Since December 31, 1999, neither Terra nor any of its Subsidiaries has
(i) except for normal increases for employees (other than officers that would be
subject to the reporting requirements of Section 16(a) of the Exchange Act if
Terra were a U.S. company with reporting obligations under Section 12 of the
Exchange Act) made in the ordinary course of business consistent with past
practice or as required by applicable law, increased the wages, salaries,
compensation, pension, or other fringe benefits or perquisites payable to any
executive officer, employee, or director from the amount thereof in effect as of
December 31, 1999, granted any severance or termination pay, entered into any
contract to make or grant any severance or termination pay, or paid any bonus
other than the customary year-end bonuses for fiscal 1999 in amounts consistent
with past practice, (ii) granted any stock appreciation rights or granted any
rights to acquire any shares of its capital stock to any executive officer,
director or employee other than grants to employees (other than officers subject
to the reporting requirements of Section 16(a) of the Exchange Act) made in the
ordinary course of business consistent with past practice under the Terra Stock
Plans or (iii) suffered any strike, work stoppage, slow-down, or other labor
disturbance.
5.8 Legal Proceedings. (a) Except as publicly disclosed in Terra SEC
Reports filed prior to May 16, 2000, as of May 16, 2000 neither Terra nor any of
its Subsidiaries is a party to any, and there are no pending or, to the best of
Terra's knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory investigations of any
nature against Terra or any of its Subsidiaries or challenging the validity or
propriety of the transactions contemplated by this Agreement as to which, in any
such case, there is a reasonable probability of an adverse determination and
which, if adversely determined, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Terra.
(b) As of May 16, 2000, there is no injunction, order, judgment, decree,
or regulatory restriction imposed upon Terra, any of its Subsidiaries or the
assets of Terra or any of its Subsidiaries that has had, or would reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect on Terra or the Surviving Corporation.
5.9 Taxes and Tax Returns. (a) Each of Terra and its Subsidiaries has
duly filed all Spanish, U.S. federal, state, province and local, and foreign
information returns and Tax returns required to be filed by it on or prior to
May 16, 2000 and has duly paid or made provisions for the payment of all Taxes
which have been incurred by it or are due from it to Spanish, U.S. federal,
state, province and local, and foreign taxing authorities on or prior to May 16,
2000 (including, without limitation, if and to the extent applicable, those due
in respect of its properties, income, business, capital stock, franchises,
licenses, sales and payrolls) other than (i) Taxes which are not yet delinquent
or are being contested in good faith and have not been finally determined, or
(ii) information returns, Tax returns or Taxes as to which the failure to file,
pay or make provision for would not reasonably be expected to, either
individually or in the aggregate, have a Material Adverse Effect on Terra. None
of the Spanish national income Tax returns of Terra or its subsidiaries have yet
been examined by the Spanish national Tax authorities. To Terra's knowledge,
there are no material disputes pending with respect to, or claims asserted for,
Taxes or assessments upon Terra or any of its Subsidiaries for which Terra does
not have adequate reserves other than such disputes, claims, assessments or
inadequacies that would not reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect on Terra.
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(b) Except for actions expressly contemplated by Articles I, II, III and
VII of this Agreement, neither Terra nor any of its Subsidiaries has taken or
agreed to take any action, or intends or plans to take any action or knows of
any agreement, plan or intention to take any action that is reasonably likely to
(i) prevent either of the Reincorporation Merger and the Share Exchange from
constituting a reorganization described in Section 368(a) of the Code or (ii)
result in gain recognition to the shareholders of Lycos Virginia pursuant to
Section 367(a) of the Code.
5.10 Employees. Terra has made available to Lycos copies, as of May 16,
2000, of: (a) the current documentation and rules of each of the material
employee benefit plans to which Terra and its Subsidiaries make or could become
liable to make payments for providing retirement, death, disability or life
assurance benefits (the "TERRA EMPLOYEE BENEFIT PLANS") (including any draft
amendments); (b) the most recently prepared explanatory booklets and
announcements relating to each of the Terra Employee Benefit Plans; and (iii)
the actuarial report for such Terra Employee Benefit Plans (if applicable) for
each of the last two years. The Terra Employee Benefit Plans are each funded so
as to comply with the minimum funding requirement under the Spanish Law 8/1997
of June 8, the Spanish Royal Decree 1307/1998 of September 30, both regulations
as amended and where applicable and there are no unfunded liabilities under any
such plans that would be reasonably likely to have a Material Adverse Effect on
Terra. Each Terra Employee Benefit Plan has been administered in accordance with
its terms and is in compliance with applicable law, other than instances of
non-compliance that, individually or in the aggregate, have not had and would
not reasonably be expected to have a Material Adverse Effect on Terra.
5.11 Compliance with Applicable Law. (a) Except as publicly disclosed in
Terra SEC Reports filed prior to May 16, 2000, Terra and each of its
Subsidiaries hold all material licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to each, and have complied in all respects with and are not in default
in any material respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating to Terra
or any of its Subsidiaries, except where the failure to hold such license,
franchise, permit or authorization or such noncompliance or default, either
individually or in the aggregate, would not have and would not reasonably be
expected to have a Material Adverse Effect on Terra.
5.12 Certain Contracts. (a) As of May 16, 2000, neither Terra nor any of
its Subsidiaries is a party to or bound by any contract, arrangement, commitment
or understanding (whether written or oral) (i) with respect to the employment of
any directors, officers or employees, other than in the ordinary course of
business consistent with past practice, (ii) which, upon the consummation or
stockholder approval of the transactions contemplated by this Agreement will
(either alone or upon the occurrence of any additional acts or events) result in
any payment (whether of severance pay or otherwise) becoming due from Lycos,
Terra, the Surviving Corporation, or any of their respective Subsidiaries to any
officer or employee thereof, (iii) which is a "material contract" (as such term
is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed
after May 16, 2000 that has not been filed or incorporated by reference in the
Terra SEC Reports, (iv) which materially restricts the conduct of any line of
business by Terra or upon consummation of the Share Exchange will materially
restrict the business of Terra; (v) with or to a labor union or guild (including
any collective bargaining agreement) or (vi) (including any stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase plan)
any of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any stockholder approval or
the consummation of any of the transactions contemplated by this Agreement, or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement. Terra has previously made
available to Lycos true and correct copies of all employment and deferred
compensation agreements in effect as of May 16, 2000 which are in writing and to
which Terra or any of its Subsidiaries is a party. Each contract, arrangement,
commitment or understanding of the type described in this Section 5.12(a),
whether or not set forth in the Terra Disclosure Schedule, is referred to herein
as a "TERRA CONTRACT," and neither Terra nor
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any of its Subsidiaries knows of, or has received notice of, any violation of
the above by any of the other parties thereto which has had or would reasonably
be expected to have, either individually or in the aggregate, a Material Adverse
Effect on Terra.
(b) (i) As of May 16, 2000, each Terra Contract is valid and binding on
Terra or any of its Subsidiaries, as applicable, and in full force and effect,
(ii) Terra and each of its Subsidiaries has in all material respects performed
all obligations required to be performed by it to date under each Terra
Contract, except where such noncompliance would not reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect on
Terra, and (iii) no event or condition exists which constitutes or, after notice
or lapse of time or both, will constitute, a material default on the part of
Terra or any of its Subsidiaries under any such Terra Contract, except where
such default, either individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on Terra.
5.13 Environmental Liability. There are no legal, administrative,
arbitral or other proceedings, claims, actions, causes of action, private
environmental investigations or remediation activities or governmental
investigations of any nature seeking to impose, or that could reasonably result
in the imposition, on Terra of any liability or obligation arising under common
law or under any U.S., European Union, national, regional or local laws, rules
or regulations relating to pollution, the environment or protection of human
health as it relates to the environment pending or threatened against Terra,
which liability or obligation, either individually or in the aggregate, has had
or would reasonably be expected to have a Material Adverse Effect on Terra. To
the knowledge of Terra, there is no reasonable basis for any such proceeding,
claim action or governmental investigation that would impose any liability or
obligation that would reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect on Terra. Terra is not subject to any
agreement, order, judgment, decree, letter or memorandum by or with Governmental
Authority or third party imposing any liability or obligation with respect to
the foregoing that will or would reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect on Terra.
5.14 Intellectual Property; Proprietary Rights; Employee
Restrictions. (a) All Intellectual Property Rights used by Terra or its
Subsidiaries in their respective businesses are owned by Terra or such
Subsidiaries by operation of law, have been validly assigned to Terra or such
Subsidiaries or Terra otherwise has the right to use such Intellectual Property
Rights in its business as currently conducted except for such failures that
would not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on Terra. Terra reasonably believes that
the Intellectual Property Rights are sufficient to carry on the business of
Terra as presently conducted. Terra or one of its Subsidiaries has exclusive
ownership of or a license to use all Intellectual Property Rights used by Terra
or its Subsidiaries in Terra's business as presently conducted, including all
other registered Intellectual Property Rights used in connection with or
contained in all versions of Terra's World Wide Web sites and all licenses,
assignments and releases of Intellectual Property Rights of others without which
Terra or its Subsidiaries could not offer the services they currently offer or
has obtained any licenses, releases or assignments reasonably necessary to use
all third parties' Intellectual Property Rights in works embodied in its
services, except for such failures as, either individually or in the aggregate,
have not had and would not reasonably be expected to have a Material Adverse
Effect on Terra. The business activities or products of Terra as of May 16, 2000
do not infringe any Intellectual Property Rights of others, except as have not
had and would not reasonably be expected to have a Material Adverse Effect on
Terra. To its knowledge, as of May 16, 2000 Terra has not received any notice or
other claim from any person asserting that any of Terra's present activities
infringe or may infringe any Intellectual Property Rights of such person except
for such notices or claims which, either individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on Terra.
(b) Except as have not had and would not reasonably be expected to have a
Material Adverse Effect on Terra or as disclosed in the Terra SEC Reports
publicly filed prior to May 16, 2000, (i) Terra has the right to use all trade
secrets, customer lists, hardware designs, programming processes,
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software and other information required for its services or its business as
presently conducted or contemplated; (ii) Terra has taken all reasonable
measures to protect and preserve the security and confidentiality of its trade
secrets and other confidential information; (iii) all employees and consultants
of Terra or its Subsidiaries involved in the design, review, evaluation or
development of products or Intellectual Property Rights have executed
nondisclosure and assignment of inventions agreements to protect the
confidentiality of Terra's trade secrets and other confidential information and
to vest in Terra exclusive ownership of such Intellectual Property Rights; (iv)
to the knowledge of Terra, all trade secrets and other confidential information
of Terra are not part of the public domain or knowledge, nor, to the knowledge
of Terra, have they been misappropriated by any person having an obligation to
maintain such trade secrets or other confidential information in confidence for
Terra; (v) to the knowledge of Terra, no employee or consultant of Terra or any
of its Subsidiaries has used any trade secrets or other confidential information
of any other person in the course of their work for Terra or any such
Subsidiary.
(c) To the knowledge of Terra, no university, government agency (whether
federal or state) or other organization sponsored research and development
conducted by Terra or any of its Subsidiaries or has any claim of right to or
ownership of or other encumbrance upon any of the Intellectual Property Rights
of Terra, except for such claims or other encumbrances that would not reasonably
be expected to have a Material Adverse Effect on Terra. Terra is not aware of
any infringement by others of its copyrights or other Intellectual Proprietary
Rights in any of its technology or services, or any violation of the
confidentiality of any of its proprietary information, except for such
infringement and violations that would not reasonably be expected to have a
Material Adverse Effect on Terra. To Terra's knowledge, Terra is not making
unlawful use of any confidential information or trade secrets of any past or
present employees of Terra or any of its Subsidiaries, except for such use as
would not reasonably be expected to have a Material Adverse Effect on Terra. For
the purposes of this Section 5.14, and except where the context otherwise
requires, Intellectual Property Rights also includes any and all intellectual
property rights, licenses, databases, computer programs and other computer
software user interfaces, know-how, trade secrets, customer lists, proprietary
technology, processes and formulae, source code, object code, algorithms,
architecture, structure, display screens, layouts, development tools,
instructions, templates, marketing materials created by Terra or its
Subsidiaries, inventions, trade dress, logos and designs.
5.15 Insurance. Terra and its Subsidiaries have in effect insurance
coverage with reputable insurers or are self-insured, which in respect of
amounts, premiums, types and risks insured, constitutes reasonably adequate
coverage against all risks customarily insured against by companies and their
subsidiaries comparable in size and operations to Terra and its Subsidiaries
which are engaged in Terra's industry.
5.16 Opinions. Prior to May 16, 2000, Terra has received an opinion from
Lazard Freres & Co. to the effect that as of the date thereof and based upon and
subject to the matters set forth therein, the Exchange Ratio is fair to the
stockholders of Terra from a financial point of view. Such opinion has not been
amended or rescinded as of May 16, 2000.
5.17 Terra Information. The information relating to Terra and its
Subsidiaries to be contained in the Proxy Statement, the F-4, the Prospectus and
any supplements thereto and any circulars or documents issued to shareholders,
employees or debenture holders of Terra and the information relating to Terra
and its Subsidiaries that is provided by Terra and its representatives for
inclusion in any other document filed with any other regulatory agency in
connection herewith, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances in which they are made, not misleading. The Proxy Statement
(except for such portions thereof that relate only to Lycos or any of its
Subsidiaries) will comply with the provisions of the Exchange Act and the rules
and regulations thereunder. The F-4 will comply with the provisions of the
Securities Act and the rules and regulations thereunder. The Prospectus and any
supplements thereto and any circulars or documents issued to shareholders,
employees or debenture holders of Terra will comply in all material respects
with all applicable law
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and all information contained therein (except for such portions thereof that
relate only to Lycos or any of its Subsidiaries) and will be substantially in
accordance with the facts and will not omit anything material likely to affect
the import of such information.
5.18 Telefonica Ownership. Telefonica owns beneficially and of record
approximately 66.6% of the outstanding Terra Capital Stock.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 Conduct of Businesses Prior to the Effective Time. During the period
from May 16, 2000 to the Exchange Effective Time, except as expressly
contemplated or permitted by this Agreement (including the Terra Disclosure
Schedule and the Lycos Disclosure Schedule), each of Lycos and Terra shall, and
shall cause each of their respective Subsidiaries to, (a) conduct its business
in the ordinary course, (b) use reasonable best efforts to maintain and preserve
intact its business organization, employees and advantageous business
relationships and retain the services of its key officers and key employees and
(c) take no action that would adversely affect or delay the ability of either
Lycos or Terra to obtain any necessary approvals of any Governmental Entity
required for the transactions contemplated hereby or to perform its covenants
and agreements under this Agreement or to consummate the transactions
contemplated hereby.
6.2 Lycos Forbearances. During the period from May 16, 2000 to the
Exchange Effective Time, except as set forth in the Lycos Disclosure Schedule
and except as expressly contemplated or permitted by this Agreement, Lycos shall
not, and shall not permit any of its Subsidiaries to, without the prior written
consent of Terra (which consent shall not be unreasonably withheld):
(a) other than in the ordinary course of business, incur any
indebtedness for borrowed money (other than short-term indebtedness
incurred to refinance short-term indebtedness, indebtedness of Lycos or any
of its wholly-owned Subsidiaries to Lycos or any of its Subsidiaries or
indebtedness incurred to finance investments expressly permitted by Section
6.2(d)), assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or
other entity, or make any loan or advance;
(b) (i) adjust, split, combine or reclassify any capital stock; (ii)
make, declare or pay any dividend, or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of
its capital stock or any securities or obligations convertible (whether
currently convertible or convertible only after the passage of time or the
occurrence of certain events) into or exchangeable for any shares of its
capital stock (except dividends paid by any of the Subsidiaries of Lycos to
Lycos); (iii) grant any stock appreciation rights or grant any individual,
corporation or other entity any right to acquire any shares of its capital
stock, other than pursuant to the Lycos Stock Plans in the ordinary course
of business and otherwise in accordance herewith; or (iv) issue any
additional shares of capital stock except (A) pursuant to the exercise of
stock options outstanding as of May 16, 2000 or issued in compliance with
Section 6.2(b)(iii), or (B) in the ordinary course of business and
consistent with past practice in connection with the Lycos ESPP and the
Lycos Stock Plans or (C) to finance acquisitions permitted by Section
6.2(d);
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties or assets, including by merger, consolidation or
otherwise, to any individual, corporation or other entity other than a
Subsidiary, or cancel, release or assign any indebtedness to any such
person or any claims held by any such person, in each case other than in
the ordinary course of business or pursuant to contracts or agreements in
force at May 16, 2000;
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(d) except for transactions in the ordinary course of business or
pursuant to contracts or agreements in force at the date of or permitted by
this Agreement or investments in an aggregate amount not in excess of
$250,000,000, make any material investment either by purchase of stock or
securities, contributions to capital, property transfers or purchase of any
property or assets, in each case, of or to any other individual,
corporation or other entity other than a Subsidiary thereof;
(e) except for transactions in the ordinary course of business,
terminate, or waive any material provision of any Lycos Contract or make
any change in any instrument or agreement governing the terms of any of its
securities, or material lease or contract, other than normal renewals of
contracts and leases without material adverse changes of terms;
(f) except as required by applicable law, increase, reduce or modify
in any manner the compensation or fringe benefits of any of its employees
or pay any pension or retirement allowance not required by any existing
plan or agreement to any such employees or become a party to, amend or
commit itself to any pension, retirement, profit-sharing or welfare benefit
plan or agreement or employment agreement with or for the benefit of any
employee other than in the ordinary course of business, or accelerate the
vesting of, or the lapsing of restrictions with respect to, any stock
options or other stock-based compensation;
(g) settle any material claim, action or proceeding involving money
damages, except in the ordinary course of business;
(h) amend its articles of incorporation, its bylaws or comparable
governing documents or otherwise take any action to exempt any person or
entity (other than Terra or any of its Subsidiaries) or any action taken by
such person or entity from any takeover statute or similarly restrictive
provisions of Lycos's organizational documents;
(i) take any action that is intended or expected to result in any of
its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Exchange
Effective Time, or in any of the conditions to the Share Exchange set forth
in Article VIII not being satisfied or in a violation of any provision of
this Agreement, except, in every case, as may be required by applicable
law;
(j) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by U.S. GAAP or
regulatory guidelines;
(k) renew any current contract or agreement containing any material
exclusivity provisions or enter into any contract or agreement containing
any material exclusivity provision; or
(l) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 6.2.
6.3 Terra Forbearances. During the period from May 16, 2000 to the
Exchange Effective Time, except as set forth in the Terra Disclosure Schedule
and except as expressly contemplated or permitted by this Agreement, Terra shall
not, and shall not permit any of its Subsidiaries to, without the prior written
consent of Lycos (which consent shall not be unreasonably withheld):
(a) other than in the ordinary course of business, incur any
indebtedness for borrowed money (other than short-term indebtedness
incurred to refinance short-term indebtedness, indebtedness of Terra or any
of its wholly-owned Subsidiaries to Terra or any of its Subsidiaries or
indebtedness incurred to finance investments expressly permitted by Section
6.3(d)), assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or
other entity, or make any loan or advance;
(b) (i) adjust, split, combine or reclassify any capital stock; (ii)
make, declare or pay any dividend, or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of
its capital stock or any securities or obligations convertible
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(whether currently convertible or convertible only after the passage of
time or the occurrence of certain events) into or exchangeable for any
shares of its capital stock (except dividends paid by any of the
Subsidiaries of Terra to Terra); (iii) grant any stock appreciation rights
or grant any individual, corporation or other entity any right to acquire
any shares of its capital stock, other than pursuant to the Terra Stock
Plans in the ordinary course of business and otherwise in accordance
herewith; or (iv) issue any additional shares of capital stock except (A)
pursuant to the exercise of stock options outstanding as of May 16, 2000 or
issued in compliance with Section 6.3(b)(iii), or (B) in the ordinary
course of business and consistent with past practice in connection with the
Terra Stock Plans (as the same may be amended from time to time excluding,
however, amendments that would increase the authorized shares thereunder)
or (C) to finance acquisitions permitted by Section 6.3(d);
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties or assets, including by merger, consolidation or
otherwise, to any individual, corporation or other entity other than a
Subsidiary, or cancel, release or assign any indebtedness to any such
person or any claims held by any such person, in each case other than in
the ordinary course of business or pursuant to contracts or agreements in
force at May 16, 2000;
(d) except for transactions in the ordinary course of business or
pursuant to contracts or agreements in force at the date of or permitted by
this Agreement or investments in an aggregate amount not in excess of
$500,000,000, make any material investment either by purchase of stock or
securities, contributions to capital, property transfers or purchase of any
property or assets, in each case, of or to any other individual,
corporation or other entity other than a Subsidiary thereof;
(e) amend its articles of incorporation, its bylaws or comparable
governing documents, except as contemplated by this Agreement or as
otherwise required to facilitate actions otherwise permitted hereunder;
(f) take any action that is intended or expected to result in any of
its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Exchange
Effective Time, or in any of the conditions to the Share Exchange set forth
in Article VIII not being satisfied or in a violation of any provision of
this Agreement, except, in every case, as may be required by applicable
law;
(g) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by Spanish GAAP or U.S.
GAAP or regulatory guidelines; or
(h) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 6.3.
6.4 Taxes. Neither Lycos nor Terra shall take any action or fail to take
any action, which action or failure to take action might reasonably be expected
to prevent the Reincorporation Merger or the Share Exchange from qualifying as a
reorganization within the meaning of Section 368(a) of the Code or might
reasonably be expected to result in the shareholders of Lycos Virginia
recognizing gain under Section 367(a) of the Code with respect to the Share
Exchange. Terra and Lycos Virginia shall comply with the "reporting
requirements" of Treasury Regulation Section 1.367(a)-3(c)(6).
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ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Regulatory Matters. (a) Lycos and Terra shall promptly prepare and
file with the SEC the Proxy Statement and Terra shall promptly prepare and file
with the SEC the F-4, in which the Proxy Statement will be included as a
prospectus. Each of Lycos and Terra shall use their reasonable best efforts to
have the F-4 declared effective under the Securities Act as promptly as
practicable after such filing, and Lycos shall thereafter mail or deliver the
Proxy Statement to its stockholders. Terra shall also use its reasonable best
efforts to obtain all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this Agreement,
and Lycos shall furnish all information concerning Lycos and the holders of
Lycos Common Stock as may be reasonably requested in connection with any such
action.
(b) As soon as practicable, (i) the Terra Board of Directors shall, with
the reasonable assistance of Lycos, prepare reports (Informe del consejo de
administracion) to be made available to the holders of Terra Shares in
accordance with applicable law (the "BOARD REPORTS") in connection with the
Terra Shareholder Meeting containing information required by the SCL and (ii)
Terra shall prepare and arrange to have registered with and verified by the NSEC
a Prospectus. Terra will use its reasonable best efforts to cause the Prospectus
to receive the required registration with and verification of the NSEC as soon
as practicable after May 16, 2000 and to cause the definitive Prospectus to be
made available to the holders of Terra Shares in accordance with applicable law
as soon as reasonably practicable.
(c) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, to
obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities that are necessary
or advisable to consummate the transactions contemplated by this Agreement, and
to comply with the terms and conditions of all such permits, consents, approvals
and authorizations of all such Governmental Entities. Lycos and Terra shall have
the right to review in advance, and, to the extent practicable, each will
consult the other on, in each case subject to applicable laws relating to the
exchange of information, all the information relating to Terra or Lycos, as the
case may be, and any of their respective Subsidiaries, that appears in any
filing made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing rights of review and consultation, each
of the parties hereto shall act reasonably and as promptly as practicable. The
parties hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(d) Lycos and Terra shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement, the F-4, the Board Reports and the
Prospectus or any other statement, filing, notice or application made by or on
behalf of Lycos, Terra or any of their respective Subsidiaries to any
Governmental Entity in connection with the transactions contemplated by this
Agreement.
(e) Lycos and Terra shall promptly advise each other upon receiving any
communication from any Governmental Entity whose consent or approval is required
for consummation of the transactions contemplated by this Agreement that causes
such party to believe that there is a reasonable likelihood that any approval of
such Governmental Entity will not be obtained or that the receipt of any such
approval will be materially delayed.
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7.2 Access to Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, each of Lycos and Terra
shall, and shall cause each of their respective Subsidiaries to, afford to the
officers, employees, accountants, counsel and other representatives of the other
party reasonable access, during normal business hours during the period prior to
the Exchange Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of Lycos and Terra shall,
and shall cause their respective Subsidiaries to, make available to the other
party (i) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of U.S. federal or Spanish securities laws and (ii) all other information
concerning its business, properties and personnel as such party may reasonably
request. Neither Lycos nor Terra nor any of their respective Subsidiaries shall
be required to provide such access or to disclose such information where such
access or disclosure would violate or prejudice the rights of Lycos's or
Terra's, as the case may be, customers, jeopardize the attorney-client privilege
of the institution in possession or control of such information or contravene
any law, rule, regulation, order, judgment, decree, fiduciary duty or binding
agreement entered into prior to May 16, 2000. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) Each of Lycos and Terra shall hold all information furnished by or on
behalf of the other party or any of such party's Subsidiaries or representatives
pursuant to Section 7.2(a) in confidence to the extent required by, and in
accordance with, the provisions of confidentiality agreement, dated May 12,
2000, by and among Telefonica, Terra and Lycos (the "CONFIDENTIALITY
AGREEMENT").
(c) No investigation by either of the parties or their respective
representatives shall affect the representations and warranties of the other set
forth herein.
7.3 Shareholder and Terra Board Approvals. (a) Notwithstanding any action
taken pursuant to the proviso of the last sentence of this Section 7.3(a), Lycos
shall call a meeting of its stockholders (the "LYCOS STOCKHOLDER MEETING") and
shall use its reasonable best efforts to cause the Lycos Stockholder Meeting to
be held as soon as reasonably practicable following May 16, 2000 for the purpose
of voting upon this Agreement and the transactions contemplated hereby,
including, without limitation, the Reincorporation Merger, and to approve the
actions theretofore taken by Lycos as the sole shareholder of Lycos Virginia to
approve the Share Exchange, and shall use its reasonable best efforts to cause
such meeting to occur as soon as reasonably practicable. Subject to the proviso
of the last sentence of this Section 7.3(a), the Board of Directors of Lycos
shall use its reasonable best efforts to obtain from such stockholders the vote
in favor of the adoption of this Agreement required by the DGCL and, as
applicable, the rules of the Nasdaq, to consummate the transactions contemplated
hereby and the ratification of such stockholders referred to in the preceding
sentence. The Lycos Board shall include in the Proxy Statement its
recommendation to the Lycos stockholders that they adopt this Agreement and
approve the Reorganization and ratify the actions to be taken by Lycos as the
sole shareholder of Lycos Virginia; provided, however, that the Lycos Board may,
at any time prior to the vote of the Stockholders of Lycos on the
Reorganization, withdraw or modify such recommendation to the extent that it
determines, in good faith after consulting with outside legal counsel, that such
action is necessary to comply with the fiduciary duties of the Lycos Board under
applicable law.
(b) Terra shall call a meeting of its stockholders to be held as soon as
reasonably practicable following May 16, 2000 for the purpose of (i) approving
the increase in capital of Terra required in connection with the Share Exchange,
(ii) approving a resolution abolishing the preemptive rights of Terra
shareholders and (iii) delegating to the Terra Board the requisite authority to
effectuate the Capital Increase following the contribution to Terra of the
shares of Lycos Virginia Common Stock (the "TERRA SHAREHOLDER APPROVAL"), and
shall use its reasonable best efforts to cause such meetings to occur as soon as
reasonably practicable. The Terra Board shall use its reasonable best efforts to
obtain from such stockholders the vote in favor of such capital increase and
abolishment of preemptive rights as required by the SCL.
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7.4 Affiliates. Lycos shall use its reasonable best efforts to cause each
of its directors and executive officers and any other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of it to deliver
to Terra, as soon as practicable after May 16, 2000, and prior to the date of
the Lycos Stockholder Meeting, a written agreement, in the form of Exhibit 6.4
hereto.
7.5 Stock Exchange Listing. (a) Terra shall cause the Terra ADSs to be
issued in the Share Exchange to be approved for listing on the Nasdaq, subject
to official notice of issuance, prior to the Exchange Effective Time.
(b) Terra shall amend the Depositary Agreement to establish the Terra ADSs
to be issued pursuant to the Share Exchange (or, alternatively, enter into a new
depositary agreement on substantially similar terms).
7.6 Employee Benefit Plans. (a) For a period of at least one year after
the Exchange Effective Time, the Lycos Benefit Plans (other than equity or
equity-based programs) in effect as of May 16, 2000 shall remain in effect with
respect to employees of Lycos (or its Subsidiaries) covered by such plans at the
Exchange Effective Time or such Plans may be replaced by substitute plans
providing benefits no less favorable in the aggregate than the benefits provided
for under such Plans at the Exchange Effective Time. From and after the Exchange
Effective Time, Terra will, or will cause Lycos Virginia to, recognize the prior
service with Lycos or its subsidiaries of each employee of Lycos or any of its
subsidiaries as of the Exchange Effective Time (the "LYCOS EMPLOYEES") in
connection with all Terra employee benefit plans in which such Lycos Employees
are eligible to participate following the Exchange Effective Time, for purposes
of eligibility, vesting and levels of benefits (but not for purposes of benefit
accruals under any defined benefit pension plan). From and after the Effective
Time, Terra will, or will cause Lycos Virginia to, (i) cause any pre-existing
conditions or limitations and eligibility waiting periods under any group health
plans of Terra to be waived with respect to the Lycos Employees and their
eligible dependents and (ii) give each Lycos Employee credit for the plan year
in which the Exchange Effective Time occurs towards applicable deductibles and
annual out-of-pocket limits for expenses incurred prior to the Exchange
Effective Time.
(b) The foregoing notwithstanding, as of the Exchange Effective Time Lycos
Virginia agrees to honor in accordance with their terms all benefits vested as
of the Exchange Effective Time under the Lycos Benefit Plans and all other
contractual commitments of Lycos to its current and former employees provided
that such Lycos Benefit Plans and contractual commitments are maintained and
administered after May 16, 2000 not in violation of Section 5.2(b) of this
Agreement.
(c) Nothing in this Section 7.6 shall be interpreted as preventing Lycos
Virginia from amending, modifying or terminating any Lycos Benefit Plans or
other contracts, arrangements, commitments or understandings, in accordance with
their terms and applicable law, except that Lycos Virginia shall in any event
comply with its obligations set forth in this Section 7.6.
7.7 Indemnification; Directors' and Officers' Insurance. (a) In the event
of any threatened or actual claim, action, suit, proceeding or investigation,
whether civil, criminal or administrative, including, without limitation, any
such claim, action, suit, proceeding or investigation in which any individual
(an "INDEMNIFIED PARTY") who is now, or has been at any time prior to May 16,
2000, or who becomes prior to the Exchange Effective Time, a director or officer
of Lycos or Lycos Virginia or any of their respective Subsidiaries is, or is
threatened to be, made a party based in whole or in part on, or arising in whole
or in part out of, or pertaining to (i) the fact that he or she is or was a
director or officer of Lycos or Lycos Virginia or any of their respective
Subsidiaries or (ii) this Agreement or any of the transactions contemplated
hereby, whether in any case asserted or arising before or after the Exchange
Effective Time, the parties hereto agree to cooperate and use their best efforts
to defend against and respond thereto. It is understood and agreed that after
the Exchange Effective Time, Terra shall indemnify and hold harmless, pursuant
to the Lycos Certificate, the Lycos By-Laws, the Lycos Virginia Articles, the
Lycos Virginia By-Laws and indemnification agreements and otherwise as and to
the fullest extent permitted by law, each such Indemnified Party against any
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losses, claims, damages, liabilities, costs, expenses (including reasonable
attorney's fees and expenses), judgments, fines and amounts paid in settlement
in connection with any such threatened or actual claim, action, suit, proceeding
or investigation, and shall advance costs and expenses to any Indemnified Party
in advance of the final disposition of any claim, suit, proceeding or
investigation to the fullest extent permitted by law upon receipt of any
undertaking required by applicable law.
(b) For a period of six years after the Exchange Effective Time, Lycos
Virginia shall, and Terra shall cause Lycos Virginia to maintain in effect
policies of directors' and officers' liability insurance with coverage in amount
and scope at least as favorable as Lycos's existing policies with respect to
claims arising from facts or events that occurred prior to the Exchange
Effective Time; provided, however, that during such period, Lycos Virginia shall
in no event be required to expend pursuant to this Section 7.7(b) more than an
amount per year equal to 200% of current premiums paid by Lycos for such
insurance, which current premium amount is set forth in Section 7.7(b) of the
Lycos Disclosure Schedule.
(c) In the event Terra or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Terra
assume the obligations set forth in this Section 7.7.
(d) The provisions of this Section 7.7 shall survive the Exchange
Effective Time and are intended to be for the benefit of, and shall be
enforceable by, each Indemnified Party and his or her heirs and representatives.
7.8 Additional Agreements. In case at any time after the Exchange
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest Lycos Virginia with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Reincorporation Merger, the proper officers and directors of each
party to this Agreement and their respective Subsidiaries shall take all such
necessary action as may be reasonably requested by Terra or Lycos Virginia.
7.9 Advice of Changes. Lycos and Terra shall each promptly advise the
other party of any change or event (i) having a Material Adverse Effect on it or
(ii) that it believes would or would be reasonably likely to cause or constitute
a material breach of any of its representations, warranties or covenants
contained herein.
7.10 Exemption from Liability Under Section 16(b). Assuming that Lycos
delivers (as defined below) to Terra the Section 16 Information reasonably in
advance of the Exchange Effective Time, the Board of Directors of Terra, or a
committee of Non-Employee Directors thereof (as such term is defined for
purposes of Rule 16b-3(d) under the Exchange Act), shall reasonably promptly
thereafter and in any event prior to the Effective Time adopt a resolution
providing that the receipt by the Lycos Insiders (as defined below) of Terra
Stock in exchange for shares of Lycos Common Stock, and of options to purchase
Terra Stock upon conversion of options to purchase shares of Lycos Common Stock,
in each case pursuant to the transactions contemplated hereby and to the extent
such securities are listed in the Section 16 Information provided by Lycos to
Terra prior to the Exchange Effective Time, are intended to be exempt from
liability pursuant to Section 16(b) under the Exchange Act such that any such
receipt shall be so exempt. "SECTION 16 INFORMATION" shall mean information
accurate in all respects regarding the Lycos Insiders, the number of shares of
Lycos Common Stock held by each such Lycos Insider and expected to be exchanged
for Terra Common Stock in the Reincorporation Merger, and the number and
description of the options to purchase shares of Lycos Common Stock held by each
such Lycos Insider and expected to be converted into options to purchase shares
of Terra Common Stock in connection with the Reincorporation Merger. "LYCOS
INSIDERS" shall mean those officers and directors of Lycos who are subject to
the reporting requirements of Section 16(a) of the Exchange Act and who are
listed in the Section 16 Information.
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7.11 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of Terra and Lycos agrees that it shall use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Reorganization as promptly
as practicable and otherwise to enable consummation of the transactions
contemplated hereby including, without limitation, using its reasonable best
efforts to obtain (and cooperating with the other party hereto to obtain) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Authority and any other third party that is required to be obtained
by Lycos or Terra or any of their respective Subsidiaries in connection with the
Reorganization and the other transactions contemplated by this Agreement.
7.12 Acquisition Proposals. Lycos will not, and will not permit or cause
any of its Subsidiaries or any of the officers and directors of it or its
Subsidiaries to, and shall direct and cause its and its Subsidiaries' employees,
agents and representatives (including any advisor, investment banker, attorney
or accountant retained by it or any of its Subsidiaries) ("REPRESENTATIVES") not
to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate
any inquiries or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any purchase of 15% or more of the voting securities of Lycos or 15% or more
of the consolidated assets of Lycos and its Subsidiaries (any such proposal or
offer being hereinafter referred to as an "ACQUISITION PROPOSAL"). Lycos will
not, and will not permit or cause any of its Subsidiaries or any of the officers
and directors of it or its Subsidiaries to and shall direct and cause its and
its Subsidiaries' employees, agents and Representatives not to, directly or
indirectly, engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to an
Acquisition Proposal, whether made before or after May 16, 2000, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal;
provided, however, that (A) Lycos may, and may authorize and permit its
employees, agents and Representatives to, furnish or cause to be furnished
confidential information and may participate in such negotiations and
discussions, (B) the Lycos Board may take the actions described in the last
sentence of Section 7.3(a) as permitted thereby, (C) the Lycos Board may
recommend an Acquisition Proposal to the Lycos stockholders and (D) may
terminate this Agreement pursuant to Section 9.1(g) of this Agreement in order
to immediately thereafter enter into a definitive agreement with respect to such
Acquisition Proposal, in each case, if the Lycos Board determines, in good faith
after consulting with outside legal counsel, that such action is necessary to
comply with the fiduciary duties of the Lycos Board under applicable law,
provided that prior to furnishing non-public information to any such party,
Lycos shall have entered into a confidentiality agreement on customary terms as
advised by outside legal counsel; provided, further, however, that nothing
contained in this Agreement shall prevent Lycos or the Lycos Board from (x)
complying with Rule 14e-2 promulgated under the Exchange Act or (y) making any
disclosure to the Lycos stockholders required by applicable law. Lycos will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. Lycos agrees that it will take the necessary steps to
promptly inform the individuals or entities referred to in the first sentence
hereof of the obligations undertaken in this Section 7.12. Lycos will notify
Terra promptly if any such inquiries, proposals or offers are received by, any
such information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, any of its officers, directors or its
Representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers. Lycos
also will promptly request each Person that has heretofore executed a
confidentiality agreement in connection with its consideration of an Acquisition
Proposal to return all confidential information heretofore furnished to such
Person by or on behalf of it or any of its Subsidiaries.
7.13 Board of Directors. The parties will take such actions with respect
to the Terra Board as are necessary to cause the Terra Board, from and after the
Exchange Effective Time, to be comprised of not more than 15 members, of which
three shall be Robert J. Davis, Edward M. Philip
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and one member of the Lycos Board selected by Lycos prior to the Exchange
Effective Time and reasonably acceptable to Terra.
7.14 Capital Increase. The Terra Board shall execute the approval of the
shareholders of Terra to increase the share capital of Terra against a
contribution in kind (Aumento con aportaciones no dinerarias) and shall register
such action pursuant to the Deed of Capital Increase with the Commercial
Registry immediately following receipt of the Lycos Virginia Certificate.
7.15 Transfer Taxes. All stock transfer, real estate transfer,
documentary, stamp, recording and other similar Taxes (including interest,
penalties and additions to any such Taxes) ("TRANSFER TAXES") incurred in
connection with the Reorganization shall be paid by the party incurring such tax
and the parties hereto shall cooperate in preparing, executing and filing any
tax returns with respect to such Transfer Taxes. Notwithstanding the foregoing,
any Transfer Taxes incurred by the shareholders of either Lycos or Lycos
Virginia in connection with the Reorganization ("SHAREHOLDER TRANSFER TAXES")
shall be paid by Lycos Virginia out of its own funds. No funds will be supplied,
directly or indirectly, by Terra for the purpose of paying Shareholder Transfer
Taxes, nor will Terra, directly or indirectly, reimburse Lycos Virginia for any
such payment of Shareholder Transfer Taxes.
7.16 Employee Stock Purchase Plan. Lycos shall take all necessary action
to provide that the "purchase period" commencing February 1, 2000 under the ESPP
shall be the final purchase period under such plan and that the last day of such
final purchase period shall occur on the earlier of (1) the date on which such
purchase period would terminate according to the terms of the ESPP and (2) the
last day of the payroll period immediately prior to the Exchange Effective Time.
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligation to Effect the Reincorporation
Merger and the Share Exchange. The respective obligations of the parties to
effect each of the Reincorporation Merger and the Share Exchange shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approval. The Lycos Stockholder Approval and the
Terra Shareholder Approval each shall have been obtained.
(b) Listing. The Terra ADSs to be issued to the stockholders of
Lycos Virginia upon consummation of the Share Exchange shall have been
authorized for quotation on the Nasdaq, subject to official notice of
issuance.
(c) HSR Act; EC Merger Regulations; Deed of Execution. The waiting
period (and any extension thereof) applicable to the Reincorporation Merger
or the Share Exchange under the HSR Act shall have been terminated or shall
have expired, any required approval of the Reincorporation Merger or the
Share Exchange of the European Commission under Counsel Regulation (EEC)
No. 4064/89 shall have been obtained and the execution of the Deed of
execution of Capital Increase, the filing of the necessary auditors' report
and the filing of the necessary report of the expert designated by the
Commercial Registry relating to the fair value of the assets acquired by
Terra in the Share Exchange shall have been filed or made.
(d) F-4. The F-4 shall have become effective under the Securities
Act and no stop order suspending the effectiveness of the F-4 shall have
been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No (i) order,
injunction, writ or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Reorganization or any of the other transactions
contemplated by this Agreement shall be in effect and (ii) statute, rule,
regulation, order, injunction, writ or decree
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shall have been enacted, entered, promulgated or enforced by any
Governmental Entity that prohibits, or makes illegal consummation of the
Reorganization (collectively, "RESTRAINTS").
(f) Federal Tax Opinion. Lycos shall each have received the opinion
of Cravath, Swaine & Moore, and Terra shall have received the opinion of
Davis Polk & Wardwell, in form and substance reasonably satisfactory to
Lycos and Terra, respectively, dated the Closing Date, substantially to the
effect that, for U.S. tax purposes on the basis of facts, representations
and assumptions set forth in each such opinion that are consistent with the
state of facts existing at the Reincorporation Effective Time and at the
Exchange Effective Time:
(i) Each of the Reincorporation Merger and the Share Exchange will
constitute a reorganization within the meaning of Section 368(a) of the
Code;
(ii) Lycos and Lycos Virginia will each be a party to the
reorganization within the meaning of Section 368(b) of the Code with
respect to the Reincorporation Merger and Lycos Virginia and Terra will
each be a party to the reorganization within the meaning of Section
368(b) of the Code with respect to the Share Exchange;
(iii) No gain or loss will be recognized by Lycos or Lycos
Virginia as a result of the Reincorporation Merger or by Lycos Virginia
as a result of the Share Exchange; and
(iv) No gain or loss will be recognized by shareholders of Lycos
who exchange all of their Lycos Common Stock solely for shares of Lycos
Virginia Common Stock pursuant to the Reincorporation Merger and no gain
or loss will be recognized by shareholders of Lycos Virginia who
exchange all of their Lycos Virginia Common Stock solely for Terra Stock
pursuant to the Share Exchange (except with respect to cash received in
lieu of a fractional share interest in Terra Stock).
In rendering such opinions, counsel may require and rely upon
representations contained in certificates of officers of Lycos, Lycos
Virginia and Terra and may assume that any shareholder of Lycos that is a
U.S. person and a "five percent transferee shareholder" as defined in
Treas. Reg. sec. 1.367(a)-3(c)(5)(ii) will enter into a five-year gain
recognition agreement in the form provided in Treas. Reg. sec. 1.367(a)-8.
(g) Prospectus Verification. The Prospectus shall have been verified
by, and registered with, the NSEC.
8.2 Conditions to Obligations of Lycos. The obligation of Lycos to effect
each of the Reincorporation Merger and the Share Exchange is also subject to the
satisfaction, or waiver by Lycos, at or prior to the Effective Time, of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Terra set forth in this Agreement shall be true and correct
in all material respects as of May 16, 2000 and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; provided,
however, that for purposes of this Section 8.2(a), Terra's representations
and warranties shall be deemed to be true and correct unless the failure or
failures of such representations and warranties to be so true and correct,
either individually or in the aggregate, and without giving effect to any
qualification as to materiality or Material Adverse Effect set forth in
such representations or warranties, has had or would reasonably be expected
to have a Material Adverse Effect on Terra or the Surviving Corporation.
Lycos shall have received a certificate signed on behalf of Terra by the
Chief Executive Officer and the Chief Financial Officer of Terra to the
foregoing effect.
(b) Performance of Obligations of Terra. Terra shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Lycos shall have
received a certificate signed on behalf of Terra by the Chief Executive
Officer and the Chief Financial Officer of Terra to such effect.
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(c) Completion of Rights Offering. Terra shall have completed, and
received the proceeds from, a rights offering in respect of Terra Shares
contemplated by the Rights Offering Agreement (as defined below) for
aggregate value, including a par value plus premium to be paid in by the
subscribers, of 2.2 billion Euros;
(d) Entry into Wireless Agreement. Terra and Telefonica Moviles,
S.A., shall have entered into a definitive agreement with respect to the
matters set forth on Schedule 8.2 hereto.
(e) Performance of Obligations of Telefonica. Telefonica shall have
performed in all material respects all obligations required to be performed
by it under the Rights Offering Agreement dated the date hereof between
Telefonica, Terra and Lycos at or prior to the Closing Date.
8.3 Conditions to Obligations of Terra. The obligation of Terra to effect
the Share Exchange is also subject to the satisfaction or waiver by Terra at or
prior to the Reorganization Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Lycos set forth in this Agreement shall be true and correct
in all material respects as of May 16, 2000, except for the representations
and warranties of Lycos set forth in Section 4.19 which shall be true and
correct in all material respects as of the Closing Date, and (except to the
extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, provided,
however, that for purposes of this Section 8.3(a), Lycos's representations
and warranties shall be deemed to be true and correct unless the failure or
failures of such representations and warranties to be so true and correct,
either individually or in the aggregate, and without giving effect to any
qualification as to materiality set forth in such representations or
warranties, has had or would reasonably be expected to have a Material
Adverse Effect on Lycos. Terra shall have received a certificate signed on
behalf of Lycos by the Chief Executive Officer and the Chief Financial
Officer of Lycos to the foregoing effect.
(b) Performance of Obligations of Lycos. Lycos shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Terra shall have
received a certificate signed on behalf of Lycos by the Chief Executive
Officer and the Chief Financial Officer of Lycos to such effect.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 Termination. This Agreement may be terminated at any time prior to
the Reincorporation Effective Time, whether before or after (unless otherwise
provided below) approval of the matters presented in connection with the
Reincorporation Merger or the Share Exchange by the shareholders of Lycos or
Terra:
(a) by mutual consent of Lycos and Terra in a written instrument, if
the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either the Board of Directors of Lycos or the Board of
Directors of Terra if any Restraint having any of the effects set forth in
Section 8.1(e) shall be in effect and shall have become final and
nonappealable, provided that such terminating party shall have used its
reasonable best efforts to prevent the entry of and to remove such
Restraint;
(c) by either the Board of Directors of Lycos or the Board of
Directors of Terra if any shareholder approval required by Section 8.1(a)
is not obtained at shareholder meetings duly convened pursuant to Section
7.3 or at any postponement or adjournment thereof;
(d) by either the Board of Directors of Lycos or the Board of
Directors of Terra if the Reorganization shall not have been consummated on
or before January 31, 2001, unless the
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failure of the Closing to occur by such date shall be due to the failure of
the party seeking to terminate this Agreement to perform or observe the
covenants and agreements of such party set forth herein;
(e) by either the Board of Directors of Lycos or the Board of
Directors of Terra (provided that the terminating party is not then in
breach of any representation, warranty, covenant or other agreement
contained herein) if there shall have been a breach of any of the covenants
or agreements or any of the representations or warranties set forth in this
Agreement on the part of Terra, in the case of a termination by Lycos, or
Lycos, in the case of a termination by Terra, which breach, either
individually or in the aggregate, would constitute, if occurring or
continuing on the Closing Date, the failure of the conditions set forth in
Section 8.2 or 8.3, as the case may be, and that is not cured within 30
days following written notice to the party committing such breach or by its
nature or timing cannot be cured prior to the Closing Date;
(f) by Terra, (i) if the Board of Directors of Lycos withdraws,
modifies or changes its recommendation of this Agreement in a manner
adverse to Terra or shall have resolved to do so, (ii) if, after a bona
fide Acquisition Proposal shall have been made public, the Board of
Directors of Lycos shall have refused to affirm its recommendation of this
Agreement as promptly as practicable (but in any case within 10 business
days) after receipt of any written request from Terra (provided that Terra
may only make one such request in respect of each Acquisition Proposal),
(iii) if the Board of Directors of Lycos shall have recommended to the
stockholders of Lycos an Acquisition Proposal or shall have resolved to do
so, or (iv) if a tender offer or exchange offer for 15% or more of the
outstanding shares of capital stock of Lycos is commenced, and the Board of
Directors of Lycos fails to recommend against acceptance of such tender
offer or exchange offer by its stockholders (including by taking no
position with respect to the acceptance of such tender offer or exchange
offer by its stockholders);
(g) by Lycos prior to the vote of the stockholders of Lycos on the
Agreement and the Reorganization, if, after receiving a bona fide
Acquisition Proposal, the Board of Directors of Lycos determines, in good
faith after consulting with outside legal counsel, that such action is
necessary to comply with the fiduciary duties of the Lycos Board under
applicable law; provided, however, that Lycos may not terminate this
Agreement pursuant to this subsection (g) until three business days have
elapsed following delivery to Terra of written notice of such determination
of Lycos (which written notice will inform Terra of the material terms and
conditions of the Acquisition Proposal); provided, further, however, that
such termination under this Section 9.1(g) shall not be effective until
Lycos has made payment to Terra of the amounts required to be paid pursuant
to Section 9.2(b).
9.2 Effect of Termination. (a) In the event of termination of this
Agreement by either Lycos or Terra as provided in Section 9.1, this Agreement
shall forthwith become void and have no effect, and none of Lycos, Terra, any of
their respective Subsidiaries or any of the officers or directors of any of them
shall have any liability of any nature whatsoever hereunder, or in connection
with the transactions contemplated hereby, except that (i) Sections 9.2(b), 9.2,
10.3, and 10.12 through and including 10.15 shall survive any termination of
this Agreement, and (ii) notwithstanding anything to the contrary contained in
this Agreement, neither Lycos nor Terra shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provision of
this Agreement.
(b) In the event that (i) this Agreement is terminated by Terra pursuant
to clause (ii), (iii) or (iv) of Section 9.1(f) or (ii) this Agreement is
terminated by Lycos pursuant to Section 9.1(g) or (iii) (A) this Agreement is
terminated pursuant to (x) Section 9.1(c) due to the failure of Lycos's
stockholders to approve and adopt this Agreement, (y) Section 9.1(d) without the
Lycos Stockholder Meeting having occurred or (z) clause (i) of Section 9.1(f)
and (B) at the time of such failure to so approve and adopt this Agreement (in
the case of clause (x)) or at the time of such termination, (in the case of
clause (y)) or at the time of the withdrawal, modification or change in
recommendation (in the case of clause (z)) any person (other than Terra) has
made to Lycos or any of its Subsidiaries
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a bona fide Acquisition Proposal which shall have been made known to the Lycos
stockholders generally or shall have publicly announced an intention (whether or
not conditional) to make an Acquisition Proposal and, within 12 months of the
termination of this Agreement, Lycos enters into a definitive agreement with any
third party to consummate, or consummates, an Acquisition Proposal (as defined
in Section 7.12 except that the references to "15%" therein shall be deemed to
be references to "40%"), then in each of (i) - (iii), Lycos shall pay to Terra
an amount equal to 3% of the product of (A) the closing price of Terra Shares on
the SCME on May 16, 2000 expressed in U.S. dollars using the noon buying rate of
Euros for U.S. dollars as of such date as reported by the U.S. Federal Reserve,
(B) 1.72 and (C) 120,000,000 (the "TERMINATION FEE").
(c) The Termination Fee required to be paid pursuant to Section 9.2(b)(i)
shall be paid to Terra by wire transfer of immediately available funds no later
than two days after this Agreement has been terminated. The Termination Fee
required to be paid pursuant to Section 9.2(b)(ii) shall be paid to Terra prior
to, and shall be a pre-condition to effectiveness of, termination of this
Agreement pursuant to Section 9.1(g). The Termination Fee required to be paid
pursuant to Sections 9.2(b)(iii) shall be paid to Terra no later than two days
after the earlier to occur of the date of entrance by Lycos or any of its
Subsidiaries into the definitive agreement referenced in Section 9.2(b)(iii) and
the date of consummation of such Acquisition Proposal referenced in Section
9.2(b)(iii).
(d) Each of Lycos and Terra agrees that the payments provided for in
Sections 9.2(b) shall be the sole and exclusive remedies of the parties upon a
termination of this Agreement pursuant to Section 9.1(c), (d), (f), or (g), as
the case may be, and such remedies shall be limited to the payments stipulated
in Section 9.2(b); provided, however, that nothing herein shall relieve any
party from liability for the willful breach of any of its representations and
warranties or the breach of any of its covenants or agreements set forth in this
Agreement.
(e) Any payment required to be made pursuant to Section 9.2(b) shall be
made by wire transfer of immediately available funds to an account designated by
the party entitled to receive payment.
9.3 Amendment. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with Reorganization by the shareholders of Lycos
and Terra; provided, however, that after any approval of the transactions
contemplated by this Agreement by the respective shareholders of Lycos or Terra,
there may not be, without further approval of such shareholders, any amendment
of this Agreement that changes the amount or the form of the consideration to be
delivered hereunder to the holders of Lycos Common Stock, other than as
contemplated by this Agreement, or that under applicable law otherwise requires
the further approval of such shareholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
9.4 Extension; Waiver. At any time prior to the Exchange Effective Time,
the parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein; provided, however,
that after any approval of the transactions contemplated by this Agreement by
the respective shareholders of Lycos or Terra, there may not be, without further
approval of such shareholders, any extension or waiver of this Agreement or any
portion thereof that reduces the amount or changes the form of the consideration
to be delivered to the holders of Lycos Common Stock hereunder, other than as
contemplated by this Agreement, or that under applicable law otherwise requires
the further approval of such shareholders. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to
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insist on strict compliance with an obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure.
ARTICLE X
GENERAL PROVISIONS
10.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the Reincorporation Merger and the Share Exchange (the "CLOSING")
will take place at 10:00 a.m. on a date and at a place to be specified by the
parties, which shall be no later than five business days after the satisfaction
(or, to the extent permitted by law or regulation, waiver by all parties) of the
conditions set forth in Section 8.01, or, if on such day any condition set forth
in Section 8.02 or 8.03 has not been satisfied (or, to the extent permitted by
law or regulation, waived by the party or parties entitled to the benefits
thereof), as soon as practicable after all the conditions set forth in Article
VIII have been satisfied (or, to the extent permitted by law or regulation,
waived by the parties entitled to the benefits thereof), or at such other place,
time and date as shall be agreed in writing between Terra and Lycos. The date on
which the Closing occurs is referred to in this Agreement as the "CLOSING DATE".
10.2 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement (other than the
Confidentiality Agreement, which shall terminate in accordance with the terms
thereof) shall survive the Closing, except for Section 7.7 and for those other
covenants and agreements contained herein and therein that by their terms apply
in whole or in part after the Closing.
10.3 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense, provided, however, that the costs and expenses of
printing and mailing the Proxy Statement, and all filing and other fees paid to
the SEC in connection with the Reincorporation Merger, shall be shared equally
by Lycos and Terra.
10.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Lycos or Lycos Virginia, to:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451-2000
Facsimile No.: 781-370-2600
Attn.: Edward M. Philip
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Facsimile No.: 212-474-3700
Attn: Faiza J. Saeed, Esq.
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and
(b) if to Terra, to:
Terra, S.A.
Via de las Dos Castillas
33, Complejo Atica, Edeficial
Pozuelo de Alarcon
28223 Madrid
Spain
Facsimile No.: 011-34-91-452-3305
Attention: Antonio de Esteban
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Facsimile No.: 212-450-4800
Attention: Diane G. Kerr, Esq.
and a copy to:
Greenberg Traurig, LLP
The MetLife Building
200 Park Avenue
New York, NY 10166
Facsimile No.: (212) 801-6400
Attn: Clifford E. Neimeth, Esq.
10.5 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
10.6 Counterparts; Effectiveness. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement. Upon
the execution of this Agreement by each of the parties hereto (it being
understood that all parties need not sign the same counterpart) and the delivery
by each party of a counterpart executed by it to each other party hereto, the
Original Agreement shall, without any further action by any of the parties
thereto, be automatically amended and restated to read as this Agreement reads.
10.7 Entire Agreement. This Agreement (including the documents and the
instruments referred to herein) and the Confidentiality Agreement, the Rights
Offering Agreement, dated as of May 16, 2000, by and among Lycos, Terra and
Telefonica, the Strategic Alliance Memorandum of Understanding dated as of May
16, 2000, among Bertelsmann AG, Terra and Lycos and the Strategic Alliance
Memorandum of Understanding dated as of May 16, 2000, among Bertelsmann AG,
Telefonica, Terra and Lycos constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof.
10.8 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without regard to any
applicable conflicts of law principles.
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10.9 Publicity. Except as otherwise required by applicable law or the
rules of the Nasdaq or the CNMV, neither Lycos or Terra shall, or shall permit
any of its Subsidiaries to, issue or cause the publication of any press release
or other public announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this Agreement without
the consent of Terra, in the case of a proposed announcement or statement by
Lycos, or Lycos, in the case of a proposed announcement or statement by Terra,
which consent shall not be unreasonably withheld.
10.10 Assignment; Third Party Beneficiaries. Neither this Agreement nor
any of the rights, interests or obligations shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Except as otherwise
specifically provided in Section 7.7, this Agreement (including the documents
and instruments referred to herein) is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
10.11 Submission to Jurisdiction; Waivers; Consent to Service of
Process. (a) Each of Terra and Lycos irrevocably agree that any legal action or
proceeding with respect to this Agreement or for recognition and enforcement of
any judgment in respect hereof brought by another party hereto or its successors
or assigns may be brought and determined in any Delaware state court or Federal
court sitting in the State of New York or the State of Delaware, and each of
Terra and Lycos hereby (x) irrevocably submits with regard to any such action or
proceeding for itself and in respect to its property, generally and
unconditionally, to the exclusive personal jurisdiction of the aforesaid courts
in the event any dispute arises out of this Agreement or any transaction
contemplated hereby, (y) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court
and (z) agrees that it will not bring any action relating to this Agreement or
any transaction contemplated hereby in any court other than any Delaware state
or Federal court sitting in the State of New York or the State of Delaware. Any
service of process to be made in such action or proceeding may be made by
delivery of process in accordance with the notice provisions contained in
Section 10.11(b). Each of Terra and Lycos hereby irrevocably waives, and agrees
not to assert, by way of motion, as a defense, counterclaim or otherwise, in any
action or proceeding with respect to this Agreement, (a) the defense of
sovereign immunity, (b) any claim that it is not personally subject to the
jurisdiction of the above-named courts for any reason other than the failure to
serve process in accordance with this Section 10.11, (c) that it or its property
is exempt or immune from jurisdiction of any such court or from any legal
process commenced in such courts (whether through service of notice, attachment
prior to judgment, attachment in aid of execution of judgment, execution of
judgment or otherwise), and (d) to the fullest extent permitted by applicable
law that (i) the suit, action or proceeding in any such court is brought in an
inconvenient forum, (ii) the venue of such suit, action or proceeding is
improper and (iii) this Agreement, or the subject matter hereof, may not be
enforced in or by such courts.
(b) Terra hereby appoints National Registered Agents, Inc., with offices
on the date hereof at 9 East Loockerman Street in the City of Dover, County of
Kent, State of Delaware, and with offices on the date hereof at 440 Ninth
Avenue, Fifth Floor, in the City of New York, County of New York, State of New
York, as its authorized agent (the "AUTHORIZED AGENT"), upon whom process may be
served in any suit, action or proceeding arising out of or relating to this
Agreement or any transaction contemplated by this Agreement that may be
instituted in any court described in Section 10.11(a). Telefonica agrees to take
any and all reasonable action, including the filing of any and all documents,
that may be necessary to establish and continue such appointment in full force
and effect as aforesaid. Telefonica agrees that service of process upon the
Authorized Agent shall be, in every respect, effective service of process upon
Telefonica.
10.12 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specified terms or was otherwise breached.
It is accordingly agreed that the parties shall be
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entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of
competent jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
10.13 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
IN WITNESS WHEREOF, Lycos, Lycos Virginia and Terra have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
TERRA NETWORKS, S.A.
By: /s/ ABEL LINARES PALACIOS
--------------------------------------
Name: Abel Linares Palacios
Title: Chief Executive Officer
LYCOS, INC.
By: /s/ EDWARD M. PHILIP
--------------------------------------
Name: Edward M. Philip
Title: Chief Operating Officer,
Chief Financial Officer
and
Secretary
LYCOS VIRGINIA, INC.
By: /s/ EDWARD M. PHILIP
--------------------------------------
Name: Edward M. Philip
Title: Vice President, Treasurer
and Secretary
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ANNEX A
PLAN OF SHARE EXCHANGE
BETWEEN
LYCOS VIRGINIA, INC.
AND
TERRA NETWORKS, S.A.
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"), Lycos
Virginia, Inc. ("Lycos Virginia"), shall become a wholly-owned subsidiary of
Terra Networks, S.A., a company organized under the laws of the Kingdom of Spain
("Terra"), pursuant to a statutory share exchange under Section 13.1-722 of the
Virginia Stock Corporation Act.
ARTICLE I
TERMS OF THE SHARE EXCHANGE
1.1 The Share Exchange. Subject to the terms and conditions of the
Amended and Restated Agreement and Plan of Reorganization, dated as of September
20, 2000, between Lycos, Inc., Lycos Virginia and Terra (the "Agreement") at the
Exchange Effective Time (as defined Section 2.1 of this Plan of Share Exchange),
Lycos Virginia shall become a wholly-owned subsidiary of Terra through the
exchange of each outstanding share of common stock of Lycos Virginia for
ordinary shares of Terra (such shares to be issued in the form of American
Depositary Shares, except as otherwise provided in Section 2.1(a) of this Plan
of Share Exchange) in accordance with Section 2.1 of this Plan of Share Exchange
and pursuant to a statutory share exchange under Sections 13.1-717 and 13.1-722
of the Virginia Stock Corporation Act (the "Share Exchange"). At the Exchange
Effective Time, the Share Exchange shall have the effect as provided in Section
13.1-721 of the Virginia Stock Corporation Act.
ARTICLE II
MANNER OF EXCHANGING SHARES
2.1 Exchange of Shares. Upon and by reason of the Share Exchange becoming
effective pursuant to the issuance of a Certificate of Share Exchange by the
Virginia State Corporation Commission (the "Exchange Effective Time"):
(a) each share of Lycos Virginia Common Stock issued and outstanding
immediately prior to the Exchange Effective Time shall be exchanged for
that number of shares of Terra Capital Stock (as defined in the Agreement)
determined by dividing (i) $97.55 by (ii) the average closing price
(rounded to the nearest thousandth, or if there shall not be a nearest
thousandth of a U.S. dollar, the next higher thousandth) of Terra Shares
(the "Terra Average Price") on the Spanish Continuous Market Exchange
(Systema de Interconexion Bursatil-Mercado Continuo) (the "SCME") for the
ten full SCME trading days ending on the tenth SCME trading day prior to
the Closing Date (excluding the Closing Date), each closing price expressed
in U.S. dollars using the noon buying rate of Euros for U.S. dollars as of
each day on which such average closing price is measured (such quotient, as
it may be adjusted as provided herein, the "Exchange Ratio"); provided,
however, that if the Terra Average Price is equal to or greater than
$68.06, the Exchange Ratio shall be 1.433, and if the Terra Average Price
is equal to or less than $45.37, the Exchange Ratio shall be 2.150. The
Terra Shares to be issued in exchange for the shares of Lycos Virginia
Common Stock exchanged hereunder shall be registered in the name of the
Depositary by the Settlement and Clearing System and then delivered (x) in
the form of American Depositary Shares representing Terra Shares ("Terra
ADSs"), and such Terra ADSs shall be issued in accordance with the
Depositary Agreement dated as of November 15, 1999,
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by and between Terra, Citibank, N.A., as depositary, and the holders of
Terra ADSs (as such agreement may be amended to deposit the Terra Shares
being issued pursuant hereto and to deliver the Terra ADSs being delivered
hereto) or a depositary agreement to be entered into after the date of this
Agreement in form and substance not reasonably objected to by Lycos (the
"Depositary Agreement") or (y) if and to the extent elected by any holder
in the manner provided in Section 3.2(b) of the Agreement, in the form of
Terra Shares, in account entry form, rather than Terra ADSs. Following the
Exchange Effective Time, each certificate previously representing any
shares of Lycos Virginia Common Stock ("Lycos Virginia Common Certificate")
exchanged for Terra Shares pursuant to this Section 2.1 shall cease to
represent shares of Lycos Virginia Common Stock and shall thereafter
represent only the right to receive (i) a receipt issued in accordance with
the Depositary Agreement representing the number of whole Terra ADSs or
such number of Terra Shares in account entry form and (ii) cash in lieu of
fractional shares, in each case, for which the shares of Lycos Virginia
Common Stock represented by such Lycos Virginia Common Certificate have
been exchanged pursuant to this Section 2.1 and Section 2.3, respectively.
Certificates previously representing shares of Lycos Virginia Common Stock
shall be exchanged for receipts representing whole Terra ADSs or Terra
Shares in account entry form and cash in lieu of fractional shares issued
in consideration therefor upon the surrender of such Lycos Virginia Common
Certificates in accordance with Section 2.3, without any interest thereon.
If, prior to the Exchange Effective Time, the outstanding shares of Terra
Capital Stock, Lycos Common Stock or Lycos Virginia Common Stock shall have
been changed into or exchanged for a different number or kind of shares or
securities as a result of a merger, consolidation or other business
combination, reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, or other similar change in
capitalization, an appropriate and proportionate adjustment shall be made
to the Exchange Ratio to provide to the stockholders of Lycos the same
economic effect, including any premiums, as contemplated by the Agreement
prior to such event.
(b) Shares of Lycos Virginia Common Stock issued and outstanding
shall, by virtue of the Share Exchange, continue to be issued and
outstanding shares held by Terra.
(c) At the Exchange Effective Time, each option granted by Lycos
Virginia to purchase shares of Lycos Virginia Common Stock that is
outstanding and unexercised immediately prior thereto shall cease to
represent a right to acquire shares of Lycos Virginia Common Stock and
shall be exchanged automatically for an option to purchase Terra ADSs in an
amount and at an exercise price determined as provided below (and otherwise
subject to the terms of the Lycos Stock Plans (as defined in the Agreement)
and the agreements evidencing grants thereunder):
1. The number of Terra ADSs to be subject to the new option shall
be equal to the product of the number of shares of Lycos Virginia Common
Stock subject to the original option and the Exchange Ratio, provided
that any fractional shares of Terra Common Stock resulting from such
multiplication shall be rounded to the nearest whole share; and
2. The exercise price per Terra ADS under the new option shall be
equal to the exercise price per share of Lycos Virginia Common Stock
under the original option divided by the Exchange Ratio, provided that
such exercise price shall be rounded to the nearest whole cent.
3. The adjustment provided herein with respect to any options that
are "incentive stock options" (as defined in Section 422 of the Internal
Revenue Code) shall be and is intended to be effected in a manner that
is consistent with Section 424(a) of the Internal Revenue Code. The
duration and other terms of the new option shall be the same as the
original option, except that all references to Lycos (or Lycos Virginia)
shall be deemed to be references to Terra.
2.2 Manner of Exchange. As promptly as practicable after the Exchange
Effective Time, Terra shall cause the Exchange Agent (as defined in the
Agreement) to send to each former stockholder
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of record of Lycos Virginia immediately prior to the Exchange Effective Time
transmittal materials for use in exchanging such stockholder's certificates of
Lycos Virginia Common Stock for the consideration set forth in Section 2.1 above
and Section 2.3 below. Any fractional share checks which a Lycos Virginia
shareholder shall be entitled to receive in exchange for such stockholder's
shares of Lycos Virginia Common Stock, and any dividends paid on any shares of
Terra Common Stock that such stockholder shall be entitled to receive prior to
the delivery to the Exchange Agent of such stockholder's certificates
representing all of such stockholder's shares of Lycos Virginia Common Stock,
will be delivered to such stockholder only upon delivery to the Exchange Agent
of the certificates representing all of such shares (or indemnity satisfactory
to Terra and the Exchange Agent, in their judgment, if any of such certificates
are lost, stolen or destroyed). No interest will be paid on any such fractional
share checks or dividends to which the holder of such shares shall be entitled
to receive upon such delivery.
2.3 No Fractional Shares. No certificates or scrip for fractional Terra
ADSs or Terra Shares will be issued. In lieu thereof, Terra will pay the value
of such fractional shares an amount of cash determined by multiplying (i) the
Terra Average Price by (ii) the fraction of a Terra Share (rounded to the
nearest thousandth when expressed in decimal form) to which such holder would
otherwise be entitled to receive pursuant to Section 2.1 of this Plan of Share
Exchange.
2.4 Dividends. No dividend or other distribution payable to the holders
of record of Terra Common Stock at or as of any time after the Exchange
Effective Time shall be paid to the holder of any certificate representing
shares of Lycos Virginia Common Stock issued and outstanding at the Exchange
Effective Time until such holder physically surrenders such certificate for
exchange as provided in Section 2.2 of this Plan of Share Exchange, promptly
after which time all such dividends or distributions shall be paid (without
interest).
ARTICLE III
MODIFICATIONS -- TERMINATION
Subject to the limitations of Section 13.1-718 of the of the Virginia Stock
Corporation Act, this Plan of Share Exchange may be amended, modified or
abandoned at any time prior to the Exchange Effective Time by action of the
Board of Directors of each of the parties hereto.
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ANNEX B
PLAN OF
MERGER BETWEEN
LYCOS, INC. AND
LYCOS VIRGINIA, INC.
ARTICLE I
TERMS OF THE MERGER
1.1 The Reincorporation Merger. Subject to the terms and conditions of
the Amended and Restated Agreement and Plan of Reorganization (the "Agreement"),
dated as of September 20, 2000, between Terra Networks, S.A. ("Terra"), Lycos,
Inc. ("Lycos") and Lycos Virginia, Inc. ("Lycos Virginia"), Lycos shall merge
(the "Reincorporation Merger") with and into Lycos Virginia. Lycos Virginia
shall be the Surviving Corporation (the "Surviving Corporation") in the
Reincorporation Merger and shall continue its corporate existence under the laws
of the Commonwealth of Virginia. Upon consummation of the Reincorporation
Merger, the separate corporate existence of Lycos shall cease.
1.2 Articles of Incorporation. The Articles of Incorporation of Lycos
Virginia immediately prior to the Reincorporation Merger shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable law.
1.3 Bylaws. The Bylaws of Lycos Virginia immediately prior to the
Reincorporation Merger shall be the Bylaws of the Surviving Corporation until
thereafter amended in accordance with applicable law.
ARTICLE II
MANNER OF CONVERTING SHARES
2.1 Conversion of Shares.
(a) Upon the Reincorporation Merger becoming effective pursuant to the
issuance of a Certificate of Merger by the Virginia State Corporation Commission
(the "Reincorporation Effective Time"), by virtue of the Reincorporation Merger
and without any action on the part of Lycos, Lycos Virginia or any holder of
common stock, par value $0.01 per share, of Lycos ("Lycos Common Stock"), (i)
each share of Lycos Common Stock issued and outstanding immediately prior to the
Reincorporation Effective Time shall be converted into one share of common
stock, par value $0.01 per share, of Lycos Virginia ("Lycos Virginia Common
Stock"), (ii) each share of Lycos Common Stock held in the treasury of Lycos
immediately prior to the Reincorporation Effective Time shall be cancelled and
(iii) each share of Lycos Virginia Common Stock issued and outstanding
immediately prior to the Reincorporation Effective Time shall be cancelled.
(b) All shares of Lycos Common Stock converted into shares of Lycos
Virginia Common Stock pursuant to Section 2.2(a) shall no longer be outstanding
and shall automatically be canceled and shall cease to exist as of the
Reincorporation Effective Time, and each certificate previously representing any
such shares ("Lycos Common Certificate") shall thereafter represent, without the
requirement of any exchange thereof, that number of shares of Lycos Virginia
Common Stock into which such shares of Lycos Common Stock represented by such
Lycos Common Certificate have been converted pursuant to Section 2.2(a) (such
certificates following the Reincorporation Merger, the "Lycos Virginia Common
Certificates").
(c) Lycos and Lycos Virginia shall take all requisite action such that, at
the Reincorporation Effective Time, each option granted by Lycos to purchase
shares of Lycos Common Stock that is outstanding and unexercised immediately
prior thereto shall cease to represent a right to acquire
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shares of Lycos Common Stock and shall be converted automatically into an option
to purchase a number of shares of Lycos Virginia Common Stock equal to the
number of shares of Lycos Common Stock subject to such option immediately prior
to the Reincorporation Effective Time at an exercise price per share of Lycos
Virginia Common Stock equal to the exercise price per share of Lycos Common
Stock in effect immediately prior to the Reincorporation Effective Time and
otherwise subject to the terms of the Lycos Stock Plans (as defined in Section
4.2 of the Agreement) under which such options were issued and the agreements
evidencing grants thereunder (including accelerated vesting provisions under
such agreements evidencing grants thereunder or under any employment agreements
between employees of Lycos and Lycos). The adjustment provided herein with
respect to any options that are "incentive stock options" (as defined in Section
422 of the Internal Revenue Code) shall be and is intended to be effected in a
manner which is consistent with Section 424(a) of the Internal Revenue Code. The
duration and other terms of the new option shall be the same as the original
option except that all references to Lycos shall be deemed to be references to
Lycos Virginia. Notwithstanding anything to the contrary herein, each option
granted by Lycos to a non-employee director prior to the Reincorporation
Effective Time shall be fully vested, to the extent not already vested, as of
the Reincorporation Effective Time.
ARTICLE III
MODIFICATIONS -- TERMINATION
Subject to the limitations of Section 13.1-718 of the Virginia Stock
Corporation Act, this Plan of Merger may be amended, modified or abandoned at
any time prior to the Reincorporation Effective Time by action of the Board of
Directors of each of the parties hereto.
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ANNEX B
<PAGE> 392
AMENDED AND RESTATED RIGHTS OFFERING AGREEMENT
AMENDED AND RESTATED RIGHTS OFFERING AGREEMENT, dated as of May 16, 2000 (this
"AGREEMENT"), by and among Telefonica, S.A., a company organized under the laws
of the Kingdom of Spain ("TELEFONICA"), Terra Networks, S.A., a company
organized under the laws of the Kingdom of Spain ("TERRA"), and Lycos, Inc., a
Delaware corporation ('LYCOS").
W I T N E S S E T H :
WHEREAS, Terra and Lycos have entered into an Agreement and Plan of
Reorganization dated as of the date hereof, as the same may be amended from time
to time, pursuant to which Lycos will become a wholly owned subsidiary of Terra
(the "REORGANIZATION AGREEMENT"; capitalized terms used herein but not defined
herein shall have the meanings ascribed thereto in the Reorganization
Agreement);
WHEREAS, in connection with the Reorganization Agreement, Terra's Board of
Directors (the "TERRA BOARD") has agreed to consummate a rights offering (the
"RIGHTS OFFERING") of shares of common stock ("SUBSCRIPTION STOCK") equal to an
aggregate value, including a par value plus premium to be paid in by the
subscribers, of 2.2 billion Euros (the "SUBSCRIPTION AMOUNT");
WHEREAS, Telefonica wishes to support Terra's business prospects and join
other Terra shareholders in a common vision for Terra's success;
WHEREAS, Telefonica, Terra and Lycos entered into a Rights Offering
Agreement, dated as of the date hereof (the "ORIGINAL RIGHTS OFFERING
AGREEMENT"), providing for the Rights Offering on the terms and subject to the
conditions set forth therein;
WHEREAS, Telefonica, Terra and Lycos desire to amend and restate the
Original Rights Offering Agreement as provided in this Agreement and, upon
satisfaction of the condition specified in Section 6(a), the Original Rights
Offering Agreement will be so amended and restated;
NOW THEREFORE, in consideration of the above-referenced recitals, and other
good and valuable consideration, the receipt and adequacy of which is hereby
conclusively acknowledged, the parties hereto intending to be legally bound,
agree as follows:
1. Rights Offering.
(a) As soon as reasonably practicable after the date of this Agreement,
the Board of Directors of Terra will call a meeting of the Terra shareholders
("TERRA SHAREHOLDERS") as soon as practicable to seek their approval to delegate
to the Board of Directors the power to effectuate the Rights Offering in an
amount equal to the Subscription Amount, in accordance with the Spanish
Corporation Law of 1989 (Texto Refundido de la Ley de Sociedades Anonimas). The
Terra Shareholders shall agree that necessary terms and conditions, including in
order to permit Telefonica to subscribe to the shares of the Subscription Stock
in accordance with Section 2 below, shall be determined by the Board of
Directors or the Delegated Committee of the Board of Directors (the "COMMITTEE")
at a meeting of such Board or Committee to be held in order to carry out the
Rights Offering. The per share subscription price shall be the closing price per
share of the Terra Capital Stock on the Spanish Continuous Market Exchange
(Systema de Interconexion Bursatil-Mercado Continuo) ("SCME") on May 16, 2000.
The Rights Offering shall be effective, available for subscription, completed
and the proceeds therefrom received by Terra at least two full SCME trading days
prior to the period during which the Terra Average Price is to be calculated
pursuant to the terms of the Reorganization Agreement.
(b) As soon as practicable following the date of this Agreement, Terra
shall (i) prepare and file with the CNMV a relevant fact disclosure (hecho
relevante), (ii) prepare and arrange to have a prior notice to the CNMV
outlining the proposed transaction (comunicacion previa) and have registered
with and verified by the CNMV a prospectus (folleto), and (iii) prepare and file
with the U.S.
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Securities and Exchange Commission a registration statement on Form F-1 (the
"Registration Statement"), if necessary, relating to the Rights Offering. Terra
shall use its reasonable best efforts to have such prospectus registered, and
the Registration Statement, if required, filed with and declared effective, by
the relevant securities authorities as promptly as practicable after such
filings. Terra shall also use its reasonable best efforts to (i) obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the Rights Offering, (ii) make the filings with and obtain the
authorization of the listing of Terra Shares on the Spanish Stock Exchange and
the verification by the NSEC and the Managing Companies of the Spanish Stock
Exchanges and (iii) make the filing with and obtain the approval of the Nasdaq
National Market to authorize the quotation of the ADSs.
2. Telefonica Commitment.
Subject to the terms and conditions of this Agreement, Telefonica agrees
that it shall subscribe for all of the shares of the Subscription Stock not
subscribed for by other shareholders of Terra in the Rights Offering; provided,
however, that in no event shall Telefonica be required to subscribe for in
excess of the entire Subscription Amount in connection with the Rights Offering.
3. Voting of Terra Shares. Telefonica agrees that it shall vote all of
its Terra Shares, which Telefonica represents to constitute approximately 66.6%
of the outstanding Terra Shares (all such shares, as they may be adjusted as a
result of any stock split, stock dividend, reclassification, merger,
reorganization, recapitalization or other change in the capital structure of
Terra, as well as any Terra Shares acquired after the date hereof and prior to
the meeting at which a vote of the Terra Shareholders is held in respect of
matters contemplated hereby or by the Reorganization Agreement, the "SUBJECT
SHARES"), in favor of the matters to be voted upon by the holders of Terra
Shares pursuant to the transaction contemplated hereby and by the Reorganization
Agreement. Telefonica agrees that it shall vote all such Terra Shares against
any matter upon which the Terra Shareholders are asked to vote involving any
amendment of the Terra Articles or the Terra By-Laws or any proposals or
transactions involving Terra or its Subsidiaries that, in any such case, would
prevent or materially delay consummation of the transactions contemplated hereby
or by the Reorganization Agreement or change in any manner the voting rights of
any class of capital stock of Terra.
4. Purchase and Sale of Subject Shares. Telefonica and Terra each hereby
agrees that it will not, and that it shall use its reasonable best efforts to
cause its "affiliates" and "associates" (as such terms are defined under Rule
12b-2 promulgated under the Exchange Act) not to, purchase or agree to purchase
any additional Terra Shares, any securities convertible into or exchangeable for
Terra Shares or any options, warrants or other rights to acquire Terra Shares
during the period during which the Terra Average Price is to be calculated
pursuant to the terms of the Reorganization Agreement and that it will not,
during such period, publicly announce any intention to purchase any Terra Shares
(other than pursuant to the Rights Offering). Telefonica further agrees that it
shall not sell, transfer, pledge, assign or otherwise dispose of (collectively,
"Transfer") or enter into any contract, option or other arrangement with respect
to the Transfer of, or the creation or offer of any derivative security in
respect of, the Subject Shares to any person or commit or agree, or announce an
intention to, take any of the foregoing actions.
5. Representations and Warranties. Telefonica represents and warrants
(with respect to the representations and warranties regarding Telefonica only)
to Lycos, Terra represents and warrants (with respect to the representations and
warranties regarding Terra only) to Lycos and Lycos represents and warrants
(with respect to the representations and warranties regarding Lycos only) to
Telefonica and Terra, each as of the date hereof:
(a) It has full corporate power and authority to execute and deliver
this Agreement and the Reorganization Agreement (if it is a party thereto)
and has full corporate power and authority to consummate the transactions
contemplated hereby and thereby (if it is a party thereto); the execution
and delivery of this Agreement and the Reorganization Agreement (if it is a
party thereto) and the consummation of the transactions contemplated hereby
and thereby (if it is a
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party thereto) have been duly and validly approved by its Board of
Directors (or, in the case of Telefonica, the Chairman of the Board of
Telefonica under the authorization granted by the Executive Committee of
the Board of Telefonica); this Agreement and the Reorganization Agreement
(if it is a party thereto) has been duly and validly executed and delivered
by it and (assuming due authorization, execution and delivery by the other
party or parties thereto) constitutes valid and binding obligation(s) of
it, enforceable against it in accordance with its (or their) terms; neither
the execution and delivery of this Agreement or the Reorganization
Agreement (if it is a party thereto) by it nor the consummation by it of
the transactions contemplated hereby or thereby (if it is a party thereto),
nor compliance by it with any of the terms or provisions hereof, will
violate any provision of its certificate of incorporation, articles of
incorporation, by-laws or other similar documents or violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to it or any of its properties or assets; and no
consents or approvals of or filings or registrations with any court,
administrative agency or commission or other governmental or regulatory
authority or instrumentality ("GOVERNMENTAL AUTHORITY"), or of or with any
third party, are necessary in connection with the execution and delivery by
it of this Agreement or the Reorganization Agreement (if it is a party
thereto) and the consummation by it of the transactions contemplated hereby
or thereby (if it is a party thereto) and compliance by it with any of the
provisions hereof or thereof (if it is a party thereto), other than those
the failure of which to obtain or make would not reasonably be expected to
prevent or materially delay the transactions contemplated hereby and other
than the approvals, filings, notices and registrations referred to in
Section 1 and in the Reorganization Agreement.
(b) Telefonica represents and warrants to Lycos that Telefonica owns,
directly or indirectly, all of the Subject Shares, free and clear of any
liens, pledges, charges, encumbrances and security interests whatsoever.
Telefonica represents and warrants to Lycos that Telefonica does not own
(of record or beneficially) any options, warrants, rights or other similar
instruments to acquire any capital stock or other voting securities of
Terra. Telefonica has the sole right to vote and Transfer the Subject
Shares, and none of the Subject Shares is subject to any voting trust or
other agreement, arrangement or restrictions with respect to the voting or
Transfer of the Subject Shares, except pursuant to this Agreement.
Telefonica hereby agrees that at all times prior to and including the date
of Terra Shareholder Meeting, it shall continue to own and have the right
to vote no less than the number and kind of Terra Shares held as of the
date hereof. To the extent inconsistent with the provisions of this
Agreement, Telefonica hereby represents that any proxies heretofore given
in respect of the Subject Shares are not irrevocable and that it hereby
revokes any and all previous proxies given by it with respect to the
Subject Shares or any other voting securities of Terra. Telefonica hereby
agrees that it shall not, directly or indirectly, grant any proxies or
powers of attorney with respect to the Subject Shares or any other voting
securities of Terra with respect to any matter that would prevent or
materially delay Telefonica from complying with its obligations set forth
in this Agreement. The parties understand and agree that the
representations and warranties contained in this Section 5(b) regarding the
Subject Shares do not relate to any Subject Shares acquired after the date
hereof.
6. General Provisions.
(a) This Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement. Upon execution of this Agreement by each
of the parties hereto (it being understood that all parties need not sign the
same counterpart) and the delivery by each party of a counterpart executed by it
to each other party hereto, the Original Rights Offering Agreement shall,
without any further action by any of the parties thereto, be automatically
amended and restated to read as this Agreement reads.
(b) This Agreement, together with the Reorganization Agreement (if a party
thereto) (including the documents and the instruments referred to herein)
constitutes the entire agreement and
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<PAGE> 395
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof.
(c) This Agreement shall be governed and construed in accordance with the
laws of the Kingdom of Spain, without regard to any applicable conflicts of law
principles.
(d) Except as otherwise required by applicable law or the rules of the
NASDAQ and Spanish Stock Exchange authorities (in which cases the party
proposing to make any disclosure shall provide reasonable notice to the other
party prior to making the proposed disclosure), none of the parties shall, or
shall permit any of its subsidiaries to, issue or cause the publication of any
press release or other public announcement with respect to, or otherwise make
any public statement concerning, the transactions contemplated by this Agreement
without the consent of Terra and Telefonica, in the case of a proposed
announcement or statement by Lycos, or Lycos, in the case of a proposed
announcement or statement by Terra or Telefonica, which consent shall not be
unreasonably withheld.
(e) This Agreement may not be amended, changed, supplemented, waived or
otherwise modified or terminated except by an instrument in writing signed by
Lycos and Telefonica. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to demand
such compliance.
(f) This Agreement shall be binding upon and shall inure to the benefit of
and be enforceable by the parties and their respective successors and assigns,
including without limitation in the case of any corporate party hereto any
corporate successor by merger or otherwise, and in the case of any individual
party hereto any trustee, executor, heir, legatee or personal representative
succeeding to the ownership of the Subject Shares or other securities subject to
this Agreement. Notwithstanding any transfer of Subject Shares, the transferor
shall remain liable for the performance of all obligations under this Agreement
of the transferor.
(g) If any term of this Agreement or the application thereof to any party
or circumstance shall be held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such term to the other
parties or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by applicable law, provided that in such event the
parties shall negotiate in good faith in an attempt to agree to another
provision (in lieu of the term or application held to be invalid or
unenforceable) that will be valid and enforceable and will carry out the
parties' intentions hereunder.
(h) The parties acknowledge that money damages are not an adequate remedy
for violations of this Agreement and that any party may, in its sole discretion,
apply to a court of competent jurisdiction for specific performance or
injunctive or such other relief as such court may deem just and proper in order
to enforce this Agreement or prevent any violation hereof and, to the extent
permitted by applicable law, each party waives any objection to the imposition
of such relief. All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
(i) This Agreement is not intended to be for the benefit of and shall not
be enforceable by any person or entity who or which is not a party hereto.
(j) Each party hereto hereby waives any right to a trial by jury in
connection with any such action, suit or proceeding.
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(k) Each of Telefonica, Terra and Lycos irrevocably agree that any legal
action or proceeding with respect to this Agreement or for recognition and
enforcement of any judgment in respect hereof brought by another party hereto or
its successors or assigns may be brought and determined in any Delaware state
court or Federal court sitting in the State of Delaware, and each of Telefonica
and Lycos hereby (x) irrevocably submits with regard to any such action or
proceeding for itself and in respect to its property, generally and
unconditionally, to the exclusive personal jurisdiction of the aforesaid courts
in the event any dispute arises out of this Agreement or any transaction
contemplated hereby, (y) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court
and (z) agrees that it will not bring any action relating to this Agreement or
any transaction contemplated hereby in any court other than any Delaware state
or Federal court sitting in the State of Delaware. Any service of process to be
made in such action or proceeding may be made by delivery of process in
accordance with the notice provisions contained in Section 6(k). Each of
Telefonica, Terra and Lycos hereby irrevocably waives, and agrees not to assert,
by way of motion, as a defense, counterclaim or otherwise, in any action or
proceeding with respect to this Agreement, (a) the defense of sovereign
immunity, (b) any claim that it is not personally subject to the jurisdiction of
the above-named courts for any reason other than the failure to serve process in
accordance with this Section 6(k), (c) that it or its property is exempt or
immune from jurisdiction of any such court or from any legal process commenced
in such courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise),
and (d) to the fullest extent permitted by applicable law that (i) the suit,
action or proceeding in any such court is brought in an inconvenient forum, (ii)
the venue of such suit, action or proceeding is improper and (iii) this
Agreement, or the subject matter hereof, may not be enforced in or by such
courts.
(l) Telefonica hereby appoints National Registered Agents, Inc., with
offices on the date hereof at 9 East Loockerman Street in the City of Dover,
County of Kent, State of Delaware, and with offices on the date hereof at 440
Ninth Avenue, Fifth Floor, in the City of New York, County of New York, State of
New York, as its authorized agent (the "AUTHORIZED AGENT"), upon whom process
may be served in any suit, action or proceeding arising out of or relating to
this Agreement or any transaction contemplated by this Agreement that may be
instituted in any court described in Section 6(k). Telefonica agrees to take any
and all reasonable action, including the filing of any and all documents, that
may be necessary to establish and continue such appointment in full force and
effect as aforesaid. Telefonica agrees that service of process upon the
Authorized Agent shall be, in every respect, effective service of process upon
Telefonica.
(m) Subject to the terms and conditions of this Agreement, the parties
hereto each agree to use its reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
permit consummation of transactions contemplated hereby and by the
Reorganization Agreement (if a party thereto) including, without limitation,
using its reasonable best efforts to obtain (and cooperating with the other
party hereto to obtain) any consent, authorization, order or approval of, or any
exemption by, any Governmental Authority (as defined in Section 5(a)) and any
other third party that is required to be obtained by any of the parties hereto
in connection with the transactions contemplated by this Agreement and by the
Reorganization Agreement (if a party thereto).
B-5
<PAGE> 397
(n) All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, telecopied (with confirmation),
mailed by registered or certified mail (return receipt requested) or delivered
by an express courier (with confirmation) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to Lycos, to:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451-2000
Facsimile No.: 781-370-2600
Attn.: Edward M. Philip
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Facsimile No.: 212-474-3700
Attn: Faiza J. Saeed, Esq.
and
if to Terra, to:
Terra Networks, S.A.
Via de las Dos Castillas
33, Complejo Atica, Edeficial
Pozuelo de Alarcon
28223 Madrid
Spain
Facsimile No.: 011-34-91-452-3144
Attention: Antonio de Esteban
With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Facsimile: 212-450-4800
Attention: Diane G. Kerr, Esq.
and a copy to:
Greenberg Traurig, LLP
The MetLife Building
200 Park Avenue
New York, NY 10166
Facsimile No.: (212) 801-6400
Attn: Clifford E. Neimeth, Esq.
(o) It is a condition precedent to the effectiveness of this Agreement
that the Reorganization Agreement shall have been executed and delivered by each
of the parties thereto and be in full force and effect. In the event the
Reorganization Agreement is terminated in accordance with its terms, this
Agreement shall automatically terminate and be of no further force or effect.
Upon such termination, except for any rights any party may have in respect of
any breach by any other party of its or his obligations hereunder, none of the
parties hereto shall have any further obligation or liability hereunder.
B-6
<PAGE> 398
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
TELEFONICA, S.A.
By: /s/ DIEGO LOZANO ROMERAL
------------------------------------
Name: Diego Lozano Romeral
Title: Vice Secretary General
TERRA NETWORKS, S.A.
By: /s/ ABEL LINARES PALACIOS
------------------------------------
Name: Abel Linares Palacios
Title: Chief Executive Officer
LYCOS, INC.
By: /s/ EDWARD M. PHILIP
------------------------------------
Name: Edward M. Philip
Title: Chief Operating Officer,
Chief Financial Officer
and Secretary
B-7
<PAGE> 399
ANNEX C
<PAGE> 400
LOGO
May 16, 2000
Board of Directors
Lycos, Inc.
400-2 Totten Pond Road
Waltham, Massachusetts 02451-2000
Members of the Board:
You have asked us to advise you with respect to the fairness, from a financial
point of view, to the holders of the common stock of Lycos, Inc. ("Lycos") of
the Exchange Ratio (as defined below) set forth in the Agreement and Plan of
Reorganization, dated as of May 16, 2000 (the "Agreement"), by and between Terra
Networks, S.A. ("Terra") and Lycos. The Agreement provides for, among other
things, (i) the merger (the "Reincorporation Merger") of Lycos with and into a
newly formed, wholly owned subsidiary of Lycos incorporated in Virginia ("Lycos
Virginia"), pursuant to which each outstanding share of the common stock, par
value $0.01 per share, of Lycos ("Lycos Common Stock") will be converted into
one share of the common stock, par value $0.01 per share, of Lycos Virginia
("Lycos Virginia Common Stock") and (ii) immediately following the
Reincorporation Merger, the exchange (the "Share Exchange" and, together with
the Reincorporation Merger, the "Reorganization") of each outstanding share of
Lycos Virginia Common Stock for that number of the ordinary shares, par value 2
Euros per share, of Terra ("Terra Ordinary Shares") (such Terra Ordinary Shares
to be delivered in the form of American depositary shares representing Terra
Ordinary Shares ("Terra ADSs" and, together with the Terra Ordinary Shares,
"Terra Shares"), unless the holder of Lycos Virginia Common Stock elects to
receive Terra Ordinary Shares) determined by dividing (a) $97.55 by (b) the
average closing price of the Terra Ordinary Shares (the "Terra Average Price")
on the Continuous Market Exchange (the "SCME") for the ten full SCME trading
days ending on the tenth SCME trading day prior to the closing date of the
Reorganization (the number of Terra Ordinary Shares for which each share of
Lycos Virginia Common Stock will be so exchanged in the Share Exchange, the
"Exchange Ratio"); provided, that if the Terra Average Price is equal to or
greater than $68.06, the Exchange Ratio will be 1.433, and if the Terra Average
Price is equal to or less than $45.37, the Exchange Ratio will be 2.150.
In arriving at our opinion, we have reviewed the Agreement and certain related
documents, and certain publicly available business and financial information
relating to Lycos and Terra. We have also reviewed certain other information
relating to Lycos and Terra provided to or discussed with us by Lycos and Terra,
as well as publicly available financial forecasts for Lycos and Terra discussed
with us by Lycos and Terra, and have met with the managements of Lycos and Terra
to discuss the businesses and prospects of Lycos and Terra. We have also
considered certain financial and stock market data of Lycos and Terra, and we
have compared those data with similar data for other publicly held companies in
businesses we deemed similar to those of Lycos and Terra, and we have
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions which have recently been
effected or announced. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. We have reviewed and
discussed with the managements of Lycos and Terra publicly available financial
forecasts relating to Lycos and Terra and have been advised, and have assumed,
that such forecasts represent reasonable estimates and judgments as to the
future financial performance of Lycos
<PAGE> 401
Board of Directors
Lycos, Inc.
May 16, 2000
Page 2
and Terra. In addition, we have relied upon, without independent verification,
the assessment of the managements of Lycos and Terra as to Terra's existing
technology and products and the validity of, and risks associated with, Terra's
future technology and products. We also have assumed, with your consent, that
(i) prior to the consummation of the Reorganization, Terra will complete, and
receive the proceeds from, a rights offering in respect of Terra Ordinary Shares
for aggregate value of 2.2 billion Euros, in accordance with the terms of the
Rights Offering Agreement, dated as of May 16, 2000, by and among Telefonica
S.A., the holder of approximately 70% of the Terra Ordinary Shares
("Telefonica"), Terra and Lycos and (ii) Bertelsmann AG ("Bertelsmann") will
purchase certain products and services from Terra for $1.0 billion in the
aggregate over a five-year period following the consummation of the
Reorganization, in accordance with the terms described to us by representatives
of Lycos. We further have assumed that the Reorganization will be treated as a
tax-free reorganization for United States federal income tax purposes. In
addition, we have not been requested to make, and have not made, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Lycos or Terra, nor have we been furnished with any such evaluations or
appraisals. Our opinion is necessarily based upon information available to us
and financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof. We are not expressing any opinion as to what the
value of Terra Ordinary Shares or Terra ADSs actually will be when issued to
Lycos' stockholders pursuant to the Share Exchange or the prices at which Terra
Shares will trade subsequent to the Reorganization. In connection with our
engagement, we were not requested to, and did not, solicit third party
indications of interest in the possible acquisition of all or any part of Lycos.
We have acted as financial advisor to Lycos in connection with the
Reorganization and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Reorganization. In the past, we
and our affiliates have provided financial services to Lycos and Telefonica, and
are currently providing financial services to Lycos, unrelated to the proposed
Reorganization, for which services we have received and will receive
compensation. In the ordinary course of business, we and our affiliates may
actively trade the debt and equity securities of Lycos, Terra, Telefonica and
Bertelsmann for our own and such affiliates' accounts and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Board of
Directors of Lycos in connection with its consideration of the Reorganization
and does not constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to any matter relating to the proposed
Reorganization.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of Lycos Common Stock.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
<PAGE> 402
SCHEDULE I
<PAGE> 403
DIRECTORS AND EXECUTIVE OFFICERS OF TERRA NETWORKS AND LYCOS
DIRECTORS AND EXECUTIVE OFFICERS OF TERRA NETWORKS
The name, business address, present principal occupation or employment and
five-year employment history of each director and executive officer of Terra
Networks and certain other information are set forth below. Unless otherwise
indicated below, the address of each director and executive officer is Via de
los Dos Castillas, 33, Complejo Atica Edificio 1, Pozuelo de Alarcon, 28223
Madrid, Spain. Unless otherwise indicated, each occupation set forth opposite an
individual's name refers to employment with us. Unless otherwise indicated in
the footnotes, all directors listed below are citizens of Spain.
DIRECTORS
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Joaquim Agut Bonsfills............... 2000 2005 Executive Chairman of our Board of Directors.
From 1997 to August 2000, Mr. Agut served as
president and chief executive officer of GE Power
Controls. Prior to that time, he served as vice
president and general manager of marketing and
sales of GE Power Controls. Mr. Agut was also the
GE national executive for Spain and Portugal and
chairman of the Pan European GE Quality Council.
In December 1999, he was named leader of the
European Corporate Executive Council of General
Electric, becoming General Electric's first
executive in Europe.
Cesar Alierta Izuel.................. 1999 2004 Director. On July 26, 2000, Mr. Alierta was named
chairman of the board of directors of Telefonica,
S.A. Mr. Alierta has served as president of
Altadis, S.A. since its inception. He has also
served as general manager of capital markets for
Banco Urquijo, a director of the Madrid Stock
Exchange and president of the Spanish Institute
of Financial Analysts. Mr. Alierta also serves on
the board of directors of Telefonica
Internacional, S.A.
Alberto Cortina de Alcocer........... 1999 2004 Director. Since 1997, Mr. Cortina has served as
chief executive officer of Banco Zaragozano. He
also serves on the board of directors of
Telefonica, S.A., Telefonica Internacional, S.A.,
Telefonica Publicidad e Informacion, S.A., A.C.
Hoteles and Autopista Vasco-Aragonesa C.E.A.
Alejandro Junco de la Vega
Elizondo(1)........................ 2000 2005 Director. Mr. Junco de la Vega is Director of the
internet division of Grupo Reforma. From
1997-1999 he served in the executive development
program of CEMEX (Cementos Mexicanos).
</TABLE>
Schedule I-1
<PAGE> 404
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Francisco Moreno de Alboran y de
Vierna............................. 1999 2004 Director. From 1973 until the present, Mr. Moreno
served in various positions at McKinsey & Co.,
and served as president of McKinsey's Spanish
organization and on its board of directors. Mr.
Moreno is also a member of the board of directors
of Circulo de Empresarios.
Abel Linares Palacios................ 2000 2005 Chief Executive Officer. From 1998 to 1999, Mr.
Linares served as executive vice president of
Telefonica Internacional USA, and during 1999 he
served as chief executive officer of Telefonica
Publicidad e Informacion. He has also held other
positions within the Telefonica group, including
president of Telefonica El Salvador, chief
executive officer of Telefonica Central America
and senior director of sales and customer
services at Telefonica, S.A.
Nelson P. Sirotsky................... 1999 2004 Director. From 1985 to the present, he has served
as chief executive officer of Grupo RBS. Since
1993 he has served on the boards of directors of
Televisao Gaucha S.A. and RBS Participacoes S.A.,
and since 1995 he has served on the board of
directors of Zero Hora Editora Jornalistica, S.A.
and Radio Gaucha S.A.
Bert C. Roberts, Jr.................. 2000 2005 Director. Mr. Roberts also serves as chairman of
the board of directors of WorldCom. Mr. Roberts
was a director of MCI until the merger of MCI and
Worldcom in 1998. From 1992 until the merger, Mr.
Roberts served as chairman of the board of
directors of MCI. Mr. Roberts was chief executive
officer of MCI from December 1991 to November
1996. Mr. Roberts is also a director of
Telefonica, S.A., The News Corporation
Limited,Valence Technology, Inc. and CAPCure.
John de Mol.......................... 2000 2005 Director. Since 1998 Mr. De Mol has served as the
chairman of the executive board of Endemol
Entertainment. He formed John De Mol Productions
in 1979, which merged in 1994 with Joop van den
Ende Productions to create Endemol Entertainment.
</TABLE>
Schedule I-2
<PAGE> 405
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Jose Maria Mas Millet................ 1999 2004 Director. From 1997 until the present, Mr. Mas
has served as secretary of Telefonica, S.A. and
as secretary of its board of directors. Prior to
1997, Mr. Mas practiced law in Spain. Since 1996,
he has served on the board of directors of Caja
de Ahorros de Valencia, Castellon y Alicante.
</TABLE>
---------------
(1) Mexican citizen.
EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
Abel Linares Palacios(1)
Juan Antonio Garcia-Urgeles 2000
Capdevilla......................... Chief Operating Officer. Mr. Garcia-Urgeles has
served in different positions at Microsoft Iberica,
among them as technical director for 5 years,
marketing director for 4 years and corporate
customer division general manager since 1999.
Antonio de Esteban Quintana.......... Chief Financial Officer. From 1998 until 1999, Mr. 1999
de Esteban served as director of sales for Spain
and Portugal for Barclays Capital. From 1993 until
1998, he served as director of sales for
derivatives products at Bankers Trust International
PLC, where he was named managing director in 1997.
Antonio Botas........................ Chief Marketing Officer. From 1997 until September 1999
of 1999 Mr. Botas served as director and general
manager of DoubleClick Iberoamerica. From 1995
until 1997 Mr. Botas served in a number of
executive positions at Telefonica Publicidad e
Informacion S.A. including director of marketing.
From 1994 through 1995 Mr. Botas served as director
of research and communication of the Royal Life
Insurance Company.
Luis Velo Puig-Duran................. E-Commerce General Manager. During the last five 2000
years Mr. Velo has developed his professional
carrier within the Antena 3 TV Group, a leading
Spanish private TV channel, first as General
Manager of Antena 3 Directo (Direct TV Sales
Company) and later as general manager of Antena 3
Iniciativas Comerciales.
</TABLE>
Schedule I-3
<PAGE> 406
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
Cristina Lamana...................... General Counsel. Ms. Lamana has practiced law in 1999
her own private practice and at the international
law firm of Baker & McKenzie. She has also served
as general counsel for several multinational
companies, including INDRA, S.A. from 1988 to 1992,
the Ericsson group in Spain and Latin America from
1992 to 1998 and the Terra Networks group since
1999.
Carmen Casares....................... Head of Human Resources and General Services. Mrs. 1999
Casares has served in different positions at the
Telefonica group, among them as head of human
resources for Telefonica de Espana for 10 years and
sales director for small office/home office and
residential for two years.
Raul de la Cruz...................... Corporate Sales Director. Mr. de la Cruz served as 1999
sales director at Double Click Iberoamerica from
1997 to 1999, digital communications director at
Clak Comunicaciones Integradas from 1996 to 1997
and in different positions at Ruiz Nicoli from 1995
to 1996.
Ramon Ros............................ Business Development and M&A Director. From 1991 to 1999
1992, Mr. Ros served in various positions at
Banesto, including as portfolio manager and
assistant director of the projects department.
During 1993, Mr. Ros served as an assistant
director at Sanofi Beaute -- Elf Aquitane Group.
From 1993 to 1994, Mr. Ros served as assistant
director to the investment products group at
Banesto. From 1994 to 1999, Mr. Ros served as
assistant director at Corporacion Industrial y
Financiera de Banesto.
Rafael Bonnelly...................... Content Director. From 1997 to 1999, Mr. Bonnelly 1999
served as vice-president of international business
development at Total Sports, Inc. From 1992 to
1994, Mr. Bonnelly served as president and
publisher at Inter-American Media Corp.
Laura Abasolo........................ Planning Director and Controller. Mrs. Abasolo 1999
served at Goldman Sachs & Co. for four years in its
M&A Department and at Middle Bank in its risk
management department during 1994.
Julian de Cabo Moreno................ General Manager in Spain. From 1998 until 1999, Mr. 2000
De Cabo was vice president of e-commerce Spanish
Association, and from 1994 until 1998, he served in
various executive positions for companies in
different industry sectors.
Silvia de Jesus...................... General manager of ZAZ. From 1996 until 1999, 1999
Ms. de Jesus served as the chief executive officer
of Nutec Informatica S.A., and from 1994 until
1996, served as the technology and communications
director for Grupo RBS.
</TABLE>
Schedule I-4
<PAGE> 407
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
Ines Maria Leopoldo.................. General manager in Argentina. From 1997 until 1999, 1999
Ms. Leopoldo served as systems and new media
manager of S.A. La Nacion, a national Argentine
newspaper. From 1993 until 1997, she served as
director of business development for Telecom
Argentina. Ms. Leopoldo served on the board of
directors of Portfolio Personal S.A., the majority
shareholder of S.A. La Nacion, in 1999.
Arturo Galvan........................ General manager of Infosel. From 1988 until 1999, 1999
Mr. Galvan served as chief executive officer of
Informacion Selectiva, S.A. de C.V. (Infosel).
Rainer Spitzer....................... General manager in Peru. From 1998 until 1999, Mr. 1999
Spitzer served in various management positions for
companies in the Telefonica group. From 1994 until
1998, he served in various management positions for
Cantec, a telecommunications company, and served on
its board of directors from 1997 until 1998.
Jorge Martina Aste................... General manager of CTC Internet. From 1998 until 1999
1999, Mr. Martina served as chief executive officer
of CTC Internet, S.A. From 1996 until 1998, he
served in various positions, including chief
executive officer of Metropolis -- Intercom, and
from 1994 until 1995 served as chief financial
officer for Intercom, S.A.
Rolando Rosito Solares............... General manager in Guatemala. From 1996 until 1999, 1999
Mr. Rosito served in several executive positions at
Infovia, S.A., including director of marketing and
sales. From 1993 until 1996, Mr. Rosito served as
general manager of Proteccion Electronica, S.A.
Manuel Bellod........................ United States General Manager. From 1989 until 2000
early 2000 Mr. Bellod served in different positions
at Bankers Trust Company and Donaldson Lufkin &
Jenrette with a focus on Latin America and emerging
markets.
</TABLE>
---------------
(1) See "-- Directors."
Schedule I-5
<PAGE> 408
DIRECTORS AND EXECUTIVE OFFICERS OF LYCOS
The name, business address, present principal occupation or employment and
five-year employment history of each director and executive officer of Lycos and
certain other information are set forth below. Unless otherwise indicated below,
the address of each director and executive officer is 400-2 Totten Pond Road,
Waltham, MA 02451. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to employment with Lycos. Unless otherwise
indicated in the footnotes, all directors listed below are citizens of the
United States.
DIRECTORS
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Robert J. Davis...................... 1995 2002 Robert J. Davis has served as President and Chief
Executive Officer of the Company since its
inception in June 1995. From January 1993 to June
1995, Mr. Davis served as Vice President of Sales
at Cambex Corporation, a manufacturer of
computer-related products. From January 1982 to
January 1993, Mr. Davis was employed by Wang
Laboratories, a computer manufacturer, in various
sales and marketing positions, including Director
of United States Commercial Sales and Marketing
and Director of Worldwide Marketing. Mr. Davis
holds a Bachelor of Science degree, summa cum
laude, from Northeastern University and a Master
in Business Administration from Babson College.
Mr. Davis received an honorary Doctor of
Commercial Sciences degree from Bentley College
in May of 1999. Mr. Davis serves on the Board of
Directors of Boston College High School, The
Greater Boston Chamber of Commerce, The
Massachusetts Interactive Media Council and The
Man.com.
</TABLE>
Schedule I-6
<PAGE> 409
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Daniel J. Nova....................... 1995 2000 Between 1996 and the present, Mr. Nova served as
a general partner of the general partner of
Highland Capital Partners II, III and IV Limited
Partnerships, a series venture capital
partnerships. Mr. Nova has also served as a
managing member of the general partner of
Highland Entrepreneurs' Fund III Limited
Partnership, a venture capital partnership. From
January 1995 to July 1996, Mr. Nova served as a
general partner of CMG@Ventures, L.P.
("CMG@Ventures"), a venture capital firm and a
significant stockholder of Lycos, and as Vice
President of CMG@Ventures, Inc., the managing
general partner of CMG@Ventures. From June 1991
to January 1995, Mr. Nova was a senior associate
at Summit Partners, a venture capital firm. From
September 1989 to May 1991, Mr. Nova attended
Harvard Business School. From June 1983 to August
1989, Mr. Nova was employed by Wang Laboratories,
a computer manufacturer, in various sales and
management positions. Mr. Nova received a
Bachelor of Science degree with honors in
Computer Science and Marketing from Boston
College and a Master in Business Administration
from Harvard Business School. Mr. Nova serves on
the Board of Directors of Etoys.com, MapQuest,
AskJeeves, BeFree, Topico, RadioLan, Send.com and
Beliefnet.com
Richard H. Sabot..................... 1998 2001 From February 1998 until approximately October
1999, Mr. Sabot served as Executive Vice
President of Tripod, Inc., a wholly owned
subsidiary of Lycos, and has been with Tripod.
From its inception in 1994 until February 1998,
Mr. Sabot served as Chairman of Tripod, Inc. Mr.
Sabot is the John J. Gibson Professor of
Economics Emeritus at Williams College where he
has taught since 1984. Previous to his tenure at
Williams, Mr. Sabot spent ten years at the World
Bank researching the role of human capital
accumulation in the development process. Mr.
Sabot received an undergraduate degree from the
University of Pennsylvania and a Doctorate of
Philosophy in Economics from Oxford University in
England. Mr. Sabot also serves on the Board of
Directors of eZiba.com and Newforum, Inc.
</TABLE>
Schedule I-7
<PAGE> 410
<TABLE>
<CAPTION>
BOARD CURRENT CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION
MEMBER TERM OR EMPLOYMENT; MATERIAL POSITIONS
NAME SINCE EXPIRES HELD DURING PAST FIVE YEARS
---- ------ ------- -------------------------------------------------
<S> <C> <C> <C>
Peter A. Lund........................ 1999 2001 Mr. Lund currently serves as a media consultant
and is a private investor in a number of
companies. Mr. Lund was President and CEO of CBS
Corporation from October 1995 to June 1997.
Previously, Mr. Lund held a variety of senior
management positions at CBS, including President,
CBS Sports, President, CBS Television Network;
President, Multimedia Entertainment. Mr. Lund
serves as a director for GHS Inc. and the
University of St. Thomas.
John M. Connors...................... 1996 2001 Mr. Connors is a founding partner, Chairman, and
CEO of Hill, Holiday, Connors, Cosmopolos, Inc.,
a leading full-service marketing communications
company. Hill, Holiday is a member of the
Interpublic Group of Companies which is traded on
the New York Stock Exchange. Mr. Connors is the
Chairman of the Board of Partners HealthCare
System, a member of the Board of Trustees of
Boston College and a member of the Board of
Directors of the John Hancock Mutual Life
Insurance Company, Geerlings and Wade, Inc. and
Saucony, Inc. He is past Chairman of the Board of
Directors of the Boys and Girls Clubs of Boston,
Belmont Hill School, the American Ireland Fund
and the Greater Boston Chamber of Commerce. Mr.
Connors is a graduate of Boston College.
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
Robert J. Davis(1)
Edward M. Philip..................... Chief Financial Officer and Secretary of the 1995
Company since December 1995 and Chief Operating
Officer since December 1996. From July 1991 to
December 1995, Mr. Philip was employed by The Walt
Disney Company where he served in various finance
positions, most recently as Vice President and
Assistant Treasurer. From September 1989 to May
1991, Mr. Philip attended Harvard Business School.
From August 1987 to June 1989, Mr. Philip was an
investment banker at Salomon Brothers Inc.
</TABLE>
Schedule I-8
<PAGE> 411
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
Ron A. Sege.......................... Executive Vice President Officer since January 1999
1999. Mr. Sege is responsible for steering the
development of the rapidly growing Lycos Network.
Prior to joining Lycos, Mr. Sege worked for 3Com
Corporation, most recently as senior vice president
of one of three business units at 3Com, a company
with approximately $6 billion in annual revenue and
13,000 employees. Before joining 3Com, Mr. Sege
worked for Rolm Corporation through its acquisition
by IBM. Mr. Sege serves on various corporate and
non-profit boards, including Artel Video Systems,
the Massachusetts Telecommunications Council and
Junior Achievement of New England.
David G. Peterson.................... Vice President of Advertising Sales of the Company 1996
since December 1996. From 1985 to 1996, Mr.
Peterson served in various sales positions at
International Data Group ("IDG"), most recently as
Associate Publisher of Computerworld, where he was
responsible for all U.S. advertising sales
operations and managed seven regional offices.
Previously, Mr. Peterson also held such positions
within IDG as Vice President of Eastern Advertising
Sales, Regional Vice President of New England
Advertising Sales and District Manager.
Thomas E. Guilfoile.................. Vice President of Finance and Administration since 1996
December 1996 and previously served as Controller
since February 1996. From July 1986 to January
1996, Mr. Guilfoile was employed by Ernst & Young
LLP, most recently as Senior Manager in the
Entrepreneurial Services Group. While at Ernst and
Young, Mr. Guilfoile provided both audit and
consulting services to both privately held and
publicly traded organizations, primarily in the
high-tech area with a focus on companies in the
information, communications and entertainment
industries. Mr. Guilfoile is a member of the Board
of Directors of AdOne LLC.
Jeffrey S. Bennett................... Senior Vice President of Business and Corporate 1999
Development since December 1999 and previously
served as Vice President and General Manager of
E-Commerce, Director of Business Development and
Manager of Business Development since December
1996. Mr. Bennett was formerly at Thomson Financial
Services, DST Systems and Wang Laboratories.
</TABLE>
Schedule I-9
<PAGE> 412
<TABLE>
<CAPTION>
CURRENT POSITION AND PRESENT PRINCIPAL OCCUPATION EXECUTIVE
OR EMPLOYMENT; MATERIAL POSITIONS OFFICER
NAME HELD DURING PAST FIVE YEARS SINCE
---- ------------------------------------------------- ---------
<S> <C> <C>
John P. McMahon...................... Chief Human Resources Officer since August 1999. 1999
Prior to joining Lycos, McMahon served as Vice
President of Human Resources at Wang Global. Before
joining Wang Global, McMahon served as Senior Vice
President of Human Resources at Stream
International and Stride Rite.
</TABLE>
---------------
(1) See "-- Directors."
Schedule I-10
<PAGE> 413
LOGO LOGO
SKU LYCIS-SM-00
<PAGE> 414
[X]
PLEASE MARK VOTES
AS IN THIS EXAMPLE
---------------------------------------------------------------
LYCOS, INC.
---------------------------------------------------------------
Mark box at right if you plan to attend the meeting. [ ]
Mark box at right if an address change or comment has been
noted on the reverse side of this card. [ ]
CONTROL NUMBER:
RECORD DATE SHARES:
Please be sure to sign and date this Proxy. Date
Stockholder sign here Co-owner sign here
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. To adopt the Amended and Restated Agreement and Plan of [ ] [ ] [ ]
Reorganization among Terra Networks, S.A., Lycos, Inc. and
Lycos Virginia, Inc. Under the Amended and Restated
Agreement and Plan of Reorganization, the combination will
occur in the following steps:
- FIRST, Lycos will be merged with and into its wholly
owned subsidiary, Lycos Virginia, Inc., a Virginia
corporation, whereby each share of Lycos common stock,
par value $.01 per share, will be converted into one
share of Lycos Virginia common stock, par value $.01 per
share.
- SECOND, immediately following the first step, Lycos
Virginia and Terra Networks will effect a share exchange
whereby each share of Lycos Virginia common stock will
be exchanged for Terra Networks ordinary shares, nominal
value 2 euro per share, which will be deposited in
exchange for Terra Networks American Depositary Shares
unless you elect to receive ordinary shares in the
exchange, based on the exchange ratio described in the
accompanying proxy statement/prospectus.
Following the completion of the combination, Lycos
Virginia will be a wholly owned subsidiary of Terra
Networks.
2. In their discretion, the proxies are authorized to vote upon
other business as may properly come before the meeting, all as
set out in the Notice and Proxy Statement relating to the
meeting, receipt of which is hereby acknowledged.
</TABLE>
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