<PAGE>
As filed with the Securities and Exchange Commission on January 4, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LYCOS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3277338
(State or other (IRS Employer
jurisdiction of Identification Number)
incorporation or
organization) 400-2 Totten Pond Road,
Waltham, Massachusetts 02451
(781) 370-2700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Robert J. Davis
Lycos, Inc.
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
With Copies to:
Mark H. Burnett, Esq. Stephen L. Burns, Esq.
Kenneth J. Gordon, Esq. Cravath, Swaine & Moore
Testa, Hurwitz & Thibeault, LLP Worldwide Plaza
125 High Street 825 Eighth Avenue
Boston, Massachusetts 02110 New York, New York 10019
(617) 248-7000 (212) 474-1000
Approximate date of commencement of proposed sale to the public: Immediately
after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest investment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Shares to be to be Offering Price Offering Registration
Registered Registered Per Share(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share.................. 5,750,000 $79.13 $454,997,500 $120,120
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee, based
upon the average of the high and low prices of Lycos' common stock as
reported on the Nasdaq National Market on December 28, 1999 in accordance
with Rule 457 under the Securities Act of 1933.
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. The prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 4, 2000
5,000,000 Shares
[LOGO OF LYCOS, INC.]
Common Stock
--------
Our common stock is traded on The Nasdaq Stock Market's National Market under
the symbol "LCOS". On January 3, 2000, the last reported sale price of our
common stock was $85.22 per share.
The underwriters have an option to purchase a maximum of 750,000 additional
shares of our common stock to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to Lycos
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Goldman, Sachs & Co.
Merrill Lynch & Co.
Allen & Company Incorporated
Bear, Stearns & Co. Inc.
Chase H&Q
The date of this prospectus is , 2000.
<PAGE>
The Lycos Network
[In the middle of the page is a graphic containing three columns. The left
column contains a header which reads "Get Traffic" beneath which are listed
logos for lycos.com, hotbot.com, angelfire.com and tripod.com. The center
column contains a header which reads "Retain Traffic" beneath which are listed
logos for quote.com, gamesville.com, sonique.com, Wired News and Lycos Zone.
The right column contains a header which reads "Monetize Traffic" beneath which
are listed the logos for LYCOShop, barnesandnoble.com and Wingspanbank.com.]
Find It
Talk About It
Buy It
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 4
Special Note Regarding Forward-
Looking Statements............... 14
Use of Proceeds................... 15
Price Range of Common Stock....... 15
Dividend Policy................... 15
Capitalization.................... 16
Dilution.......................... 17
Selected Consolidated Historical
Financial Data................... 18
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 19
Business............................ 31
Management.......................... 44
Underwriting........................ 46
Notice to Canadian Residents........ 48
Legal Matters....................... 49
Experts............................. 49
Where You Can Find More Information. 49
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Except as otherwise indicated, the information in this prospectus does not
reflect the issuance of 4,951,674 shares of our common stock in connection with
our acquisitions of Quote.com and Gamesville.com in December 1999 and assumes
that the underwriters' over-allotment option is not exercised.
Lycos is a registered trademark of Carnegie Mellon University and we have a
perpetual right to the Lycos trademark. HotBot, Tripod and several other Lycos
products and websites referred to in this prospectus are trademarks of Lycos.
Other product, company or organization names cited in this prospectus may be
trademarks of their respective companies or organizations.
<PAGE>
PROSPECTUS SUMMARY
The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider. Therefore, you should
also read the more detailed information set out in this prospectus and the
financial statements.
Lycos
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, attracting nearly one of every two
U.S. Internet users in November 1999. According to a Media Metrix report, the
Lycos Network of branded websites included four of the twenty most popular U.S.
sites on the Internet, and had over 29 million unique users in November 1999.
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. While users
typically access the Lycos Network for specific content through one of our
branded sites, they are encouraged to remain in the Lycos Network by the
breadth of our product offerings and the easy navigation possible amongst our
sites.
We derive our revenues primarily from online advertising and e-commerce.
Demand for online advertising is expected to grow significantly in the future.
According to Forrester Research, the market for online advertising is expected
to grow from $3.3 billion in 1999 to $33.1 billion by 2004. We believe that we
are well positioned to serve this market as the Lycos Network provides
advertisers a large and diverse audience and the ability to segment and target
that audience. 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. The
Lycos Network has attracted a wide variety of advertisers, including Dell,
Intel, Motorola, Johnson & Johnson, Macy's, OfficeMax and Sears.
The electronic commerce, or e-commerce, market is also projected to
experience significant growth. International Data Corporation projects that e-
commerce revenues will grow from $50.4 billion in 1998 to $1.3 trillion by
2003. We generate e-commerce revenue through two principal means. We integrate
product and service offerings from merchant partners directly into our search,
directory and community offerings on a topical basis. In addition, in October
1999, we launched our online marketplace, LYCOShop, providing users with a
seamless e-commerce experience that incorporates products from over 2,000
retailers, as well as classified advertising and auctions.
We expect that international users will become a substantial part of the
Internet user base in the future. According to International Data Corporation,
Web users outside the U.S. will increase from 79.4 million in 1998 to 325.5
million in 2003. We have broadened our offerings outside of the U.S. by
expanding into Latin America and by partnering with local media and technology
companies in Asia and Europe. We currently offer country-specific versions of
our Lycos search and navigation service and other selected network services in
Argentina, Belgium, Brazil, Chile, Denmark, France, Germany, Ireland, Italy,
Japan, Mexico, The Netherlands, Norway, Peru, Singapore, South Korea, Spain,
Sweden, Switzerland, the United Kingdom and Venezuela.
1
<PAGE>
Our Strategy
Our goal is to be the most visited and utilized global online destination.
The essential elements of our strategy are to:
. expand the reach of the Lycos Network;
. increase the frequency and duration of user visits to the Lycos Network;
. continue to provide comprehensive advertising solutions;
. provide a compelling e-commerce platform; and
. expand the global presence of the Lycos Network.
Recent Developments
As part of our strategy to continue to expand our product and service
offerings and audience reach, in December 1999, we completed the acquisitions
of Quote.com and Gamesville.com.
. Quote.com is a leading online provider of financial content and tools to
independent investors, including stock quotes, news and research
information. With this acquisition, Lycos advanced its presence in the
online financial industry, bringing an added dimension to the Lycos user
experience and a new branded point of entry into the Lycos Network.
. Gamesville.com is a leading online gaming site that is now the featured
product offering on the Lycos Games WebGuide. Gamesville.com's approach
to interactive gaming allows thousands of registered contestants to
compete for cash and other prizes in live card games, trivia quizzes and
other traditional games such as bingo. According to Media Metrix, in
November 1999, the Gamesville.com site ranked third among the top 500
U.S. websites based on average duration per visit of approximately 15
minutes.
We were incorporated in Delaware in June 1995. Our principal executive
offices are located at 400-2 Totten Pond Road, Waltham, Massachusetts 02451,
and our telephone number is (781) 370-2700. We maintain a site on the Web at
www.lycos.com; however, the information found on our website is not part of
this prospectus.
The Offering
<TABLE>
<CAPTION>
<C> <S>
Common stock offered......................... 5,000,000 shares
Common stock to be outstanding after this
offering.................................... 107,126,813 shares
Use of proceeds.............................. General corporate purposes,
including potential
acquisitions.
Nasdaq National Market symbol................ LCOS
</TABLE>
We calculated the number of shares of common stock to be outstanding after
this offering based on the number of shares outstanding on December 31, 1999.
This number excludes an aggregate of 39,139,158 shares of common stock that we
have reserved for issuance under our stock option plans, of which 23,054,318
were subject to outstanding options as of December 31, 1999 at a weighted
average exercise price of $29.24 per share.
2
<PAGE>
Summary Consolidated Financial Data
The following summary consolidated financial data of Lycos as of and for the
years ended July 31, 1999, 1998, 1997 and 1996 have been derived from the
consolidated financial statements of Lycos, which have been audited by KPMG
LLP, independent certified public accountants. The Lycos summary consolidated
financial data as of October 31, 1999 and for the three months ended October
31, 1999 and 1998 have been derived from the unaudited financial statements of
Lycos, which have been prepared on the same basis as the audited financial
statements of Lycos. On August 25, 1998 and July 26, 1999, Lycos effected 2 for
1 stock splits. All share and per share data included in this prospectus give
effect to these stock splits. You should read the summary consolidated
financial data together with our consolidated financial statements, the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. We have adjusted
the balance sheet data as of October 31, 1999 to give effect to our sale of
5,000,000 shares of common stock in the offering, at an assumed public offering
price of $85.22 (the last reported sale price of a share of our common stock on
The Nasdaq National Market on January 3, 2000).
<TABLE>
<CAPTION>
Three Months
Year Ended July 31, Ended October 31,
------------------------------------ ------------------
1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- --------
(in thousands, except per share
data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues:
Advertising............ $ 4,478 $17,417 $ 41,768 $ 93,440 $ 17,275 $ 39,015
Electronic commerce,
license and other..... 779 4,856 14,292 42,081 7,509 17,019
------- ------- -------- -------- -------- --------
Total revenues....... 5,257 22,273 56,060 135,521 24,784 56,034
Cost of revenues........ 2,901 4,336 12,513 28,727 5,300 11,671
------- ------- -------- -------- -------- --------
Gross profit......... 2,356 17,937 43,547 106,794 19,484 44,363
Operating expenses:
Research and
development........... 906 4,301 9,477 26,279 5,304 9,277
In process research
and development....... 452 -- 17,280 -- -- --
Sales and marketing.... 4,748 19,126 35,036 78,807 16,170 30,156
General and
administrative........ 1,692 2,719 5,631 16,250 2,486 5,435
Amortization of
intangible assets..... 360 540 7,614 52,428 11,136 28,237
------- ------- -------- -------- -------- --------
Total operating
expenses............ 8,158 26,686 75,038 173,764 35,096 73,105
------- ------- -------- -------- -------- --------
Operating loss.......... (5,802) (8,749) (31,491) (66,970) (15,612) (28,742)
Interest income......... 714 2,130 3,052 6,167 1,896 1,700
Other income, net....... -- -- -- 8,759 10,120 --
------- ------- -------- -------- -------- --------
Loss before income
taxes.................. (5,088) (6,619) (28,439) (52,044) (3,596) (27,042)
Provision for income
taxes.................. -- -- -- -- -- 480
------- ------- -------- -------- -------- --------
Net loss................ $(5,088) $(6,619) $(28,439) $(52,044) $(3,596) $(27,522)
======= ======= ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (0.11) $ (0.12) $ (0.46) $ (0.60) $ (0.04) $ (0.29)
======= ======= ======== ======== ======== ========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 47,970 55,179 61,866 86,428 83,820 95,569
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
July 31, October 31, 1999
--------------------------------- --------------------
1996 1997 1998 1999 Actual As Adjusted
------- ------- -------- -------- -------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $44,142 $40,766 $153,728 $152,970 $163,039 $ 572,354
Working capital......... 39,974 38,129 147,062 167,708 172,884 582,199
Total assets............ 53,661 65,419 317,235 874,642 859,358 1,286,673
Long-term portion of
deferred revenues, net
of current portion..... -- 5,100 26,160 55,934 42,544 42,544
Total stockholders'
equity................. 44,106 37,647 237,164 725,683 704,657 1,113,972
</TABLE>
3
<PAGE>
RISK FACTORS
The following risk factors should be considered in conjunction with the
other information included and incorporated by reference in this prospectus
before purchasing our common stock.
Our limited operating history makes it difficult to predict our performance.
We have a limited operating history for you to use in evaluating our
prospects. We generated revenues of $56.1 million for the fiscal year ended
July 31, 1998 and revenues of $135.5 million for the fiscal year ended July 31,
1999. We generated revenues of $56.0 million for the fiscal quarter ended
October 31, 1999. Due to our limited operating history, you should not take the
recent revenue growth as indicative of the rate of revenue growth, if any, that
you can expect in the future. You should consider the risks, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies operating in new and rapidly evolving
markets, such as ourselves. We may not successfully address these risks, which
include:
. the ability to continue to develop and extend the Lycos brand;
. the ability to maintain and increase levels of traffic on our websites;
. the ability to maintain a premier position on the America
Online/Netscape Web browser or to enter into additional distribution
relationships and strategic alliances;
. the ability to continue to develop or acquire content, features and
functionality for our services;
. the development of equal or superior services or products by
competitors;
. the failure of the market to adopt the Internet as an advertising or
commercial medium;
. the reduction in market prices for Internet-based advertising as a
result of competition or otherwise;
. the ability to effectively generate commerce-related revenues through
sponsored services and placements in our services; and
. the success in attracting, retaining and motivating qualified personnel.
As a strategic response to a changing competitive environment, we may choose
to make pricing, service or marketing decisions or acquisitions that would
adversely impact our operations and therefore increase our losses. Due to the
nascent nature of the Internet industry, we believe that period-to-period
comparisons of our operating results are not meaningful and that you should not
rely upon them as an indication of our future performance.
We have a history of significant losses.
We have incurred significant losses since our inception and may incur losses
in the future. As of October 31, 1999, we had an accumulated deficit of $119.8
million. We reported a loss of $0.46 per share for the year ended July 31, 1998
and a loss of $0.60 per share for the year ended July 31, 1999. We reported a
loss per share of $0.29 for the fiscal quarter ended October 31, 1999. We
currently expect that our operating expenses will continue to increase
significantly as our sales and marketing operations are expanded and as we fund
further product development and acquire complementary products and
technologies. Our potential inability to keep short-term expense levels in line
with revenues could adversely affect our financial results for any given
quarter. It is possible that in some future quarter our operating results may
be below the expectations of analysts and investors which could reduce the
price of our common stock.
Our operating results can be affected by seasonality.
We have experienced, and expect to continue to experience, seasonality in
our business. Historically, users have made a smaller number of visits to our
websites and the websites of our partners during the summer and the year-end
vacation periods.
4
<PAGE>
Our stock price is volatile and is affected by factors relating to the Internet
industry.
The price of our common stock has been and may continue to be subject to
wide fluctuations in response to any of the following events:
. quarterly variations in results of operations;
. announcements of new technological innovations or new products and media
properties by us or our competitors;
. changes in financial estimates and recommendations by securities
analysts;
. the operating and stock price performance of other companies that
investors may deem comparable to us; and
. news relating to trends in our markets.
Also, the stock market in general, and the market prices for Internet-
related companies in particular, have experienced extreme volatility that often
has been unrelated to the operating performance of these companies. These broad
market and industry fluctuations may adversely affect the price of our common
stock, regardless of our operating performance. Additionally, fluctuations in
the market price of our common stock could result in stockholder lawsuits,
which potentially could impair our business.
We may not be able to maintain advertising revenues if the Internet is not
adopted as an advertising medium.
We earn a significant portion of our revenues by selling advertisements on
our Web pages. For the fiscal year ended July 31, 1999, advertising revenues
represented approximately 69% of our total revenues and for the fiscal quarter
ended October 31, 1999, advertising revenues represented approximately 70% of
our total revenues. We will not be able to sustain or increase our advertising
revenues if the Internet does not develop into an attractive and sustainable
advertising medium. For example, Internet users may purchase "filter" software
programs that limit or remove advertising from the user's desktop. The
widespread adoption of this software by users could negatively impact the use
of advertising on the Web. It is also difficult to predict which method of
pricing will be adopted by the industry or advertisers. For example, our
advertising revenues could decrease if advertising rates are based on the
number of users who access the advertiser's website from one of our network
websites or seek additional information about a product or service by
"clicking" on the advertisement, rather than rates being based solely on the
number of times an advertisement is displayed. Our strategy is to continue to
develop advertising and other methods of generating revenues through the use of
our products and services. In order to maintain and increase advertising
revenues, we must develop a large base of users of our products and services
with demographic characteristics attractive to advertisers. Additionally, we
may be required to expand our advertising sales force, which would increase our
costs.
We may not be able to deliver or measure the delivery of advertisements
reliably.
The process of reliably delivering and tracking advertising placement within
large, high-traffic websites such as ours is an increasingly important and
complex task, and currently available software programs and other tracking
methods are rapidly evolving. We license an advertising management system from
a third party. To the extent that we encounter system failures or material
difficulties in the operation of this system, we could be unable to deliver
banner advertisements and sponsorships through our websites. Any extended
failure of, or other material difficulties with, our advertising management
system may require us to provide free advertising to our customers. In
addition, advertising clients may not advertise on our websites or may pay less
for advertising if they do not perceive our measurements to be accurate or
reliable.
5
<PAGE>
We may incur costs in connection with our arrangements with advertisers and
sponsors.
We sell advertising space on our websites and allow third-parties to provide
sponsored services and placements on our websites under agreements with
advertisers and sponsors which expose us to potentially significant financial
risks. In connection with these arrangements, we provide, and sometimes
guarantee, a minimum number of times that an advertisement is displayed or a
minimum number of user requests for additional information is made by clicking
on the advertisement or promotional hyperlink. We may receive sponsorship fees
as well as a portion of transaction revenues received by these third-party
sponsors from users originated through our websites. These sponsorship
arrangements expose us to potentially significant financial risks, including
the risk that we may fail to deliver the required number of advertisement
displays or user requests for additional information. If we fail to deliver
these minimums, the fees payable to us may decline or we may be required to
provide sponsorship services to the sponsor for free for a limited "make good"
period.
Our contracts with advertisers and sponsors typically have short terms and
are terminable on relatively short notice. Third-party sponsors may decide not
to renew the sponsorship agreements upon termination. Some of these
arrangements also require us to integrate sponsors' content with our services.
We must dedicate resources and significant programming and design efforts to
accomplish this integration. We may not be able to attract additional sponsors
or renew existing sponsorship agreements when they terminate. In addition, we
have granted exclusivity provisions to some of our sponsors, and may in the
future grant additional exclusivity provisions. These exclusivity provisions
may prevent us for the duration of these exclusivity agreements from accepting
advertising or sponsorship agreements within a particular subject matter in our
websites or across our entire service network.
We depend on third-party relationships for distribution and content of our
websites.
We depend on a number of third-party relationships to attract users to our
websites and consequently to generate revenues. We require those third-parties
to provide users with access to our products and services. If we are unable to
attract users to our websites, advertising revenues could be impaired,
advertisers and sponsors may terminate their agreements with us, advertisers
may not be willing to pay as much as they currently pay to appear on the Lycos
Network and we may be required to supply our services under agreements with
advertisers for free.
Browser services provided by AOL/Netscape.
We depend on our arrangement with AOL/Netscape relating to the positioning
of our products and services on the Netscape Web browser to create traffic on
our websites and consequently to generate revenues. If AOL/Netscape or any
other Web browser grants an exclusive arrangement for positioning on its Web
browser to our competitors, then our business may be impaired. In addition,
users have experienced difficulties due to browser failures unrelated to our
systems, products and services.
Although our agreements with AOL/Netscape may be terminated only under
particular circumstances, if we are unable to continue as a preferred provider
for AOL/Netscape, our websites could lose a material portion of our users, the
level of use on competing services could substantially increase and our
websites could become less attractive to advertisers, reducing our revenues.
Other third-party relationships.
We depend on website operators that provide links to our websites or
otherwise use our services to create traffic on these websites. We license some
technology and related databases from third parties, including search,
telephone directories, chat, street mapping and other similar services. We
believe that many of our third party relationships are important to our ability
to attract traffic and advertisers. Any errors, failures or delays experienced
in connection with these third party technologies and information services
could alienate our users and adversely affect our brand and our business.
Although we view these relationships as important, most of
6
<PAGE>
our arrangements do not include minimum commitments to use our services or to
provide access or links to Lycos' products or services in the future, are not
exclusive and generally have a term of only one to three years. In addition,
our partners may not regard their relationship with us to be as important to
their own respective businesses and operations. Our partners may reassess their
commitment to our products or services at any time in the future, or may
develop their own competitive products or services. The failure of one or more
of our partnering relationships to achieve or maintain market acceptance or
commercial success, or the termination of one or more successful collaborative
relationships, could adversely impact our ability to conduct our business.
Content.
We rely on content developed by third parties. We believe that third party
content is an important element in attracting users to our websites. Failure of
these third party content providers to develop and maintain high quality
products and services or our inability to enter into agreements allowing our
users to access this content could impair our ability to attract users and
advertisers.
We face risks relating to our customers' liquidity.
The Internet as a commercial endeavor has been in existence for a relatively
short period of time. The costs of establishing a website are low, and new
online service providers, content providers and advertisers are launched
regularly. Many of our advertisers and electronic commerce sponsors were funded
with venture capital and other forms of financing before they proved to be
successful. Those companies that are unable to prove themselves successful
before they have spent their initial funding may find it difficult or
impossible to secure additional funding and, therefore, difficult to pay
amounts due to us. Our losses could increase if any of our advertisers or
electronic commerce sponsors fails to pay amounts due on a timely basis.
We compete with a variety of competitors both to attract Internet users to
visit our websites and to attract advertisers and sponsors to place content on
our websites.
The market for Internet products and services, including those which we
offer to Internet users, is highly competitive. We compete with other providers
both to attract Internet users and to attract advertisers and sponsors. For
example, we compete with search program services that allow a user to search
the databases maintained by us and our competitors simultaneously. We also
compete indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. Our community-based
websites, Tripod and Angelfire.com, compete with other community-based
websites.
Additional competition may come from a variety of companies that have begun
to offer or have announced their intention to offer services similar to those
currently offered by us. For example, many large media companies have developed
or acquired Internet navigation services and are attempting to become "gateway"
or "portal" sites through which users may access the Internet, similar to the
sites maintained by us and our competitors. These entities may be able to
utilize their substantial financial resources and access to traditional media
outlets to promote their competitive businesses and access a substantial user
base. Additionally, companies with greater financial resources may acquire our
competitors or may enter into joint ventures and/or licensing arrangements
involving our competitors.
A number of companies offering Internet products and services, including our
direct competitors, recently have begun to integrate multiple features within
their products and services, including search and retrieval features. For
example, the Web browser offered by AOL/Netscape, which is a substantial source
of users for us, may incorporate and promote information search and retrieval
capabilities in future releases or upgrades. This integration of search and
retrieval capabilities could make it more difficult for Internet viewers to
find and to use our products and services.
7
<PAGE>
We also compete with traditional off-line media, including print and
television, for a share of advertising budgets.
If our competitors become more successful than us in attracting users, then
our attractiveness to advertisers will be diminished. We believe that the
principal competitive factors in attracting users include:
. name recognition;
. quality of content and commerce offerings;
. site performance;
. ease of use;
. features; and
. quality of support.
We receive a majority of our revenue from selling advertising space on our
websites and allowing third parties to provide sponsored services and
placements on our websites under sponsorship agreements with us. There is
intense competition based on price in the sale of advertising on the Internet,
and we may not be able to compete successfully against our current or future
competitors.
We may be subject to risks associated with e-commerce.
We believe that the portion of our business dedicated to e-commerce will
play a significant role in our future financial growth and development. In
order to support our electronic commerce initiative, we must rely on our third
party suppliers. The failure of our third party suppliers to provide quality
service to users of our websites, to deliver to our users on a timely basis the
products purchased on our websites, or to deliver satisfactory products may
result in user dissatisfaction, which may, in turn, cause users to stop
visiting our websites or using our services. In addition, to the extent that we
are an intermediary in electronic commerce transactions, it is possible that
users may involve us in claims associated with the sale of goods, including
claims relating to product liability and consumer protection. In addition, we
may suffer losses as a result of orders placed with fraudulent credit card
data, even though the consumer's payment for these orders has been authorized
by the associated financial institution.
We are uncertain whether our products and services will be accepted by the
market.
The market for our products and services has only recently begun to develop
and is rapidly evolving. An increasing number of market entrants have
introduced or developed products and services for use on the Internet. Our
market depends on the increased use of the Internet for information publication
and distribution and for commerce. Additionally, this market depends on the
development of the Internet as an advertising medium. Our future operating
results will depend upon:
. the growth of Internet advertising and commerce markets;
. the successful implementation of our advertising programs; and
. our ability to establish electronic commerce and licensing relationships
and other strategic alliances.
We cannot assure you that:
. the Internet advertising or commerce market will develop as an
attractive and sustainable medium;
. we will achieve or sustain market acceptance of our products and
services; or
. we will be able to execute our business plan successfully.
As is typical in the case of a new and rapidly evolving industry, demand and
market acceptance for recently introduced products and services are very
uncertain. The Internet industry is young and has few proven products. In
addition, the current Internet infrastructure may not effectively support the
growth, if any, that may
8
<PAGE>
occur in the use of the Web. Moreover, critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, quality of service and acceptance of advertising and electronic
commerce) remain unresolved. These critical issues may impact the growth of the
Internet, the placement of advertisements on the Internet or the growth of the
Internet as a means of electronic commerce.
Our systems may fail to function or may not have adequate capacity which could
impair our ability to attract advertisers and users.
The satisfactory performance, reliability and availability of our services
and our network infrastructure are critical to attracting Internet users and
maintaining relationships with business customers and consumers. System
interruptions that result in the unavailability of sites or slower response
times for consumers would reduce the number of advertisements purchased and
reduce the attractiveness of our online services to business customers and
consumers. Any increase in system interruptions or slower response times could
adversely impact our ability to conduct our business. We have experienced
system interruptions in the past, and interruptions are expected to occur from
time to time in the future.
We are dependent on hardware suppliers for prompt delivery, installation and
service of servers and other equipment and services used to provide our
products and services. Substantially all of our computer systems are located at
the New Jersey, California and Massachusetts sites of Exodus Communications. A
system failure at any of these locations may harm the performance of our
products and services. This system and, as a result, our business, is
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events.
Any substantial increase in traffic on the Lycos Network or on any of our
websites will require us to expand and adapt our network infrastructure. Our
inability to add additional software and hardware to accommodate increased
traffic on the Lycos Network or on any of our websites may cause unanticipated
system disruptions and result in slower response times. In addition, we
currently depend on a limited number of suppliers for certain key technologies
used to roll out and manage the Lycos Network. We may not be able to expand our
network infrastructure on a timely basis to meet increased demand and key
technology suppliers may not continue to provide us with products and services
that meet our requirements.
We must be able to adapt to technological change and to develop new products to
remain competitive.
The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of this market and the
fact that many companies are expected to introduce new competitive Internet
products and services in the future. To be successful, we must continually
improve the performance, features and reliability of our products and services.
In addition, a key element of our business strategy is the development,
introduction and integration of new products and services that take advantage
of the increasing use of the Internet. We cannot assure you that we will be
successful in developing or integrating these products or services or that they
will meet with market acceptance. In addition, our new product releases may
contain undetected errors that require significant design modifications,
resulting in a loss of customer confidence in our products and services and,
consequently, viewer support, which will diminish the use of our products and
services.
We face risks associated with brand development.
We believe that establishing and maintaining the Lycos Network brand is
crucial to the continued expansion and attraction of our Internet audience. We
believe that the importance of brand recognition will increase in the future
due to the growing number of Internet sites. Promotion and enhancement of the
Lycos Network brand will depend largely on our ability to provide consistently
high-quality products and services. The Lycos Network brand could be impaired
if:
. we do not provide consistently high-quality products and services;
. consumers do not believe that our products and services are of high
quality;
9
<PAGE>
. consumers do not use new products and services which we introduce; or
. our new business ventures are not favorably received by consumers.
The acquisitions and investments that we have made and may make in the future
may not be successful and may create unanticipated problems for us.
We have completed acquisitions of companies, technologies and assets that we
believe complement our business. We may not be able to identify additional
suitable acquisition candidates available for sale at reasonable prices or to
complete any desired acquisitions. In addition, we may not be able to
successfully integrate any or all of the businesses we have recently acquired
into our operations. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, amortization expenses and write-downs of acquired assets.
Acquisitions involve numerous additional risks, including difficulties in
the assimilation of the operations, services, products and personnel of the
acquired company. Our systems, procedures or controls may not be able to
support increased operations resulting from acquisitions. Acquisitions also
divert management's attention from other business concerns. We also encounter
risks by entering markets in which we have little or no experience. Problems
with an acquired business could impair our performance. We have, in general,
made investments in companies involved in the development of technologies or
services that we believe are complementary or related to our operations. We may
make investments of this type in the future. We have invested in companies that
are in an early stage of development and may be expected to incur substantial
losses. We cannot assure you that any investments in these companies will
result in any return, nor can we provide any assurance as to the timing of any
return.
We face risks associated with litigation.
We are subject to several purported class action lawsuits. One of the
complaints alleges, among other claims, violations of the United States federal
securities law through alleged misrepresentations relating to our agreement to
enter into an announced and later terminated transaction with USA Networks and
certain affiliated companies. Each complaint seeks an unspecified award of
damages. We are also a party to other lawsuits in the ordinary course of our
business. An adverse outcome in, or a decision to settle, these or other
lawsuits could result in significant costs to us. In addition, our senior
management may be required to devote substantial time to these lawsuits which
they could otherwise devote to our business. For a more detailed description of
these lawsuits, see "Business--Legal Proceedings."
We face risks associated with international expansion.
International sales, primarily from licensing our products and services,
accounted for less than 10% of our revenues for the fiscal year ended July 31,
1999 and the fiscal quarter ended October 31, 1999. As part of our business
strategy, we have entered into joint ventures in Europe, Japan, South Korea and
Asia. We recently launched localized sites in South and Central America.
We believe international expansion is important to our ability to continue
to grow and to market our products and services. In marketing our products and
services internationally, however, we will face new competitors. In addition,
our ability to enter international markets will be dependent upon our ability
to create localized versions of our products and services. Furthermore, to the
extent our various international operations are conducted through joint
ventures, our success will also depend to a significant extent on the
performance of our joint venture partners who generally are responsible for
day-to-day operations. We cannot assure you that we will be successful in
creating localized versions of our products and services, marketing or
distributing our products abroad, or that, if we are successful, our
international revenues will be adequate to offset the expense of establishing
and maintaining international operations. To date, we have limited experience
in marketing and distributing our products internationally.
10
<PAGE>
There are difficulties and risks inherent in doing business on an
international level, such as:
. compliance with regulatory requirements and changes in those
requirements;
. trade barriers;
. uncertainty regarding protection of intellectual property rights;
. difficulties in staffing and managing international operations;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
If one or more of these factors were to occur, our business and operating
results may suffer.
We are dependent on intellectual property and our methods of protecting our
intellectual property may not be adequate.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We generally enter into confidentiality agreements with our
employees, consultants and partners. We have registered and applied for
registration of certain service marks and trademarks, and will continue to
evaluate the registration of additional service marks and trademarks, as
appropriate. In addition, Carnegie Mellon University has licensed a patent
issued in the United States relating to our search and indexing technology to
us on a perpetual basis. Other parties may challenge this patent. If challenges
are brought, the patent may be invalidated. Also, we cannot assure you that we
will develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not impair our
ability to do business. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or services or
to obtain and use information that we regard as proprietary. The laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. Our means of protecting our proprietary rights
may not be adequate. Additionally, our competitors may independently develop
similar technology, duplicate our products or design around our intellectual
property rights.
We may become involved in intellectual property litigation which could impair
our ability to conduct our business.
There has been substantial litigation in the computer industry regarding
intellectual property rights. We may become involved in claims and
counterclaims with third parties regarding infringement with respect to current
or future products or trademarks or other proprietary rights. Any infringement
or other claims or counterclaims could impair our business because they could:
. be time-consuming;
. result in costly litigation;
. divert management's attention;
. cause product release delays; or
. require us to redesign our products or require us to enter into royalty
or licensing agreements which may not be available on terms acceptable
to us, or at all.
11
<PAGE>
We are subject to concerns regarding privacy of personal information about
users of our products and services.
We maintain a privacy policy which is displayed on each of our websites. Our
policy is not to disclose willfully any individually identifiable information
about any user of our products or services to a third party without the user's
consent. This policy and user choices regarding the dissemination of personal
information collected on our websites, which may include personal
identification information, demographic profile data, user preferences and
website behavioral data, are accessible to users of our personalized services
when they initially register. Despite this policy, however, if third persons
were able to penetrate our network security or otherwise misappropriate users'
personal information, we could be subject to liability claims. These could
include claims for unauthorized purchases, impersonation or other similar fraud
claims, as well as claims for other misuses of personal information, for
example for unauthorized marketing purposes. In addition, the Federal Trade
Commission and several states have been investigating some Internet companies
regarding their use of personal information. We could incur additional expenses
if new regulations regarding the use of personal information are introduced, if
our privacy practices are investigated or if our privacy policies are viewed
unfavorably by users or potential users.
We may face potential government regulations and legal uncertainties which may
impair our business.
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally. There are currently
few laws or regulations directly applicable to access to, or commerce on, the
Internet. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect
to issues such as the protection of databases, user privacy, pricing and
characteristics and quality of products and services. For example, as of April
2000, our LycosZone for Kids website will be subject to federal regulation
regarding child privacy. The adoption of laws or regulations may decrease the
growth of the Internet. This decrease could in turn decrease the demand for our
services and products or increase our costs of doing business. Currently, with
the acquisition of Gamesville.com, we offer Lycos Network users a form of
online interactive gaming which includes various games where users compete
without financial consideration for cash prizes. To the extent these gaming
activities become subject to future regulation, this regulation could
substantially restrict the online gaming activities we offer.
Due to the global nature of the Internet, it is possible that, although
transmission of our services originates from operations centers in New Jersey,
California and Massachusetts, the governments of other states and foreign
countries may attempt to regulate our transmissions or to prosecute us for
violations of their laws. Violations of local laws may be alleged or charged by
state or foreign governments. We may unintentionally violate these laws and
these laws may be modified, or new laws enacted, in the future. It is also
possible that states or foreign countries may seek to impose sales taxes on
out-of-state companies that engage in commerce over the Internet. In the event
that states or foreign countries succeed in imposing sales or other taxes on
Internet commerce, the growth of the use of the Internet for commerce could
slow substantially.
We may be liable for information retrieved from the Internet.
Because material may be downloaded from Internet services operated or
facilitated by us and be subsequently distributed to others, it is possible
that claims will be made against us on the basis of defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of these materials. We could be held liable for information contained
on the Lycos Network which we have not generated or compiled. These claims
could be based on us providing access to obscene, lascivious, inaccurate, or
indecent information. Although we carry general liability insurance, our
insurance may not cover potential claims of this type, or may not be adequate
to indemnify us for all types of liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of insurance
coverage could impair our business. In addition, our provision of access to
Internet content or advertisements on the Lycos Network that users may find
objectionable could harm our reputation and reduce the value of our brand.
12
<PAGE>
We may not be able to manage effectively the potential growth of our
businesses.
Our businesses have grown rapidly in recent periods. The growth of these
businesses has resulted, and, for us, is expected to result in growth in
employee levels, in the establishment of new offices and in increased
responsibility for both existing and new management personnel. In addition,
this growth has and will put additional pressure on existing operational,
financial and management information systems. To the extent we continue to grow
and do not manage this expansion successfully, we may be unsuccessful in
executing our strategy and operating our business.
We are dependent upon key senior management.
Our success depends to a significant degree upon the contributions of our
executive management team. The loss of the services of members of our executive
management team could adversely impact our business.
We must hire and retain skilled personnel to be successful.
Our success depends upon our ability to attract and retain highly qualified
management, technical and sales and marketing personnel. The process of
locating and hiring personnel with the combination of skills and attributes
required to carry out our strategy is often lengthy and intensely competitive.
The loss of the services of key personnel or the inability to attract
additional qualified personnel could adversely impact our business.
Our systems may experience difficulties related to Year 2000 computer problems.
The codes of many currently installed computer systems and software products
accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. Many companies' software and
computer systems, including ours and the companies we depend on, may need to be
upgraded or replaced so that they will be able to distinguish 21st century
dates from 20th century dates in order to comply with Year 2000 requirements
and therefore be Year 2000 compliant.
To the extent that we fail to identify and remedy any non-compliant internal
or external Year 2000 problems, or the Year 2000 phenomenon creates a systemic
failure beyond our control, like a prolonged telecommunications or electrical
failure or a prolonged failure of third-party software on which we rely, we
could be prevented from operating our business and permitting users access to
our websites.
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance and include statements about our plans, objectives, products and
services as well as our expectations and intentions. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by any forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 5,000,000
shares of common stock we are offering, assuming a public offering price of
$85.22 (the last reported sale price of a share of our common stock on The
Nasdaq National Market on January 3, 2000), will be $409.3 million (or
approximately $470.8 million assuming the underwriters' over-allotment option
is exercised in full), after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us. We anticipate that the net
proceeds will be used for general corporate purposes. We may also use a portion
of the net proceeds to acquire businesses, products or technologies that we
believe are complementary to our business. Although we actively engage in
discussions regarding possible acquisitions, we have no present agreements with
respect to any proposed transaction.
PRICE RANGE OF COMMON STOCK
Our common stock has traded on The Nasdaq National Market under the symbol
"LCOS" since our initial public offering on April 2, 1996. Prior to that time,
there was no public market for our common stock. The following table sets forth
the high and low reported sale prices for our common stock for the periods
indicated as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended July 31, 1998
First Quarter.................................................. $10.50 $ 4.06
Second Quarter................................................. 10.50 6.31
Third Quarter.................................................. 19.78 8.80
Fourth Quarter................................................. 26.81 12.08
Fiscal Year Ended July 31, 1999
First Quarter.................................................. 22.25 10.03
Second Quarter................................................. 72.69 20.63
Third Quarter.................................................. 72.50 34.50
Fourth Quarter................................................. 61.31 35.00
Fiscal Year Ending July 31, 2000
First Quarter.................................................. 67.25 28.56
Second Quarter (through January 3, 2000)....................... 93.63 51.00
</TABLE>
As of December 30, 1999, we had approximately 1,200 shareholders of record.
This does not reflect persons or entities who hold their stock in nominee or
"street" name through various brokerage firms.
The last reported price of our common stock on The Nasdaq National Market on
January 3, 2000 was $85.22 per share.
DIVIDEND POLICY
We have never declared or paid cash dividends on shares of our common stock.
We currently intend to retain all of our earnings to finance the development
and expansion of our business and therefore do not intend to declare or pay
cash dividends on our common stock in the foreseeable future. Any future
declaration and payment of dividends will be subject to the discretion of our
board of directors, will be subject to applicable law and will depend upon our
results of operations, earnings, financial condition, contractual limitations,
cash requirements, future prospects and other factors deemed relevant by our
board of directors.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999 on
an actual basis, on a pro forma basis to reflect the acquisitions of
Gamesville.com and Quote.com, and pro forma as adjusted to give effect to our
sale of 5,000,000 shares of our common stock at an assumed public offering
price of $85.22 per share (the last reported sale price of a share of our
common stock on The Nasdaq National Market on January 3, 2000). You should read
this table together with our consolidated financial statements and the notes to
those financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of October 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(In thousands)
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 163,039 $ 177,011 $ 586,326
========= ========= ==========
Long-term debt, less current portion......... 2,060 3,098 3,098
--------- --------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized; none issued and none
outstanding............................... -- -- --
Common stock, $0.01 par value, 300,000,000
shares authorized; 98,080,800 shares
issued and outstanding, actual;
103,032,474 shares issued and outstanding,
pro forma; and 108,032,474 shares issued
and outstanding, pro forma as adjusted(1). 981 1,030 1,080
Additional paid-in capital................. 811,426 929,493 1,338,758
Deferred compensation...................... (58) (58) (58)
Accumulated deficit........................ (119,818) (123,670) (123,670)
Treasury stock at cost, 1,814,893 shares;
actual, pro forma and pro forma as
adjusted.................................. (3,286) (3,286) (3,286)
Accumulated other comprehensive income..... 15,412 15,412 15,412
--------- --------- ----------
Total stockholders' equity................... 704,657 818,921 1,228,236
--------- --------- ----------
Total capitalization......................... $ 706,717 $ 822,019 $1,231,334
========= ========= ==========
</TABLE>
- --------
(1) Excludes outstanding options as of December 31, 1999 to purchase 23,054,318
shares of our common stock at a weighted average exercise price of $29.24
per share.
16
<PAGE>
DILUTION
As of October 31, 1999, we had a pro forma net tangible book value of
$231,538,701 or $2.29 per share. "Pro forma net tangible book value per share"
represents our tangible net worth (total tangible assets less total
liabilities) divided by the number of shares of common stock outstanding on a
pro forma basis, after giving effect to the Gamesville.com and Quote.com
acquisitions. Without taking into account any other changes in the net tangible
book value after October 31, 1999 other than to give effect to (i) the
Gamesville.com and Quote.com acquisitions and (ii) our sale of 5,000,000 shares
at an assumed public offering price of $85.22 per share and after deduction of
the estimated underwriting discount and offering expenses, our pro forma net
tangible book value at October 31, 1999 would have been $640,853,935 or $6.04
per share. This represents an immediate increase in the net tangible book value
of $3.75 per share to existing stockholders and an immediate dilution of the
net tangible book value of $79.18 per share to purchasers of shares in this
offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share ....................... $85.22
Pro forma net tangible book value per share as of October 31,
1999......................................................... $2.29
Increase attributable to new investors........................ 3.75
-----
Pro forma net tangible book value per share after this
offering..................................................... 6.04
------
Dilution per share to new investors........................... $79.18
======
</TABLE>
The above calculations do not take into account the exercise of outstanding
stock options after December 31, 1999. If the 23,054,318 options outstanding at
December 31, 1999 were exercised, there would be further dilution to new
investors.
17
<PAGE>
LYCOS, INC.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Lycos as of July 31,
1999 and 1998 and for the years ended July 31, 1999, 1998 and 1997 have been
derived from the consolidated financial statements of Lycos, which have been
audited by KPMG LLP, independent certified public accountants, and are included
in this prospectus. The following selected historical financial data of Lycos
as of and for the years ended July 31, 1997 and 1996 and as of July 31, 1995
and for the period from Inception (June 1, 1995) to July 31, 1995 have been
derived from the audited consolidated financial statements of Lycos which are
not included in this prospectus. The Lycos selected historical financial data
as of October 31, 1999 and for the three months ended October 31, 1999 and 1998
have been derived from the unaudited financial statements of Lycos, which are
included in this prospectus and have been prepared on the same basis as the
audited financial statements of Lycos. On August 25, 1998 and July 26, 1999,
Lycos effected 2 for 1 stock splits. All share and per share data included in
this prospectus give effect to these stock splits. The selected historical
financial data should not be considered to be indicative of future results and
should be read together with Lycos' consolidated financial statements, the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Inception Year Ended July 31, October 31,
(June 1, 1995 ------------------------------------ --------------------
to July 31, 1995) 1996 1997 1998 1999 1998 1999
----------------- ------- ------- -------- -------- --------- ---------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Advertising............ $ -- $ 4,478 $17,417 $ 41,768 $ 93,440 $ 17,275 $ 39,015
Electronic commerce,
license and other..... 5 779 4,856 14,292 42,081 7,509 17,019
------ ------- ------- -------- -------- --------- ---------
Total revenues....... 5 5,257 22,273 56,060 135,521 24,784 56,034
Cost of revenues........ 27 2,901 4,336 12,513 28,727 5,300 11,671
------ ------- ------- -------- -------- --------- ---------
Gross profit......... (22) 2,356 17,937 43,547 106,794 19,484 44,363
Operating expenses:
Research and
development........... 16 906 4,301 9,477 26,279 5,304 9,277
In process research
and development....... -- 452 -- 17,280 -- -- --
Sales and marketing.... 30 4,748 19,126 35,036 78,807 16,170 30,156
General and
administrative........ 37 1,692 2,719 5,631 16,250 2,486 5,435
Amortization of
intangible assets..... -- 360 540 7,614 52,428 11,136 28,237
------ ------- ------- -------- -------- --------- ---------
Total operating
expenses............ 83 8,158 26,686 75,038 173,764 35,096 73,105
------ ------- ------- -------- -------- --------- ---------
Operating loss.......... (105) (5,802) (8,749) (31,491) (66,970) (15,612) (28,742)
Interest income......... -- 714 2,130 3,052 6,167 1,896 1,700
Other income, net....... -- -- -- -- 8,759 10,120 --
------ ------- ------- -------- -------- --------- ---------
Loss before income
taxes.................. (105) (5,088) (6,619) (28,439) (52,044) (3,596) (27,042)
Provision for income
taxes.................. -- -- -- -- -- -- 480
------ ------- ------- -------- -------- --------- ---------
Net loss................ $ (105) $(5,088) $(6,619) $(28,439) $(52,044) $ (3,596) $ (27,522)
====== ======= ======= ======== ======== ========= =========
Basic and diluted net
loss per share......... $ -- $ (0.11) $ (0.12) $ (0.46) $ (0.60) $ (0.04) $ (0.29)
====== ======= ======= ======== ======== ========= =========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 44,051 47,970 55,179 61,866 86,428 83,820 95,569
====== ======= ======= ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
July 31,
---------------------------------------- October 31,
1995 1996 1997 1998 1999 1999
------ ------- ------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents. $ 446 $44,142 $40,766 $153,728 $152,970 $163,039
Working capital........... 329 39,974 38,129 147,062 167,708 172,884
Total assets.............. 1,317 53,661 65,419 317,235 874,642 859,358
Long-term portion of
deferred revenues, net of
current portion.......... -- -- 5,100 26,160 55,934 42,544
Total stockholders'
equity................... 1,145 44,106 37,647 237,164 725,683 704,657
</TABLE>
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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 prospectus.
Factors that could cause or contribute to such differences include, but are not
limited to, those we describe in "Risk Factors" as well as those discussed in
this section and elsewhere in this 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 "Selected
Consolidated Financial Data" included elsewhere in this prospectus.
Quarter Ended October 31, 1999 Compared to Quarter Ended October 31, 1998
Results of Operations
Revenues. Total revenues for the three months ended October 31, 1999
increased $31.2 million, or 126%, to $56.0 million from $24.8 million for the
three months ended October 31, 1998. As of October 31, 1999, deferred revenues
increased to $121.9 million, compared to $120.0 million at July 31, 1999,
attributable to advertising contracts and guaranteed commitments under license
and electronic commerce agreements for which we have significant obligations
remaining.
Advertising Revenues. Advertising revenues increased $21.7 million, or 126%,
to $39.0 million for the three months ended October 31, 1999, representing 70%
of total revenues. For the three months ended October 31, 1998, advertising
revenues were $17.3 million, which represented 70% of total revenues. The
increase in advertising revenues was attributable primarily to an increase in
the number of advertisers as well as growth in the average contract size and
value.
We currently derive a substantial portion of our revenues from the sale of
advertisements on our websites, primarily through banner advertisements and
sponsorships. Advertising contracts are primarily sold as: (1) a "site-based"
or "network-based" contract under which a customer is guaranteed a number of
impressions placed throughout a particular site or the entire Lycos Network; or
(2) contracts targeted to a particular audience or user, either in connection
with one of our topical WebGuides or in connection with specified word searches
(for example, when "automobile" is searched, an automotive or car manufacturer
advertisement appears).
Electronic Commerce, Licensing and Other Revenues. Electronic commerce,
licensing and other revenues increased $9.5 million, or 127%, to $17.0 million
for the three months ended October 31, 1999, representing 30% of total
revenues. For the three months ended October 31, 1998, electronic commerce,
licensing and other revenues were $7.5 million, representing 30% of total
revenues. The increase in electronic commerce, licensing and other revenue is
attributable primarily to the addition of several new partners including, among
others, Healtheon/WebMD, FirstUSA, LifeMinders and Fidelity.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within our suite of products as
well as from royalties from the sale of goods and services from our websites.
Our license and product revenues are derived principally from product licensing
fees and fees from maintenance and support of products. Electronic commerce,
license and product revenues are generally recognized upon delivery provided
that we have no further significant obligations and collection of the
receivable is probable. In cases where there are significant remaining
obligations, we defer such revenue until those obligations are satisfied. Fees
from maintenance and support of our products, including revenues bundled with
the initial licensing fees, are deferred and recognized ratably over the
service period.
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Cost of Revenues. Cost of revenues increased $6.4 million, or 120%, to $11.7
million for the quarter ended October 31, 1999, representing 21% of total
revenues. For the three months ended October 31, 1998, cost of revenues were
$5.3 million, representing 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. We expect increases in the cost of
revenues as demand for our product offerings increase.
Operating Expenses
Research and Development. Research and development expenses increased $4.0
million, or 75%, to $9.3 million for the three months ended October 31, 1999,
representing 17% of total revenues. For the three months ended October 31,
1998, research and development expenses were $5.3 million, representing 21% of
total revenues. Research and development expenses consist primarily of
equipment and salary costs. The overall increase in research and development
expenses was primarily due to increased engineering staffing to continue to
develop and enhance our expanded product offerings, while the percentage
decrease is attributable to operational synergies achieved through the
integration of our various acquisitions.
Research and development costs have been expensed as incurred. We believe
that significant investments in research and development are required to remain
competitive. As a consequence, we expect to continue to commit substantial
resources to research and development in the future.
Sales and Marketing. Sales and marketing expenses increased $14.0 million,
or 86%, to $30.2 million for the three months ended October 31, 1999,
representing 54% of total revenues. For three months ended October 31, 1998,
sales and marketing expenses were $16.2 million, representing 65% of total
revenues. Sales and marketing expenses consist primarily of compensation,
advertising, public relations, trade shows, travel and costs of marketing
literature. The spending increases were due to the addition of sales and
marketing personnel, increased commissions associated with higher sales, and
expenses pertaining to 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
$2.9 million, or 119%, to $5.4 million for the three months ended October 31,
1999, representing 10% of total revenues. For the three months ended October
31, 1998, general and administrative expenses were $2.5 million, representing
10% of total revenues. General and administrative expenses consist primarily of
compensation, rent expenses and fees for professional services. The increases
in spending were primarily due to the expansion of our corporate
infrastructure, including the addition of finance and administrative personnel
and increased costs for professional services.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $28.2 million for the three months ended October 31, 1999 versus
$11.1 million for the three months ended October 31, 1998. The increase is
attributable to increased amortization related to developed technology and
goodwill and other intangible assets recorded upon the acquisitions of Wired
Ventures and Internet Music Distribution. 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.
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. 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, Net. Net interest income was approximately $1.7 million for
the three months ended October 31, 1999 versus $1.9 million for the three
months ended October 31, 1998. Interest income is generated from investment of
our cash equivalents. Interest expense was not significant in either period.
Gain on Sale of Investments. In August 1998, Amazon.com acquired all of the
outstanding capital stock of PlanetAll. We received 322,128 shares of
Amazon.com valued at approximately $12.8 million at the time of acquisition in
exchange for our shares of PlanetAll. We sold 289,917 shares of Amazon.com,
resulting in a gain of $10.1 million, in the quarter ended October 31, 1998.
Income Taxes. 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. This effective income tax rate may change
during the remainder of 2000 if operating results differ significantly from the
current operating projections.
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. 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 by us, not to exceed $15.0 million, contingent upon unique
user downloads of the Sonique Player. We have retained security interests in
certain common stock that was issued in this transaction. The transaction was
accounted for as a purchase, and accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their respective fair
values.
Fiscal 1999 Compared to Fiscal 1998
Results Of Operations
Revenues. Total revenues for the year ended July 31, 1999 increased $79.5
million, or 142%, to $135.5 million from $56.1 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.
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Advertising Revenues. Advertising revenues increased $51.7 million, or 124%,
to $93.4 million for the year ended July 31, 1999, representing 69% of total
revenues. For the year ended July 31, 1998, advertising revenues were $41.8
million, representing 75% of total revenues. The increase in advertising
revenue was attributable primarily to an increase in the number of advertisers
as well as growth in the average contract size and value.
Electronic Commerce, License and Other Revenues. Electronic commerce,
license and other revenues increased $27.8 million, or 194%, to $42.1 million
for the year ended July 31, 1999, representing 31% of total revenues. For the
year ended July 31, 1998, electronic commerce, license and other revenues were
$14.3 million, representing 25% of total revenues. The increase in electronic
commerce, license and other revenues was attributable primarily to the addition
of several new partners during the year, including, among others, Microsoft,
Fleet Bank, Healtheon/WebMD and First USA Bank.
Cost of Revenues. Cost of revenues increased $16.2 million, or 130%, to
$28.7 million for the year ended July 31, 1999, representing 21% of total
revenues. Cost of revenues for the year ended July 31, 1998 were $12.5 million,
representing 22% of total revenues. The overall increase in the cost of
revenues was primarily due to increased usage of our services.
Operating Expenses
Research and Development. Research and development expenses increased $16.8
million, or 177%, to $26.3 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 $9.5 million, or 17% of total revenues. The
overall increase in research and development expenses was primarily due to
increased engineering staffing to continue to develop and enhance our product
offerings.
Sales and Marketing. Sales and marketing expenses increased $43.8 million,
or 125%, to $78.8 million for the year ended July 31, 1999, representing 58% of
total revenues for the year. For the year ended July 31, 1998, sales and
marketing expenses were $35.0 million, representing 62% of total revenues. The
spending increases were due to the addition of sales and marketing personnel,
increased commissions, and expenses associated with our expanded advertising,
marketing and public relations campaign. Sales and marketing expenses also
includes the cost of our "Premier Provider" agreements with Netscape and
Microsoft, which totaled $17.6 million, $4.3 million, and $4.5 million in the
fiscal years ended July 31, 1999, 1998 and 1997, respectively.
General and Administrative. General and administrative expenses increased
$10.6 million, or 189%, to $16.2 million for the year ended July 31, 1999,
representing 12% of total revenues. For the year ended July 31, 1998, general
and administrative expenses were $5.6 million, representing 10% of total
revenues. Included in general and administrative expenses for the year ended
July 31, 1999 are non-recurring expenses of $4.2 million related to the
terminated USA Networks acquisition, as well as expenses associated with the
consolidation of our Pittsburgh offices. Excluding these costs, general and
administrative costs increased $6.4 million, or 114%, to $12.0 million for the
year ended July 31, 1999, representing 8.9% 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 39% of revenues. For the year ended July 31, 1998,
amortization of intangible assets was $7.6 million, representing 14% 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.
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Interest Income. Interest income increased $3.1 million, or 102%, to $6.2
million for the year ended July 31, 1999, representing 5% of total revenues.
Interest income was approximately $3.1 million for the year ended July 31,
1998, representing 5% of total revenues. Interest income was derived primarily
from the investment of the net proceeds received upon the closing of our public
offerings of common stock in April 1996 and June 1998, as well as acquired
cash.
Other income, net. Other income, net for the year ended July 31, 1999,
consists of a $10.1 million gain on sale of equity securities, net of a $1.4
million loss in our equity share of losses in affiliates.
Income Taxes. As of July 31, 1999, we had approximately $151 million in
Federal and state net operating loss carryforwards. The Federal net operating
losses will expire beginning in 2004 if not utilized. The state net operating
losses will expire beginning in 2004 if not utilized. A portion or all of the
net operating loss carryforwards which can be utilized in any year may be
limited by changes in our ownership, pursuant to Section 382 of the Internal
Revenue Code and similar statutes.
Fiscal 1998 Compared to Fiscal 1997
Results of Operations
Revenues. Total revenues for the year ended July 31, 1998 increased $33.8
million, or 152%, to $56.1 million from $22.3 million for the year ended July
31, 1997, primarily as a result of the growth in the number and size of
advertising contracts as well as an increase in the number and value of
electronic commerce agreements.
Advertising Revenues. Advertising revenues increased $24.4 million, or 140%,
to $41.8 million for the year ended July 31, 1998, representing 75% of total
revenues. For the previous year ended July 31, 1997, advertising revenues were
$17.4 million, representing 78% of total revenues. The increase in advertising
revenue was attributable primarily to an increase in the number of advertisers
as well as growth in the average contract size and value.
Electronic Commerce, License and Other Revenues. Electronic commerce,
license and other revenues increased $9.4 million, or 194%, to $14.3 million
for the year ended July 31, 1998, representing 25% of total revenues. For the
year ended July 31, 1997, electronic commerce, license and other revenues were
$4.9 million, representing 22% of total revenues. For the year ended July 31,
1998, the increase in electronic commerce, license and other revenues is
attributable primarily to the addition of several new partners during the year,
including, among others, AT&T, Barnes and Noble, Microsoft and CDnow.
Cost of Revenues. Cost of revenues increased $8.2 million, or 189%, to $12.5
million for the year ended July 31, 1998, representing 22% of total revenues.
Cost of revenues for the year ended July 31, 1997 were $4.3 million,
representing 19% of total revenues. The overall increase in the cost of
revenues was primarily due to increased usage of our services.
Operating Expenses
Research and Development. Research and development expenses increased $5.2
million, or 120%, to $9.5 million for the year ended July 31, 1998,
representing 17% of total revenues for the year, but declined 2% as a
percentage of total revenues. For the year ended July 31, 1997, research and
development expenses were $4.3 million, or 19% 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
23
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technologies of significance: homepage building tools from Tripod in February
1998 and automated directory services from WiseWire in April 1998. Each of
these companies was in an early stage of development, had yet to develop any
significant revenue streams and had devoted most of its efforts to date to the
development of new technologies for the Internet. As a result of acquisitions
during 1998, we recorded an in process research and development charge of $17.3
million during the fiscal year ended, representing the purchased in process
research and development that had not yet reached technological feasibility and
had no alternative future use.
Subsequent to the end of our 1998 fiscal year, we continued our acquisition
strategy. However, whereas the previous acquisitions focused on purchasing
technologies, the addition of WhoWhere? in August 1998 and Wired Ventures in
October 1998 centered around adding new users as well as a suite of more
established products and services to our product offerings. This change in
focus was part of our strategic initiative to change our focus from technology
to a mass market media focus.
The following is a description of each of our acquisitions, including a
summary of all major in-process research and development projects at the time
of acquisition. The technologies described below for each acquisition have been
determined to be in-process research and development assets. These technologies
had not reached a state of technological feasibility as of the acquisition
date, nor did they exhibit any alternative future use or uses as determined by
our management.
Tripod
We acquired Tripod on February 12, 1998 for total purchase consideration of
$61.4 million. The portion of the purchase price allocated to in-process
research and development was $7.2 million, or approximately 12% of the total
purchase price. At the acquisition date, Tripod's major in-process project was
the development of an advanced Home Page Building (HPB) technology and related
website management infrastructure to integrate and support this new HPB
technology. The objective of the project was to develop and package a community
building technology product that could be licensed to other companies to build
and manage their own community-oriented sites. The new HPB technology was
designed to build everything from simple web pages to complex websites. Beyond
the basic technology, the in-process HPB technology would offer two important
features: plug-ins and templates. Plug-ins provide new interactive software
tools to homepage builders without altering the basic HPB technology. For
instance, plug-ins can enable users to easily add games, quizzes, electronic
commerce capabilities and other interactive elements to their homepages. The
HPB technology will also provide multiple template types, allowing a user to
fill in a web form and build an electronic brochure without learning the HTML
programming language.
At the date of acquisition, we estimated that completion of the HPB
technology product would be accomplished by May 31, 1998. The initial
development effort to create a licensable HPB technology product had commenced
in June 1997. The major obstacle to launching the product was completing
software development, integrating the various components into a functional
online system, completing the Application Programming Interface (API) and the
development of a user interface. At the acquisition date, the new HPB
technology product had not reached a completed prototype stage and beta testing
had not yet commenced. The project was delayed due to unexpected technical
difficulty in completing software development, integrating and packaging the
technology and creating a new user interface that performed in a live
production environment. At the acquisition date, approximately 24 man-months of
effort had been invested in the HPB project and related development. An
additional 12 man-months of effort was necessary to complete the project in
September 1998. At the time of our purchase, the project was approximately 67%
complete.
WiseWire
We acquired WiseWire on April 30, 1998 for a total purchase price of $39.4
million. The portion of the purchase price allocated to in-process research and
development was $9.1 million, or approximately 23% of the total purchase price.
The theoretical concepts underlying WiseWire's technology were conceived at
Carnegie
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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 WebGuides on the Lycos Network;
however, it was estimated that only about one-third of the technology's long-
term intended performance capability and functionality was being utilized.
Although a subset of the Community Directory technology was developed and was
functioning on the Lycos Network in a limited capacity, approximately two-
thirds of its intended performance capability and feature set was still in
development at the acquisition date.
At the acquisition date, approximately 36 man-months of effort had been
invested in the project and it was estimated that the Community Directory R&D
project would be completed within three to four months. Thus, at the time of
our purchase, the project was estimated to be approximately 90% complete.
In addition to the Community Directory, WiseWire was developing two other
components of its product line as part of an expanded offering to the
corporate, rather than consumer, user:
WiseWire for Web Sites: The WiseWire for Web Sites product will allow
companies to easily integrate the WiseWire technology into their existing
website, 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.
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In projecting the net earnings attributable to the in process research and
development projects, management estimated revenues, revenue growth rates,
operating expenses, income taxes and the costs associated with the utilization
of working capital and other complementary assets. These estimates are based on
the following assumptions:
Projections of revenue growth over a five year forecast period are based
on management's estimates of market potential that are supported by
independent industry data regarding the Internet. Tripod generated revenues
of approximately $350,000 in 1996 and $900,000 in 1997. WiseWire generated
revenues of $4,346 in fiscal year 1996 and $8,647 in fiscal year 1997. Both
Tripod and WiseWire were development stage enterprises when acquired by
Lycos. Because of the absence of meaningful historical revenues for Tripod
and WiseWire, management projected revenues for the initial year of the
forecast period based on its assessment of future market potential and each
company's ability to successfully launch its new product offerings. After
the initial year of the five year forecast period, revenues were predicted
to grow at rates comparable to the growth of Internet users and online
activity and the impact such growth would have on Internet advertising and
electronic commerce. For Tripod, forecasted annual growth rates range from
133% in 1999 to 39% in the fifth year of the projection period. For
WiseWire, forecasted annual growth rates range from a high of 200% in 2001
and then decline to an annual rate of 97% in the fifth year of the
forecast.
Forecasted operating expenses were estimated at 70% of revenues for both
Tripod and WiseWire. Income taxes were estimated at a provisional rate of
40%. The estimated after tax margin as a percentage of revenue of 18% is
consistent with future industry expectations for businesses operating in
this segment of the Internet marketplace. The 70% rate is consistent with a
convergence of the industry averages evident in the computer, software and
telecommunications industries. We believe that the 70% rate takes into
account ongoing maintenance and research and development costs typically
associated with software technologies, as well as the costs to integrate
the products into the Lycos Network. As a result of a 70% operating expense
ratio, pre-tax income is 30% and after tax income is 18%, assuming a 40%
tax rate. We believe that an 18% profit margin is reasonable and consistent
with industry expectations.
The return on working capital and other assets necessary to support the
growth of each company has been estimated so as to derive an income stream
specifically attributable to the in-process technology. Net working capital
requirements have been estimated at 15% of revenues. The 8% rate applied to
working capital reflects the long term expectation for interest rates for
working capital loans. The projected return on working capital is based
upon a market rate of return of 8%, or 4.8% on an after-tax basis. Tangible
assets have been estimated based upon the level of tangible assets
currently deployed in each business and upon anticipated capital
expenditures for normal asset replacement. The tangible asset base required
to support Tripod's R&D activities is estimated at approximately $1.0
million over the 5 year forecast period. The tangible asset base required
to support WiseWire's R&D activities is estimated at approximately $920,000
over the 5 year forecast period. The 12% interest rate applied to fixed
assets reflects the long term lending rate expectation for financing the
purchase of equipment. The projected return on tangible assets is based
upon a market rate of return estimate of 12%, or 7.2% on an after-tax
basis.
The calculated weighted average cost of capital (WACC) is approximately
16%. The 16% rate was based upon an analysis of the WACC for publicly
traded companies within the same industry. The WACC calculation produces
the average required rate of return of an investment in an operating
enterprise. The required rate of return for working capital and tangible
assets would generally be lower than the WACC given the fact that less risk
is associated with such assets. As stated above, management estimates an 8%
return on working capital and a 12% return on tangible assets. For
intangible assets that reflect a considerably higher degree of risk, such
as in-process technology, a rate range of 25.2% to 28.8% has been utilized
depending on the relevant risk of the 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.
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If actual results differ significantly from the above assumptions, we may be
adversely affected in future periods. In addition, the value of other assets
acquired may become impaired.
Sales and Marketing. Sales and marketing expenses increased $15.9 million,
or 83%, to $35.0 million for the year ended July 31, 1998, representing 62% of
total revenues for the year. For the year ended July 31, 1997, sales and
marketing expenses were $19.1 million, representing 86% of total revenues. The
spending increases were due to the addition of sales and marketing personnel,
increased commissions, and expenses associated with our expanded advertising,
marketing and public relations campaign. Sales and marketing expenses also
includes the cost of our "Premier Provider" Agreements with Microsoft and
Netscape, which totaled $4.3 million and $4.5 million in the fiscal years ended
1998 and 1997, respectively.
General and Administrative. General and administrative expenses increased
$2.9 million, or 107%, to $5.6 million for the year ended July 31, 1998,
representing 10% of total revenues. For the year ended July 31, 1997, general
and administrative expenses were $2.7 million, representing 12% of total
revenues. The increases in spending were primarily due to the expansion of our
corporate infrastructure, including the addition of finance and administrative
personnel and increased costs for professional services.
Amortization of Intangible Assets. Amortization of intangible assets
increased $7.1 million to $7.6 million for the year ended July 31, 1998,
representing 13.6% of revenues. The increase is attributable to increased
amortization related to developed technology and goodwill and other intangible
assets recorded upon the acquisitions of Tripod, WiseWire and GuestWorld.
At July 31, 1998, we had total net assets of $237.2 million, of which $78.8
million pertained to goodwill and other intangible assets. We continually
evaluate the existence of long-lived assets impairment in accordance with the
provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be disposed of." We wrote off $98,000 of goodwill related
to Point Communications and $830,000 related to the license agreement with
Carnegie Mellon University.
Interest Income. Interest income increased $921,000, or 43%, to $3.1 million
for the year ended July 31, 1998, representing 5% of total revenues. Interest
income was approximately $2.1 million for the year ended July 31, 1997,
representing 10% of total revenues. Interest income is derived primarily from
the investment of the net proceeds received upon the closing of our public
offerings of common stock in April 1996 and June 1998.
Income Taxes. We have not recorded an income tax expense or benefit because
we have incurred net operating losses since inception. As of July 31, 1998, we
had approximately $38.0 million in Federal and State net operating loss
carryforwards. Of this amount, approximately $13.0 million relates to the
acquisitions of Point Communications, Tripod, WiseWire, and GuestWorld and will
reduce goodwill when utilized.
Liquidity and Capital Resources
At October 31, 1999, we had cash and cash equivalents of approximately
$163.0 million. We regularly invest excess funds in short-term money market
funds, government securities and commercial paper.
We generated cash from operations of approximately $1.5 million during the
three months ended October 31, 1999. We generated cash from financing
activities of approximately $10.0 million during the three months ended October
31, 1999, due primarily to proceeds received by us from the exercise of
employee stock options. We used cash in investing activities of $7.5 million,
due primarily to cash used to invest in our affiliates.
At October 31, 1999, we had deferred revenues of $121.9 million, primarily
representing fees to be earned in the future on noncancelable electronic
commerce agreements.
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From time to time, we expect to evaluate the acquisition of products,
businesses and technologies that complement our business. As of the date of
this prospectus, we do not have any understandings, commitments or agreements
with respect to any material acquisitions.
We currently believe that the net proceeds of this offering, together with
current available funds and cash flows generated by operations, if any, will be
sufficient to fund our working capital and capital expenditures requirements
for at least the next twelve months. Thereafter, we may need to raise
additional funds. We may need to raise additional funds sooner in order to fund
more rapid expansion, to develop new or enhanced products and services, to
respond to competitive pressures or to acquire complementary businesses or
technologies. If additional funds are raised through the issuance of additional
equity securities, the percentage equity ownership by our stockholders will be
reduced, stockholders may experience dilution, and such equity securities may
have rights, preferences or privileges senior to those of our common stock. We
cannot assure you 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 adversely impact our ability to conduct our business.
Year 2000 Compliance
Our System May Experience Difficulties Related To Year 2000 Computer
Problems. The codes of many currently installed computer systems and software
products accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. Many companies'
software and computer systems, including ours and the companies on which we
depend, may need to be upgraded or replaced so that they will be able to
distinguish 21st century dates from 20th century dates in order to comply with
Year 2000 requirements and therefore be Year 2000 compliant.
Our State Of Year 2000 Readiness. We continue to monitor the Year 2000
readiness of the hardware and software products we sell, the information
technology systems we use and our non-information technology systems, like
building security, voice mail and other systems. We have completed our
assessment of all current versions of the hardware and software products and
technology information systems that we use and believe that they are Year 2000
compliant. We have also completed all of our testing of these technology
information systems. Whether a complete system or device that uses hardware or
software used by us will process 21st century dates depends on other components
that are supplied by parties other than us. The suppliers of our critical
information systems have informed us that their software is Year 2000
compliant. We rely, both domestically and internationally, upon various service
providers that are outside of our control including: various vendors,
governmental agencies, utility companies, telecommunications service companies,
delivery service companies, and other service providers. These third parties
may suffer a Year 2000 business disruption caused by the inability of various
systems to process 21st century dates that could hinder our ability to conduct
our business. To the extent that we fail to identify and remedy any non-
compliant internal or external Year 2000 problems, or the Year 2000 phenomenon
creates a systemic failure beyond our control, like a prolonged
telecommunications or electrical failure or a prolonged failure of third-party
software on which we rely, we could be prevented from operating our business
and permitting users access to our web sites. To date, we have not suffered any
significant Year 2000 problems, but we continue to monitor our various systems.
Costs Of Our Year 2000 Compliance. To date, we have not incurred any
material expenditures in connection with identifying or evaluating Year 2000
compliance issues. Most of our expenses thus far relate to retaining third
party consultants to assist in our compliance efforts and to the opportunity
cost of time spent by our employees evaluating its software, the current
versions of the hardware and software sold by us and Year 2000 compliance
matters generally.
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Subsequent Events
Acquisition of Quote.com
On December 6, 1999, we closed the merger of Quote.com. The acquisition will
be accounted for as a purchase. The purchase price will be allocated to the
assets acquired and liabilities assumed based on their estimated fair values.
Results of operations for Quote.com will be included with those of Lycos for
periods subsequent to the date of acquisition. Under the terms of the
acquisition, we exchanged 1,346,630 shares of Lycos common stock for all
outstanding shares of common stock and preferred stock of Quote.com.
Additionally, we converted all outstanding Quote.com options and warrants into
Lycos options and warrants to acquire a total of 239,046 shares of our common
stock.
Acquisition of Gamesville.com
On December 3, 1999, we completed the Gamesville.com merger in a stock-for-
stock transaction and Gamesville.com became our wholly owned subsidiary. Under
the terms of the acquisition, which will be accounted for as a pooling of
interests, we exchanged 3,605,044 shares of our common stock for all
outstanding shares of common stock and preferred stock of Gamesville.com.
Additionally, we converted all outstanding Gamesville.com stock options and
warrants into Lycos options and warrants to acquire a total of 423,085 shares
of Lycos common stock. Because the merger was accounted for as a pooling, SEC
rules require that we provide supplemental financial statements to show our
results and Gamesville.com's historical results on a combined basis. These
supplemental financial statements were included in a Form 8-K/A filed with the
SEC on January 3, 2000. We believe there are no material differences between
our historical financial statements included in this prospectus and the
supplemental financial statements.
Lycos Asia Joint Venture
In September 1999, we established Lycos Asia as the basis for a joint
venture agreement with Singapore Telecommunications Limited (SingTel) to create
a localized version of the Lycos Network services to be offered in Singapore,
Hong Kong, China, Taiwan, India and certain other countries in Southeast Asia.
We own 50% of the joint venture and 50% is owned by SingTel, a
telecommunications provider in Singapore. The investment will be accounted for
under the equity method and accordingly, we will recognize 50% of the net
losses and profits of Lycos Asia as realized.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. We adopted SOP 98-1 effective August 1, 1999. The adoption of
SOP 98-1 did not have a material impact on our consolidated financial
statements.
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities
and organization costs to be expensed as incurred. We adopted SOP 98- 5
effective August 1, 1999. The adoption of SOP 98-5 did not have a material
impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet at their fair value. We currently expect to adopt SFAS 133, as
amended by SFAS 137, for the year ending July 31, 2001. Management has
determined there will be no impact on its results of operations or financial
position resulting from the adoption of SFAS 133 because we currently do not
hold derivative instruments.
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Quantitative and Qualitative Disclosures about Market Risk
Lycos owns financial instruments that are sensitive to market risks as part
of its investment portfolio. Our investment portfolio is used to preserve our
capital until it is required to fund operations. None of these market-risk
sensitive instruments are held for trading purposes. We do not own derivative
financial instruments in our investment portfolio. The investment portfolio
contains instruments that are subject to a decline in equity markets.
Investment Rate Risk--Lycos' investment portfolio includes primarily certain
commercial paper which is subject to interest rate risk. Due to the short
duration and conservative nature of these instruments, Lycos does not believe
that it has a material exposure to interest rate risk.
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BUSINESS
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, reaching nearly one out of every two
U.S. Internet users in November 1999. According to a 1999 Media Metrix report,
our network of branded websites contained four of the twenty most visited U.S.
destinations on the 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 November 1999, we generated more than 2.5 billion page views
and, according to Media Metrix, reached more than 29 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, Motorola, Johnson & Johnson,
Macy's, 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 such as barnesandnoble.com directly into our search,
navigation and content offerings. Second, through our recently established
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, Chile, Denmark, France, Germany, Ireland, Italy,
Japan, Mexico, The Netherlands, Norway, Peru, Singapore, South Korea, Spain,
Sweden, Switzerland, 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
[LOGO] search and directory accompanied by deep vertical
content.
hotbot.com--a sophisticated search service that
[LOGO] provides users the ability to perform advanced Web
searches.
tripod.com--a personal publishing community,
[LOGO] 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,
[LOGO] similar to Tripod, but with a focus on a younger
age group.
whowhere.com--a home address, e-mail address and
[LOGO] 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
[LOGO] accessible from any computer with an Internet
connection.
quote.com--a broad-based financial site that
[LOGO] provides financial market data such as stock and
mutual fund quotes, news and research.
sonique.com--a website featuring our proprietary
[LOGO] music player, which allows our users to download
and listen to various audio formats.
gamesville.com--an interactive gaming site
[LOGO] featuring virtual card games, trivia quizzes and
traditional games such as bingo.
Wired News--located at Wired.com--a daily news
[LOGO] service offering reporting and analysis of
technology trends.
LYCOShop--located at Shop.Lycos.com--an online
[LOGO] consumer marketplace offering products from over
2,000 retailers.
We encourage users to remain within the Lycos Network through the use of
links, promotions, shared content and banner advertisements that feature other
Lycos 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 November 1999, Lycos' reach in the U.S. grew from approximately
14% of home users and 22% of users at work to approximately 45% of total U.S.
online users, according to Media Metrix.
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Strategy
Our objective is to be the most visited and utilized global online
destination. The essential elements of our strategy include:
. Expand the Reach of the Lycos Network. We intend to continue to increase
the number of users of the Lycos Network through partnerships and
alliances, the expansion of existing and addition of new brands, and by
providing enhanced content and services to our users. We will continue
to enter into agreements to provide direct access to our products and
services through computer hardware and software companies, such as IBM,
Internet service providers (ISPs), such as Juno, and providers of
wireless and broadband Internet access, such as Ericsson and RCN. We
seek to aggressively extend the recognition of the Lycos brand through
online and off-line advertising and promotional campaigns in order to
broaden the recognition of the various brands comprising the Lycos
Network. We will also continue to enhance and expand the breadth and
scope of our content, products and services to ensure that the Lycos
Network provides appealing content to attract and retain users.
. Increase the Frequency and Duration of User Visits to the Lycos
Network. We believe that we can increase the frequency and duration of
our users' visits to the Lycos Network by continually expanding the
content, features and functionality of our product offering. We provide
content and services through a variety of brands across the Lycos
Network in an easy to navigate format that enhances the user experience
and extends the duration of a user's visit to our sites. Throughout the
Lycos Network, we promote our sites through the use of links, shared
content and banner advertisements, making it easier for users to access
additional content, functions and features while remaining within the
Lycos Network.
. Continue to Provide Comprehensive Advertising Solutions. We believe that
our multi-brand strategy segments our user demographics more effectively
than a single brand strategy and provides an attractive platform for
measurable, targeted, cost-effective online advertising. Not only do we
provide advertisers with the ability to target our large and diverse
user base through network-wide advertising, but advertisers can purchase
site-based advertising on the individual network sites, thus targeting
the demographic group that is specific to that site. We also assist our
advertisers in developing innovative ways to reach their target
audiences online. We design and offer customized packages that include
the ability to change advertisements quickly and frequently; to link a
search advertisement to a specific term or topic; to target
advertisements based on demographics, geographic location and topical
categories; and to track daily usage and other information.
. Provide a Compelling E-Commerce Platform. We believe that we are well
positioned to take advantage of the expected growth in the purchase of
goods and services through the Internet. We integrate product and
service offerings from merchant partners directly into our search,
directory and community offerings on a topical basis. For example,
through our arrangement with barnesandnoble.com, a user who conducts a
search on a particular topic is presented with a link to the
barnesandnoble.com website which contains a list of books on the topic.
In addition, LYCOShop provides buyers and sellers with a seamless e-
commerce experience, incorporating products from over 2,000 retailers as
well as auctions and classified ads.
. Expand the Global Presence of the Lycos Network. The number of Internet
users outside of the U.S. is projected to grow rapidly over the next
several years. In order to take advantage of this growth, we have
extended the Lycos products and services to countries in Europe and Asia
by creating joint ventures with prominent local media and technology
companies. These joint ventures allow us to reduce the costs and launch
time associated with global expansion as well as leverage our
operational and brand strengths and the promotional, marketing and sales
strengths of our partners. We have also recently expanded our presence
to include Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela. We expect to launch additional sites in Asia, Europe and
Latin America during calendar year 2000.
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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 service of Internet users surveyed
by the Wall Street Journal. 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. In an alliance with
AOL, we also offer a version of the 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 recently acquired Gamesville.com, one of the leading online gaming
sites, that is now the featured product offering on the Lycos Games WebGuide.
According to Media Metrix, in November 1999, the Gamesville.com site ranked
third among the top 500 U.S. websites in average usage at approximately 15
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, and news and information
from Rolling Stone and Billboard magazines. 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, and our Sonique music
player, which allows users to download and listen to various music and audio
formats.
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Personal Finance. Lycos recently acquired 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 fee-based premium services, including
streaming real time stock quotes.
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.
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
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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.
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
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the Web with a specific intent to buy. With the Lycos Network reaching nearly
one out of two U.S. Internet users in November 1999, 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.
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:
AT&T--provides Lycos users with an ability to purchase telecommunication
services over the Internet.
barnesandnoble.com--provides Lycos users with the opportunity to
purchase books throughout the Lycos Network.
First USA Bank--provides Lycos users with a wide range of online banking
products through its Wingspanbank.com online bank.
Fleet Credit Card Services--provides Lycos users with a Lycos branded
credit card.
LYCOShop
In October 1999, we launched LYCOShop, an online marketplace offering
thousands of products and services from over 2,000 brand name retailers and
small specialty stores, including: Eddie Bauer; FogDog Sports; REI; and The
Gap. 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 also
provides shoppers the convenience of a "universal shopping cart" which allows
shoppers to purchase items from more than one merchant within LYCOShop without
having to re-register their personal information (such as credit card and
delivery information) with each merchant. 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.
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<PAGE>
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 eight acquisitions, including the following
acquisitions which we completed in 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 periods of time.
Additionally, because of the information that Gamesville.com's users permit
us to access through the registration process, Gamesville.com delivers
state-of-the-art, 1-to-1 targeted database marketing solutions to brand
name advertisers.
We continuously identify and evaluate potential acquisition candidates and
in many cases engage in discussions and negotiations regarding potential
acquisitions. We currently have no 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 250 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.
Preview Travel--Preview Travel provides us with travel-related content that
is displayed on a co-branded version of the Preview Travel site, which is
linked to contextually relevant pages on the Lycos Network. This content
includes a "fare finder" and other information about travel deals, travel news
headlines and destination guides by location. Lycos users can complete all of
their travel plans through this co-branded Preview Travel site.
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<PAGE>
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 Juno, RCN and Sprint Canada, 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.
Technology
Fidelity--Under our agreement with Fidelity, we provide personalization
technology for their PowerStreet online trading initiative. In return, we
receive prominent mention in PowerStreet advertising and sponsorship by
Fidelity of our Quote.com website.
Fast Search & Transfer--We have an agreement with Fast Search & Transfer
that allows us access to their state-of-the-art MP3 music search technology. We
have incorporated this technology with our existing music content to provide
our users with the ability to find, listen to and discuss music. We have
recently entered into an agreement to invest in Fast Search & Transfer which is
expected to close in January 2000.
LYCOShop--We have entered into agreements with a number of companies,
including Open Market, Verio, Fairmarket, Frictionless Commerce,
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. 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;
. Valent Software, a developer of software that powers online clubs;
. Frictionless Commerce, a developer of comparison shopping technologies
that take into account options such as price, product features, brand
reputation and delivery time; and
. iCOMS, a provider of engineering, operational and merchant support for
e-commerce 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).
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<PAGE>
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 U.S. 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 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 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 service and the Tripod community site
throughout Europe. This joint venture, named Lycos Bertelsmann GmbH & Co.
KG, is owned 50% by Lycos and 50% by Bertelsmann Internet Group. Lycos
Bertelsmann 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.
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 50% of the joint venture.
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, Hong Kong, 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 both simplified and traditional Chinese language services are
expected to be launched in early 2000.
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.
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 $10 million of the $75 million fund. To date, this fund has made investments
in several companies, including LifeMinders, FogDog Sports, Conducent
Technologies, Tekmetrics and Planet Feedback.
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<PAGE>
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 also
promote 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 1999 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, Pepsi and
Ticketmaster.
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 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. CMU 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.
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<PAGE>
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 December 31, 1999, Lycos' U.S. operations employed 919 persons,
including 457 in sales and marketing, 357 in research and development, product
development and service operations and 105 in finance and administrative
functions. Lycos also employs 69 independent contractors for software
development, documentation, artistic design and editorial reviews. In addition,
our international joint ventures employ an additional 250 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
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 February 1999, Lycos announced its intention to enter into a transaction
with USA Networks 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 proposed
merger by mutual agreement.
Prior to the termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle County
by shareholders of Lycos allegedly on behalf of all common stockholders of
Lycos. The complaints requested, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and
42
<PAGE>
fees, including attorneys' fees. Since the proposed merger was terminated, the
suits have been inactive. We believe that the allegations in the complaints are
without merit and, as a result of the termination of the proposed merger, are
now moot.
Also prior to the termination of the proposed merger, certain purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States
securities laws through alleged misrepresentations and omissions relating to
the announced transaction with USA Networks. The consolidated complaint seeks
an unspecified award of damages. We believe that the allegations in the
consolidated complaint are without merit and intend to contest them vigorously.
On October 22, 1999, we filed a motion with the court to have the lawsuit
dismissed for failure to adequately allege violations of the securities laws.
A former employee of Lycos has brought suit in Federal District Court in
California, seeking compensatory and punitive damages, unpaid and lost wages,
costs, attorneys' fees and prejudgment interest based on alleged gender
discrimination, harassment, retaliation, wrongful discharge, breach of implied
contract, fraud, and wage and hour violations. The matter is currently
scheduled for trial in March 2000. We believe that the allegations in the
complaint are without merit, and we have contested, and will continue to
contest, them vigorously.
In November 1999, AIWF Trust, a former shareholder of WiseWire Corporation,
filed a lawsuit in the Court of Common Pleas of Allegheny County, Pennsylvania
against WiseWire, representatives of former shareholders of WiseWire, and
Lycos, as WiseWire's alleged successor in interest. In this lawsuit, AIWF Trust
alleged that pursuant to a 1996 subscription agreement between AIWF Trust and
WiseWire, AIWF Trust was entitled to 2,500,000 million 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 the complaint are without merit and intends to
contest them vigorously. In addition, Lycos has asserted a claim against the
escrow deposit created in connection with Lycos' acquisition of WiseWire, which
currently contains approximately 329,000 shares of Lycos common stock.
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<PAGE>
MANAGEMENT
The directors, executive officers, and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert J. Davis......... 43 President, Chief Executive Officer and Director
Edward M. Philip........ 34 Chief Operating Officer, Chief Financial Officer and Secretary
Ron A. Sege............. 42 Executive Vice President
David G. Peterson....... 42 Senior Vice President of Sales
Thomas E. Guilfoile..... 35 Vice President of Finance and Administration
Jeffrey S. Bennett...... 37 Senior Vice President of Business Development
John P. McMahon......... 47 Chief Human Resources Officer
John M. Connors, Jr..... 57 Director
Daniel J. Nova.......... 38 Director
Richard H. Sabot........ 55 Director
Peter A. Lund........... 58 Director
</TABLE>
Robert J. Davis has served as our President, Chief Executive Officer and a
Director since our 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, with highest honors, from Northeastern University and a Master
in Business Administration from Babson College.
Edward M. Philip has served as our Chief Financial Officer and Secretary
since December 1995 and as our 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. Mr. Philip received a Bachelor of
Science degree in Economics and Mathematics from Vanderbilt University and a
Master in Business Administration from Harvard Business School. Mr. Philip is a
director of Allscripts, Inc. and Vialog Corporation.
Ron A. Sege has served as our Executive Vice President since February 1999.
Prior to joining Lycos, Mr. Sege worked for 3Com Corporation from January 1989
to February 1999, most recently as senior vice president of one of three
business units at 3Com. Before joining 3Com, Mr. Sege worked for Rolm
Corporation. Mr. Sege serves on various corporate and non-profit boards,
including Artel Video Systems, the Massachusetts Telecommunications Council and
Junior Achievement of New England. He holds a Bachelor of Arts degree from
Pomona College and a Master in Business Administration from Harvard Business
School.
David G. Peterson has served as our Senior Vice President of Sales since
December 1999 and was previously Vice President of Advertising Sales 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. Mr. Peterson held a variety of positions within IDG,
including Vice President of Eastern Advertising Sales, Regional Vice President
of New England Advertising Sales and District Manager. Mr. Peterson holds a
Bachelor of Arts degree in economics from the University of New Hampshire and a
Master of Business Administration from Northeastern University.
Thomas E. Guilfoile has served as our Vice President of Finance and
Administration since December 1996 and as our Controller since February 1996.
Prior to joining Lycos, Mr. Guilfoile was employed by Ernst & Young LLP from
July 1986 to February 1996, most recently as a Senior Manager in Ernst & Young
LLP's Entrepreneurial Services Group. Mr. Guilfoile holds a Bachelor of
Business Administration degree in accounting from the University of Notre Dame
and serves as a director of AdOne, Inc.
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<PAGE>
Jeffrey S. Bennett has served as our Senior Vice President of Corporate
Development since December 1999, and had previously served us in a variety of
roles since joining us in December 1996, most recently as Vice President and
General Manager of E-commerce. Prior to joining Lycos, Mr. Bennett was employed
by DST Systems from December 1993 through May 1996 and Thomson Financial
Services from May 1993 through December 1993 and May 1996 through December
1996. Mr. Bennett also worked at SunGard Financial Systems and Wang
Laboratories. Mr. Bennett held various national sales, sales management and
business development positions at his previous employers. Mr. Bennett holds a
BS Degree in marketing management from Bentley College.
John P. McMahon has served as our Chief Human Resources Officer since August
1999. Prior to joining Lycos, Mr. McMahon served as Vice President of Human
Resources at Wang Global from March 1998 through August 1999. Before joining
Wang Global, Mr. McMahon served at Stream International from July 1995 through
October 1997, most recently as Senior Vice President of Human Resources. From
January 1993 to July 1995, Mr. McMahon was employed by Stride Rite. Mr. McMahon
has a Master of Science degree in Human Resource Management from Upsala College
and a Bachelor of Science degree in criminal justice from Mercy College.
John M. Connors, Jr. has served as one of our Directors since June 1996. Mr.
Connors is a founding partner of, and since 1995, Mr. Connors has served as
Chairman of the Board of Directors and, since 1968, as Chief Executive Officer
of Hill, Holliday, Connors, Cosmopulos, Inc., a leading full-service marketing
communications company. Hill, Holliday 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 also past chairman of the board of directors of the Wang Center for
the Performing Arts, and he currently serves as a member 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.
Daniel J. Nova has served as one of our Directors since July 1995. Since
1996, Mr. Nova has served as a general partner of the general partner of
Highland Capital Partners II, III and IV Limited Partnerships, each a venture
capital partnership. Since June 1996, 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, a venture capital firm and
one of our significant stockholders, 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, Topica, RadioLan, Send.com
and Beliefnet.com.
Richard H. Sabot has served as one of our Directors since May 1998. Mr.
Sabot currently serves as Executive Vice President of Tripod, Inc., a wholly-
owned subsidiary of Lycos, and has been with Tripod since its inception in
1994. Mr. Sabot is the John J. Gibson Professor of Economics 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.
Peter A. Lund became one of our Directors in 1999. Mr. Lund currently serves
as a media consultant and is a private investor in a number of companies. Mr.
Lund was President and Chief Executive Officer 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, CBS Television Stations; and President, Multimedia
Entertainment. Mr. Lund serves as a director for GHS Inc. and the University of
St. Thomas.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Allen & Company
Incorporated, Bear, Stearns & Co. Inc. and Hambrecht & Quist LLC are acting as
representatives, the following respective numbers of shares of our common
stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Goldman, Sachs & Co................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................
Allen & Company Incorporated.......................................
Bear, Stearns & Co. Inc............................................
Hambrecht & Quist LLC..............................................
----
Total..........................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or this
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the public offering price less
the underwriting discounts and commissions. This option may be exercised only
to cover any over-allotments of common stock.
The underwriters propose to offer the shares of our common stock initially
at the public offering price on the cover page of this prospectus and to the
selling group members at that price less a selling concession of $ per
share. The underwriters and the selling group members may allow a discount of
$ per share on sales to other broker/dealers. After this offering, the public
offering price and selling concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
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<PAGE>
We have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 relating
to, any additional shares of our common stock or securities convertible into
or exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation
for a period of 60 days after the date of this prospectus, except for grants
of employee stock options under our stock incentive plans in effect on the
date hereof, issuances of securities as a result of the exercise of any
options outstanding on the date hereof, issuances of up to an aggregate of
250,000 shares of common stock in connection with acquisitions and the filing
of registration statements in connection with certain transactions entered
into prior to the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, or to contribute to payments which the underwriters
may be required to make in that respect.
Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "LCOS".
From time to time, certain of the underwriters may provide financial
advisory services to Lycos, its subsidiaries or its joint ventures.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the size of the
offering, which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilization transaction or a
syndicate covering transaction to cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions, penalty bids
and "passive" market making may cause the price of the common stock to be
higher than it would otherwise be in the absence of these transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
47
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale restrictions
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our common stock are effected. Accordingly, any resale of our common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of our common stock.
Representations of purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
(i) such purchaser is entitled under applicable provincial securities laws
to purchase our common stock without the benefit of a prospectus
qualified under such securities laws;
(ii) where required by law, that such purchaser is purchasing as principal
and not as agent; and
(iii) such purchaser has reviewed the text above under "Resale
restrictions."
Rights of action (Ontario purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of legal rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia residents
A purchaser of our common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and eligibility for investment
Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
48
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for Lycos by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. The underwriters have been represented by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
The consolidated financial statements of Lycos at July 31, 1999 and 1998 and
for each of the years in the three-year period ended July 31, 1999, and the
consolidated financial statements of Wired Ventures, Inc. at December 31, 1998
and 1997 and for each of the years in the three-year period ended December 31,
1998 included in this prospectus, or incorporated by reference, have been
audited by KPMG LLP, independent auditors, as set forth in their reports
thereon included or incorporated by reference herein, and are included herein
and incorporated by reference in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information we file 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. Our SEC filings
are also available to the public from commercial document retrieval services
and at the website maintained by the SEC at http://www.sec.gov. We have filed a
registration statement to register with the SEC the common stock offered by
this prospectus. This prospectus is part of that registration statement. As
allowed by SEC rules, this prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement. Statements in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance we refer you
to the full text of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
Some of the important business and financial information that you may want
to consider is not included in this prospectus, but rather is "incorporated by
reference" to documents that have been filed by us with the SEC. The
information that is incorporated by reference consists of:
. Our Annual Report on Form 10-K, for the fiscal year ended July 31, 1999,
as filed on October 29, 1999;
. Our Proxy Statement for our 1999 annual meeting held on December 21,
1999, as filed November 22, 1999;
. Our Current Reports on Form 8-K filed on August 6, 1999 (as amended on
October 7, 1999), September 16, 1999 (as amended on December 22, 1999)
and December 21, 1999 (as amended on January 4, 2000);
. The audited consolidated balance sheets of Wired Ventures, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations and comprehensive income (loss),
minority interest and stockholders' (deficit) equity and cash flows for
each of the years in the three-year period ended December 31, 1998; the
unaudited consolidated balance sheet of Wired Ventures, Inc. and
subsidiaries as of March 31, 1999 and the related unaudited consolidated
statements of operations and comprehensive income and cash flows for the
three months ended March 31, 1999 and 1998; and our unaudited pro forma
combined condensed balance sheet and the related unaudited pro forma
combined condensed statements of operations, each as included in our
Current Report on Form 8-K filed on July 15, 1999;
49
<PAGE>
. Our Quarterly Report on Form 10-Q, for the fiscal quarter ended October
31, 1999, as filed on December 15, 1999;
. The description of our common stock contained in our registration
statement on Form 8-A, filed with the SEC on February 23, 1996;
. All documents filed by us under the Securities Exchange Act of 1934
(e.g., Forms 10-Q and 8-K) after the date of this prospectus and prior
to the termination of this offering.
If there is any contrary information in a previously filed document that is
incorporated by reference, then you should rely on the information in this
prospectus.
You can obtain any of the documents incorporated by reference through Lycos
or the SEC. Documents incorporated by reference are available from us without
charge, excluding all exhibits. You may obtain documents incorporated by
reference in this prospectus by requesting them in writing to the following
address or by telephone:
Lycos, Inc.
Attention: Investor Relations
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
LYCOS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets at July 31, 1999 and 1998..................... F-3
Consolidated Statements of Operations for the years ended July 31, 1999,
1998 and 1997............................................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the years ended July 31, 1999, 1998 and 1997.................. F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1999,
1998 and 1997............................................................ F-6
Notes to Consolidated Financial Statements................................ F-8
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at October 31, 1999 (Unaudited) and
July 31, 1999 ........................................................... F-31
Condensed Consolidated Statements of Operations for the Three Months Ended
October 31, 1999 and 1998 (Unaudited).................................... F-32
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
October 31, 1999 and 1998 (Unaudited).................................... F-33
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lycos, Inc.:
We have audited the accompanying consolidated balance sheets of Lycos,
Inc. as of July 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for
each of the years in the three year period ended July 31, 1999. These
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. 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, 1999 and 1998, and the results of its operations
and cash flows for each of the years in the three year period ended July 31,
1999, in conformity with generally accepted accounting principles.
/s/ KMPG
Boston, Massachusetts
August 17, 1999
F-2
<PAGE>
LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $152,970,244 $153,728,200
Accounts receivable, less allowance for doubtful
accounts of $2,377,000 and $1,208,000 at July
31, 1999 and 1998, respectively................. 24,639,514 10,958,470
Electronic commerce and license fees receivable.. 71,843,202 30,223,986
Prepaid expenses................................. 8,537,383 5,559,842
Other current assets............................. 143,448 326,292
------------ ------------
Total current assets........................... 258,133,791 200,796,790
------------ ------------
Property and equipment, less accumulated
depreciation and amortization..................... 7,471,230 3,960,059
Electronic commerce and license fees receivable.... 48,029,100 21,537,371
Investments........................................ 48,000,570 8,874,568
Intangible assets, less accumulated amortization... 505,682,024 78,787,554
Other assets....................................... 7,325,353 3,278,994
------------ ------------
Total assets................................... $874,642,068 $317,235,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current........................... $ 2,589,271 $ 171,783
Accounts payable................................. 1,381,721 4,873,302
Accrued expenses................................. 22,438,326 17,277,168
Deferred revenues................................ 64,016,249 31,412,239
------------ ------------
Total current liabilities...................... 90,425,567 53,734,492
Notes payable...................................... 2,599,729 140,749
Deferred revenues.................................. 55,934,152 26,159,754
Other liabilities.................................. -- 36,667
------------ ------------
58,533,881 26,337,170
Commitments and contingencies...................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued or outstanding.......... -- --
Common stock, $.01 par value; 300,000,000 shares
authorized, 96,706,803 shares at July 31, 1999
and 77,982,872 at July 31, 1998 issued and
outstanding..................................... 967,071 779,832
Additional paid-in capital....................... 801,494,011 277,736,666
Deferred compensation............................ (69,802) (116,338)
Accumulated deficit.............................. (92,295,457) (40,251,893)
Treasury stock, at cost, 1,814,893 shares at July
31, 1999 and 1,417,348 shares at July 31, 1998.. (3,286,293) (984,593)
Accumulated other comprehensive income........... 18,873,090 --
------------ ------------
Total stockholders' equity..................... 725,682,620 237,163,674
------------ ------------
Total liabilities and stockholders' equity..... $874,642,068 $317,235,336
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LYCOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
July 31, 1999 July 31, 1998 July 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Advertising............................ $ 93,440,262 $ 41,768,607 $17,417,388
Electronic commerce, license and
other................................. 42,080,564 14,291,698 4,855,654
------------ ------------ -----------
Total revenues....................... 135,520,826 56,060,305 22,273,042
Cost of revenues......................... 28,726,949 12,513,259 4,335,941
------------ ------------ -----------
Gross profit......................... 106,793,877 43,547,046 17,937,101
Operating expenses:
Research and development............... 26,279,267 9,477,708 4,301,267
In process research and development.... -- 17,280,000 --
Sales and marketing.................... 78,807,148 35,035,754 19,126,317
General and administrative............. 16,249,670 5,631,104 2,718,763
Amortization of intangible assets...... 52,427,704 7,613,711 540,416
------------ ------------ -----------
Total operating expenses............. 173,763,789 75,038,277 26,686,763
------------ ------------ -----------
Operating loss........................... (66,969,912) (31,491,231) (8,749,662)
Interest income.......................... 6,166,942 3,051,747 2,130,472
Equity share of losses in affiliates..... (1,360,425) -- --
Gain on sale of investments.............. 10,119,831 -- --
------------ ------------ -----------
Net loss................................. $(52,043,564) $(28,439,484) $(6,619,190)
============ ============ ===========
Basic and diluted net loss per share..... $ (0.60) $ (0.46) $ (0.12)
============ ============ ===========
Shares used in computing basic and
diluted net loss per share.............. 86,428,459 61,865,964 55,178,972
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LYCOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Treasury Stock Other
------------------- Paid-in Deferred Accumulated --------------------- Comprehensive
Shares Amount Capital Compensation Deficit Shares Amount Income (Loss)
---------- -------- ------------ ------------ ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31,
1996.................. 55,171,584 $551,716 $ 49,123,821 $(376,161) $ (5,193,219) -- -- --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (6,619,190) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities...
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 14,896 148 18,254 -- -- -- -- --
Cancellation of
options............... -- -- (49,067) 49,067 -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 141,658 -- -- -- --
---------- -------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1997.................. 55,186,480 551,864 49,093,008 (185,436) (11,812,409) -- -- --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (28,439,484) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities...
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 17,176 172 65,870 -- -- -- -- --
Cancellation of
options............... -- -- (22,562) 22,562 -- -- -- --
Issuance of common
stock in connection
with exercise of stock
options............... 4,094,040 40,940 3,201,254 -- -- 123,112 $ (307) --
Purchase of treasury
stock in connection
with exercise of stock
options............... -- -- -- -- -- 1,216,368 (467,589) --
Issuance of common
stock in connection
with exercise of
warrants.............. 414,456 4,144 1,359,444 -- -- 37,672 (113,581) --
Issuance of common
stock in connection
with strategic
investments, net of
offering costs........ 602,056 6,024 7,876,419 -- -- -- -- --
Issuance of common
stock and warrants in
connection with
acquisitions.......... 8,298,284 82,984 104,766,071 -- -- 40,196 (403,116) --
Issuance of common
stock in connection
with Secondary Public
Offering, net of
offering costs........ 9,350,000 93,500 111,097,366 -- -- -- -- --
Issuance of common
stock in connection
with services
rendered.............. 20,380 204 299,796 -- -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 46,536 -- -- -- --
---------- -------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1998.................. 77,982,872 779,832 277,736,666 (116,338) (40,251,893) 1,417,348 (984,593) --
Comprehensive income
(loss):
Net loss............ -- -- -- -- (52,043,564) -- -- --
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities,
net of tax........ $18,873,090
Comprehensive
income (loss)...
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 19,112 191 247,300 -- -- -- -- --
Issuance of common
stock in connection
with exercise of stock
options............... 3,120,163 31,201 15,512,243 -- -- 397,545 (2,301,700) --
Tax benefit of stock
option exercises...... -- -- 12,582,000 -- -- -- -- --
Issuance of common
stock in connection
with acquisitions..... 15,584,656 155,847 495,415,802 -- -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- 46,536 -- -- -- --
---------- -------- ------------ --------- ------------ --------- ----------- -----------
Balances at July 31,
1999.................. 96,706,803 $967,071 $801,494,011 $ (69,802) $(92,295,457) 1,814,893 $(3,286,293) $18,873,090
========== ======== ============ ========= ============ ========= =========== ===========
<CAPTION>
Comprehensive
Total Income (Loss)
------------- --------------
<S> <C> <C>
Balances at July 31,
1996.................. $ 44,106,157
Comprehensive income
(loss):
Net loss............ (6,619,190) $ (6,619,190)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities... --
--------------
Comprehensive
income (loss)... $ (6,619,190)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 18,402
Cancellation of
options............... --
Amortization of
deferred
compensation.......... 141,658
-------------
Balances at July 31,
1997.................. 37,647,027
Comprehensive income
(loss):
Net loss............ (28,439,484) $(28,439,484)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities... --
--------------
Comprehensive
income (loss)... $(28,439,484)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 66,042
Cancellation of
options............... --
Issuance of common
stock in connection
with exercise of stock
options............... 3,241,887
Purchase of treasury
stock in connection
with exercise of stock
options............... (467,589)
Issuance of common
stock in connection
with exercise of
warrants.............. 1,250,007
Issuance of common
stock in connection
with strategic
investments, net of
offering costs........ 7,882,443
Issuance of common
stock and warrants in
connection with
acquisitions.......... 104,445,939
Issuance of common
stock in connection
with Secondary Public
Offering, net of
offering costs........ 111,190,866
Issuance of common
stock in connection
with services
rendered.............. 300,000
Amortization of
deferred
compensation.......... 46,536
-------------
Balances at July 31,
1998.................. 237,163,674
Comprehensive income
(loss):
Net loss............ (52,043,564) $(52,043,564)
Other comprehensive
income (loss):
Unrealized gains
on available-for-
sale securities,
net of tax........ $ 18,873,090 $ 18,873,090
--------------
Comprehensive
income (loss)... $(33,170,474)
==============
Issuance of common
stock in connection
with Employee Stock
Purchase Plan......... 247,491
Issuance of common
stock in connection
with exercise of stock
options............... 13,241,744
Tax benefit of stock
option exercises...... 12,582,000
Issuance of common
stock in connection
with acquisitions..... 495,571,649
Amortization of
deferred
compensation.......... 46,536
-------------
Balances at July 31,
1999.................. $725,682,620
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 31, July 31, July 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities
Net loss.............................. $(52,043,564) $(28,439,484) $(6,619,190)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred
compensation....................... 46,536 46,536 141,658
Amortization of intangible assets... 52,427,704 7,613,711 540,416
Depreciation........................ 3,554,128 1,525,132 728,648
Allowance for doubtful accounts..... 1,169,000 654,000 405,000
Gain on sale of investments......... (10,119,831) -- --
Equity share of losses in
affiliates......................... 1,360,425 -- --
In process research and development
expense............................ -- 17,280,000 --
Issuance of common stock for
services rendered.................. -- 300,000 --
Changes in operating assets and
liabilities:
Accounts receivable................. (6,206,871) (4,768,973) (3,745,337)
Electronic commerce and license fees
receivable......................... (68,110,945) (42,045,551) (7,731,585)
Prepaid expenses.................... (1,675,051) (1,258,140) (3,296,707)
Other current assets................ 182,844 (326,292) --
Other assets........................ (3,272,683) (2,895,379) (216,000)
Accounts payable.................... (6,321,113) 774,033 547,634
Accrued expenses.................... (9,333,937) 8,343,512 5,641,289
Deferred revenues................... 60,432,726 40,450,223 12,478,136
Other liabilities................... (36,667) (29,105) (449,495)
------------ ------------ -----------
Net cash used in operating
activities........................... (37,947,299) (2,775,777) (1,575,533)
------------ ------------ -----------
Investing activities
Purchase of property and equipment.... (1,746,930) (1,091,988) (1,818,798)
Sale of investment.................... 12,158,790 -- --
Cash acquired through acquisitions,
net.................................. 21,750,667 2,540,619 --
Investment in affiliates.............. (5,120,296) (992,125) --
------------ ------------ -----------
Net cash provided by (used in)
investing activities................. 27,042,231 456,506 (1,818,798)
------------ ------------ -----------
Financing activities
Proceeds from issuance of common
stock, net of offering costs......... -- 111,190,866 18,402
Proceeds from exercise of stock
options.............................. 15,543,444 3,241,887 --
Proceeds from issuance of common stock
under Employee Stock Purchase Plan... 247,491 66,042 --
Proceeds from exercise of warrants.... -- 1,250,007 --
Repayments of notes payable........... (3,342,123) -- --
Cash used to repurchase treasury
stock................................ (2,301,700) (467,589) --
------------ ------------ -----------
Net cash provided by financing
activities........................... 10,147,112 115,281,213 18,402
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents..................... (757,956) 112,961,942 (3,375,929)
Cash and cash equivalents at beginning
of year.............................. 153,728,200 40,766,258 44,142,187
------------ ------------ -----------
Cash and cash equivalents at end of
year................................. $152,970,244 $153,728,200 $40,766,258
============ ============ ===========
</TABLE>
F-6
<PAGE>
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 31, July 31,
1999 1998 July 31, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Schedule of non-cash financing and
investing activities:
Issuance of common stock upon
acquisition of WhoWhere?, Wired
Ventures, and Internet Music
Distribution, Inc.................... $495,571,649 -- --
Assets and liabilities recognized upon
acquisition of WhoWhere?, Wired
Ventures, and Internet Music
Distribution, Inc.
Accounts receivable................ 8,643,173 -- --
Prepaid expenses................... 1,302,490 -- --
Property and equipment............. 5,318,369 -- --
Goodwill and other intangible
assets............................ 479,322,174 -- --
Marketable securities.............. 5,950,000 -- --
Other assets....................... 773,676 -- --
Accounts payable................... 2,829,532 -- --
Accrued expenses................... 17,868,511 -- --
Notes payable...................... 8,218,591 -- --
Deferred revenues.................. 1,945,682 -- --
Issuance of common stock upon
acquisition of Tripod, Inc.,
WiseWire, Corp., and GuestWorld,
Inc................................. -- $104,445,939 --
Assets and liabilities recognized
upon acquisition of Tripod, Inc.,
WiseWire Corp., and GuestWorld, Inc.
Accounts receivable................ -- 209,235 --
Prepaid expenses................... -- 23,284 --
Property and equipment............. -- 1,995,601 --
Developed technology............... -- 12,331,195 --
Goodwill and other intangible
assets............................ -- 72,827,020 --
Accounts payable................... -- 809,756 --
Accrued expenses................... -- 1,858,481 --
Deferred revenues.................. -- 92,780 --
Issuance of common stock in
connection with strategic
investments......................... -- 7,882,443 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
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. The Company conducts its business in one segment,
generating revenue from selling advertising, electronic commerce and licensing
its products and services. The Company's fiscal year end is July 31.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, from their respective dates of acquisition.
All significant intercompany balances and transactions have been eliminated.
Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from
the Company's websites. The Company's license and product revenues are derived
principally from product licensing fees and fees from maintenance and support
of its products. Electronic commerce, license and product revenues are
generally recognized upon delivery provided that no significant Company
obligations remain and collection of the receivable is probable. In cases
where there are significant remaining obligations, the Company defers such
revenue until those obligations are satisfied. Fees from maintenance and
support of the Company's products including revenues bundled with the initial
licensing fees are deferred and recognized ratably over the service period.
Cost of Revenues
Cost of revenues specifically attributable to advertising and electronic
commerce, license and product revenues are not separately identifiable and
therefore are not separately disclosed in the consolidated statements of
operations.
Deferred Revenues
Deferred revenues are comprised of license and electronic commerce fees to
be earned in the future on non-cancelable agreements existing at the balance
sheet date.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents. At
July 31, 1999 and 1998, the Company had no investments with maturities greater
than three months.
F-8
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
The Company accounts for marketable securities under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"(SFAS 115). SFAS 115 establishes the accounting and
reporting requirements for all debt securities and for investments in equity
securities that have readily determinable fair value. All marketable
securities must be classified as one of the following: held-to-maturity,
available-for-sale, or trading. All of the Company's investments are
classified as available-for-sale and, as such, are carried at fair value, with
unrealized holding gains and losses, net of deferred taxes reported as a
separate component of stockholders' equity.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets primarily relate to the Company's acquisitions and include
developed technology, licensed technology, trademarks, trade names, content
copyrights, customer base and goodwill. In connection with acquisitions
accounted for under the purchase method of accounting (see Note 4), the
Company recorded these intangible assets based on the excess of the purchase
price over the identifiable tangible net assets of the acquiree on the date of
purchase. Intangible assets are reported at cost, net of accumulated
amortization, and are being amortized over their estimated useful life of five
years. At July 31, 1999 and 1998, the balance of developed technology, trade
names and other intangible assets, net of accumulated amortization was
$17,796,214 and $3,384,981, respectively.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited of 5 years. The Company evaluates whether changes have
occurred that would require revision of the remaining estimated useful life or
impact the recoverability of the goodwill. If such changes occur, the Company
would use an estimate of the undiscounted future operating cash flows to
determine the recoverability of the goodwill. At July 31, 1999 and 1998 the
balance of goodwill, net of accumulated amortization was $487,885,810 and
$75,402,573, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-9
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Research and Development Costs
Research and development expenditures are expensed as incurred. Software
development costs are required to be capitalized when a product's
technological feasibility has been established either by completion of a
detail program design or a working model of the product and ending when a
product is available for general release to consumers. To date, attainment of
technological feasibility of the Company's products and general release to
customers have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Advertising Costs
The Company expenses advertising production costs as incurred. Advertising
expense was approximately $11,755,635, $5,675,000 and $4,427,000 for the years
ended July 31, 1999, 1998 and 1997, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires
that companies either recognize compensation expense for grants of stock,
stock options, and other equity instruments based on fair value, or provide
pro forma disclosure of net income (loss) and earnings (loss) per share in the
notes to the financial statements. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized under SFAS 123 for the Company's stock
option plans, and footnote disclosure is provided in Note 7.
Employee Benefit Plan
The Company maintains a 401(K) Profit Sharing Plan (the "Plan") for its
employees. Each participant in the Plan may elect to contribute from 1% to 15%
of their annual compensation to the Plan. The Company matches employee
contributions at a rate of one-third of the first six percent of compensation
deferred. During 1999, 1998 and 1997, the Company's contributions amounted to
approximately $230,000, $87,000 and $27,000, respectively.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable.
The Company maintains allowances for credit losses and such losses have been
within management's expectations. Bad debt expense was $1,169,000, $654,000
and $405,000 in 1999, 1998 and 1997, respectively. No single customer
accounted for greater than 10% of total revenues during the years ended July
31, 1999, 1998 and 1997.
F-10
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's services are provided to customers in several industries
primarily in North America. Sales to foreign customers for the years ended
July 31, 1999, 1998 and 1997 were approximately $1,990,000, $2,640,000 and
$1,700,000, respectively.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, accounts payable, accrued expenses and deferred revenues,
approximate their fair market values as of July 31, 1999 and 1998. The Company
has no investments in derivative financial instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Treasury Stock
In connection with a license agreement with Carnegie Mellon University,
CMG@Ventures, Inc. has agreed to sell to the Company the number of shares of
common stock equal to the shares issuable upon exercise of certain options
granted, as defined, at a price equal to the exercise price of the underlying
options exercised (see Note 7). Under this agreement, the Company issues
shares of Company stock to employees upon exercise of options and subsequently
buys an equivalent number of Company shares at the respective exercise price
from CMG@Ventures, resulting in treasury stock.
Reclassifications
Certain prior years' balances have been reclassified to conform with the
current year's presentation.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130 (SFAS
130), "Reporting Comprehensive Income" during the year ended July 31, 1999.
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Comprehensive income as
defined includes all changes in equity during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustment and
unrealized gains and losses on available-for-sale securities. Comprehensive
loss was $33,170,474 for the year ended July 31, 1999. The difference between
net loss and comprehensive loss for the year ended July 31, 1999 is due to
$18,873,090 of net unrealized gains on the Company's remaining investments,
which are classified as available-for-sale investments under SFAS 115. The
Company had no "other comprehensive income" items in the years ended July 31,
1998 or 1997.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or
obtained for internal use. The Company is required to adopt SOP 98-1 effective
August 1, 1999. The adoption of SOP 98-1 is not expected to have a material
impact on the Company's consolidated financial statements.
F-11
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities
and organization costs to be expensed as incurred. The Company is required to
adopt SOP 98-5 effective August 1, 1999. The adoption of SOP 98-5 is not
expected to 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 has
determined there will be no impact on its results of operations or financial
position resulting from the adoption of SFAS 133 because the Company currently
does not hold derivative instruments.
2. Investments
The Company invests in equity instruments of privately held Internet related
companies. These investments are accounted for under the cost method as the
Company's ownership represents less than 20% of each investee. The Company's
carrying value of these investments approximates fair value at July 31, 1999.
For non-quoted investments, the Company regularly reviews the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values.
Marketable Securities
In April 1998, the Company acquired an approximate 14% ownership stake in
Sage Enterprises, Inc. (PlanetAll) which, at the time, was owned 29% by CMGI,
a related party, in exchange for shares of the Company's Common Stock valued
at $2.5 million at the time of the transaction. Launched in November 1997,
PlanetAll provides free core contact management services through the Internet.
In August 1998, pursuant to an Agreement and Plan of Merger, Amazon.com
acquired all of the outstanding capital stock of PlanetAll. The Company
received 322,128 shares of Amazon.com valued at approximately $12.8 million at
the time of acquisition in exchange for its shares of PlanetAll, resulting in
a gain of $10.1 million in the year ended July 31, 1999. The Company sold
289,917 shares of Amazon.com in October 1998, resulting in $12.2 million of
cash proceeds. The Company has 32,211 shares of Amazon.com remaining at July
31, 1999.
In April 1998, the Company acquired an ownership stake in Mail.com in
exchange for 400,248 shares of the Company's common stock valued at
approximately $4,600,000 at the time of the transaction. Mail.com is a leading
global provider of e-mail systems. On June 14, 1999, Mail.com completed an
initial public offering of its common stock. The Company's investment in
Mail.com has been adjusted to reflect its fair value of $35,750,000, based on
its traded market price on July 31, 1999.
The cost of marketable securities carried at fair value was $11,805,646 at
July 31, 1999. There was no investments held as available-for-sale at July 31,
1998. Gross unrealized gains and losses relating to securities held as
available-for-sale for the year ended July 31, 1999 are as follows:
<TABLE>
<S> <C>
Gross Unrealized Gains....................................... $33,117,590
Gross Unrealized Losses...................................... (1,662,500)
-----------
Net Unrealized Gains....................................... $31,455,090
===========
</TABLE>
F-12
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Joint Ventures
In May 1997, the Company established Lycos Bertelsmann as the basis for a
joint venture agreement with Bertelsmann Internet Services to create localized
versions of the Lycos search and navigation service throughout Europe. The
joint venture is owned 50% by Lycos and 50% by Bertelsmann. Bertelsmann
Internet Services, a subsidiary of Bertelsmann AG, has committed to provide
capital, infrastructure and employees for the venture while Lycos will provide
the core technology and brand name. The carrying value of the Company's
investment in Lycos Bertelsmann was not material at July 31, 1999 or 1998. The
investment is accounted for under the equity method and accordingly, the
Company will recognize 50% of the net profits of Lycos Bertelsmann when
realized.
In April 1998, the Company established Lycos Japan KK as the basis for a
joint venture with Sumitomo Corporation, one of Japan's largest trading
companies, and Internet Initiative Japan (IIJ), the country's largest Internet
Service Provider. The joint venture is owned 40% by Lycos, 50% by Sumitomo
Corporation and 10% by IIJ. The investment is accounted for under the equity
method. For the year ending July 31, 1999, Lycos' share of the net loss was
approximately $1,000,000. For the year ending July 31, 1998, Lycos' share of
net loss was not material.
In March 1999, the Company established Lycos Korea as the basis for a joint
venture agreement with Mirae Corporation to create a localized version of the
Lycos Network services to be offered in Korea. The joint venture is owned 50%
by Lycos and 50% by Mirae, a Korean high technology company. The investment is
accounted for under the equity method. For the year ending July 31, 1999,
Lycos' share of net loss was approximately $360,000.
Lycos Ventures Limited Partnership
In July 1999 the Company formed a venture capital fund to make strategic
early-stage investments in companies that are involved with electronic
commerce, online media or the development of Internet technology, content or
services. The Company, as a limited partner, is committed to providing $10
million to Lycos Ventures, L.P. (the "Fund"). The other limited partners,
which include Bear Stearns, Mellon Ventures, Inc., Mirae Corporation, Sumitomo
Corporation, Vulcan Ventures, and others, will provide approximately $60
million to the Fund. The general partner of the fund is Lycos Triangle
Partners, LLC, a Delaware limited liability company formed by Lycos and
Triangle Capital Corporation. As of July 31, 1999 the Company has not provided
any of its $10 million commitment to the Fund.
3. Property and Equipment
Property and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
July 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Computers and equipment........................... $ 14,138,390 $ 3,623,686
Furniture and fixtures............................ 1,626,425 1,091,726
Leasehold improvements............................ 2,980,431 1,356,222
Purchased software................................ 1,188,241 525,197
------------ -----------
19,933,487 6,596,831
Less accumulated depreciation and amortization.... (12,462,257) (2,636,772)
------------ -----------
$ 7,471,230 $ 3,960,059
============ ===========
</TABLE>
F-13
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
Tripod, Inc.
On February 11, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") by and among the Company, Pod Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company ("PAC"),
Tripod, Inc., a Delaware corporation ("Tripod"), William Peabody and Richard
Sabot, providing for the merger of PAC with and into Tripod (the "Merger"). On
February 12, 1998, the Company completed the closing of the Merger and Tripod
became a wholly-owned subsidiary of the Company. In accordance with the terms
of the Agreement, Richard Sabot was elected, effective May 1, 1998, to the
Company's Board of Directors for a term expiring at the first Annual Meeting
of the Company's stockholders held after the Company's fiscal year ending July
31, 2000.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Tripod have been included
with those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
Tripod and options and warrants to purchase Common Stock and Preferred Stock
of Tripod were converted into 6,241,652 shares and options and warrants to
purchase Common Stock of the Company. All outstanding options to purchase
Common Stock of Tripod have been assumed by the Company and converted into
options to purchase Common Stock of the Company, and all outstanding warrants
to purchase Preferred Stock of Tripod have been assumed by the Company and
converted into warrants to purchase Common Stock of the Company.
The purchase price of Tripod was allocated as follows:
<TABLE>
<S> <C>
In process research and development............................. $ 7,200,000
Developed technology, goodwill and other intangible assets...... 52,219,935
Other assets, principally cash and equipment.................... 3,633,449
Liabilities assumed............................................. (1,603,731)
-----------
$61,449,653
===========
</TABLE>
Accumulated amortization on intangible assets was $15,230,814 and $4,786,827
at July 31, 1999 and 1998, respectively.
WiseWire Corporation
On April 30, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, Wise Acquisition Corp., a
Pennsylvania corporation and a wholly-owned subsidiary of the Company ("WAC"),
and WiseWire Corporation, a Pennsylvania corporation ("WiseWire"), pursuant to
which WAC was merged with and into WiseWire (the "Merger"). As a result of the
Merger, WiseWire became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WiseWire are included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
WiseWire and options to purchase Common Stock of WiseWire were converted into
3,297,020 shares and options to purchase Common Stock of the Company. All
outstanding options to purchase Common Stock of WiseWire have been assumed by
the Company.
F-14
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price of WiseWire was allocated as follows:
<TABLE>
<S> <C>
In process research and development............................. $ 9,080,000
Developed technology, goodwill and other intangible assets...... 30,107,698
Other assets, principally cash and equipment.................... 1,085,290
Liabilities assumed............................................. (857,286)
-----------
$39,415,702
===========
</TABLE>
Accumulated amortization on intangible assets was $7,526,925 and $1,505,385
at July 31, 1999 and 1998, respectively.
GuestWorld, Inc.
On June 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, VW Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VW"), GuestWorld,
Inc., a California corporation ("GuestWorld"), and all of the stockholders of
GuestWorld, acquired all of the outstanding capital stock of GuestWorld
through the merger of VW with and into GuestWorld (the "Merger"). As a result
of the Merger, GuestWorld became a wholly-owned subsidiary of the Company.
In the Merger, all outstanding shares of Common Stock of GuestWorld were
converted into an aggregate of 252,368 shares of Common Stock of the Company.
The acquisition was accounted for as a purchase. Results of operations for
GuestWorld are included with those of the Company for periods subsequent to
the date of acquisition.
The purchase price of GuestWorld was allocated as follows:
<TABLE>
<S> <C>
In process research and development.............................. $1,000,000
Goodwill and other intangible assets............................. 2,830,584
Property and equipment........................................... 50,000
Liabilities assumed.............................................. (300,000)
----------
$3,580,584
==========
</TABLE>
Accumulated amortization on intangible assets was $636,881 and $70,765 at
July 31, 1999 and 1998.
Acquisition of WhoWhere? Inc.
On August 7, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?,
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.
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.
F-15
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
WhoWhere? were converted into an aggregate of 8,285,714 shares of Common Stock
of the Company (the "Lycos Common Stock"), and all outstanding options and
warrants to purchase Common Stock or Preferred Stock of WhoWhere? were assumed
by the Company and became options or warrants, as the case may be, to purchase
an aggregate of 2,670,488 shares of Lycos Common Stock.
Under the terms of the Agreement and related Escrow Agreement dated August
13, 1998, an aggregate of 377,038 shares of Lycos Common Stock and options and
warrants to purchase an additional 133,540 shares of Lycos Common Stock will
be held in escrow for the purpose of indemnifying the Company against certain
liabilities of WhoWhere? and its stockholders. The escrow expires on August
13, 1999.
The purchase price of WhoWhere? was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets........................... $161,322,174
Other assets, principally cash and equipment................... 8,117,977
Liabilities assumed............................................ (10,381,288)
------------
$159,058,863
============
</TABLE>
Accumulated amortization on intangible assets was $30,937,080 at July 31,
1999.
Acquisition of Wired Ventures, Inc.
On October 5, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company and Wired Ventures, Inc., a
California corporation ("Wired"). On June 30, 1999, the Company completed the
closing of the Merger and Wired became a wholly-owned subsidiary of the
Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Wired have been included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock of
Wired were converted into an aggregate of 6,192,848 shares of Common Stock of
the Company (the "Lycos Common Stock"). All outstanding options to purchase
Common Stock of Wired have been assumed by the Company and converted into
options to purchase Common Stock of the Company.
Under the terms of the Agreement and related Escrow Agreement dated June 30,
1999, an aggregate of 203,103 shares of Lycos Common Stock will be held in
escrow for the purpose of indemnifying the Company against certain liabilities
of Wired and its stockholders. The escrow expires on June 30, 2000.
The purchase price of Wired was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets........................... $268,000,000
Other assets, principally cash and equipment................... 38,915,414
Liabilities assumed............................................ (16,017,346)
------------
$290,898,068
============
</TABLE>
Accumulated amortization on intangible assets was $4,466,667 at July 31,
1999.
F-16
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisition of Internet Music Distribution, Inc.
On July 17, 1999, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company and Internet Music Distribution,
Inc., a California corporation ("IMDI"). On July 27, 1999 the Company
completed the closing of the Merger and IMDI became a wholly-owned subsidiary
of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for IMDI have been included with
those of the Company for periods subsequent to the date of acquisition.
All outstanding shares of Common Stock of IMDI were converted into an
aggregate of 1,106,094 shares of Common Stock of the Company. Terms of the
merger also provide for future purchase payments, not to exceed $15,000,000,
contingent upon unique user downloads of the Sonique Player. The Company has
retained security interests in certain Common Stock that was issued in this
transaction.
The purchase price of IMDI was allocated as follows:
<TABLE>
<S> <C>
Goodwill and other intangible assets............................ $50,000,000
Other assets, principally cash and equipment.................... 78,400
Liabilities assumed............................................. (1,090,266)
-----------
$48,988,134
===========
</TABLE>
Accumulated amortization on intangible assets was not significant at July
31, 1999.
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. 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.
F-17
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the Tripod and WiseWire acquisitions, the in-process research and
development projects were valued using an Income Approach, which included the
application of a discounted future earnings (excess earnings) methodology. In
both methodologies, the value of the in-process technology is comprised of the
total present value of the future earnings stream attributable to the
technology throughout its anticipated life. As a basis for the valuation
process, the Company made estimates of the revenue stream to be generated in
each future period and the corresponding operating expenses and other charges
to apply to this revenue stream. In order to determine the value of the
earnings stream that was specifically attributable to the in-process
technology, the excess earnings of the projects were calculated by deducting
the earnings streams attributable to all other assets, including working
capital and tangible assets. Based upon these assumptions, the future after-
tax income streams relating to the in-process technologies were discounted to
present value using a risk adjusted discount rate that reflected the
uncertainty involved in successfully completing and commercializing the in-
process technologies.
The significant assumptions used as a basis for the in-process research and
development valuations include: future revenues and expenses forecasted for
each project; future working capital needs; estimated costs to complete; date
of project completion and product launch; and the probability and risk of
project completion as reflected in the discount rate selected to compute net
present values.
The period in which material net cash inflows from significant projects was
expected to commence was within three to six months or less after the
respective acquisition dates of Tripod and WiseWire. In the case of the Tripod
acquisition, the projects required an additional four months beyond the
initial time estimate to complete the in-process technology. In the case of
the WiseWire acquisition, the in-process technology was completed in December
1998.
In the case of Tripod, management does believe that other intangible assets
had been created at the acquisition date. As a result, in addition to valuing
in-process research and development, management has also allocated a
proportion of the purchase price, based on their respective fair values, to
existing technology employed in the creation and management of pods as well as
to other intangible assets associated with the existing community members.
WhoWhere? offers an array of products that allow users to locate home
addresses, e-mail addresses and phone numbers. In addition, through its
MailCity product, WhoWhere? also offers its users free, personalized, web-
based e-mail. Identifiable assets at the acquisition date consisted primarily
of developed technology, and projects under development at that time were
determined to be enhancements or refinements to existing developed
technologies. As a result, management determined that there was no technology
which would qualify for in-process research and development.
Wired offers search capabilities through HotBot, a popular search and
navigation site. Wired licenses the HotBot principal technology and subsequent
enhancements from a third party. Other Wired properties, which include Wired
News, HotWired and Suck.com provide online content. Wired either produces,
licenses or purchases this content. Based upon the nature of Wired businesses,
management determined the Company does not possess any significant technology
assets nor was there any technology which would qualify for in-process
research and development.
Management assessed the fair market value in continued use of Internet Music
Distributors, Inc. assets to serve as a basis for allocation of purchase
price. It was determined that intangible assets consisted of developed
technology and the Company's trade name, Sonique. Each identifiable asset was
analyzed and valued based upon an Income Approach. In performing its
assessment, management determined there was no in-process research and
development.
The following unaudited pro forma financial information presents the
combined results of operations of Lycos, Wired, WhoWhere? and IMDI as if the
acquisitions had occurred as of the beginning of fiscal 1999 and
F-18
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998, after giving effect to certain adjustments, including amortization of
goodwill and other intangible assets. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
Lycos, Wired, WhoWhere? and IMDI constituted a single entity during such
period.
<TABLE>
<CAPTION>
Pro forma year ended
July 31,
----------------------------
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Revenues....................................... $ 159,331,854 $ 77,222,305
Net loss....................................... $(133,884,494) $(103,291,484)
Loss per share................................. $ (1.55) $ (1.33)
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Compensation and benefits........................... $ 7,384,653 $ 2,262,015
Advertising and royalties........................... 3,691,320 9,021,716
Professional fees................................... 3,662,644 1,262,351
Other............................................... 7,699,709 4,731,086
----------- -----------
$22,438,326 $17,277,168
=========== ===========
</TABLE>
6. Commitments and Contingencies
The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2007. Future noncancelable minimum
payments as of July 31, 1999 under these leases for each fiscal year end are
as follows:
<TABLE>
<S> <C>
2000............................................................. $14,552,382
2001............................................................. 9,480,535
2002............................................................. 4,764,682
2003............................................................. 2,249,081
2004 and thereafter.............................................. 3,520,695
-----------
$34,567,375
===========
</TABLE>
Rent expense under non-cancellable operating leases was $12,039,727,
$5,057,907, and $2,094,774 for the years ended July 31, 1999, 1998 and 1997,
respectively.
7. Stockholders' Equity
Stock Splits
In July 1998, the Company's Board of Directors approved a two-for-one common
stock split. On August 25, 1998, shareholders received one additional share
for every share held on August 14, 1998 (the record date).
In May 1999, the Company's Board of Directors approved a two-for-one common
stock split. On July 26, 1999, shareholders received one additional share for
every share held on July 16, 1999 (the record date). All share and per share
numbers in these consolidated financial statements and notes thereto have been
adjusted for all periods presented to reflect the two-for-one common stock
splits.
F-19
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Secondary Offering
On June 4, 1998, the Company completed a secondary offering of its common
stock in which 9,000,000 of the Company's shares were sold under a
registration statement filed with the SEC. Of the 9,000,000 shares sold,
8,000,000 shares were sold by the Company and 1,000,000 were sold by CMG
Information Services, Inc ("CMGI"). The Company did not receive any proceeds
from the sale of shares by CMGI. Proceeds to the Company were approximately
$95 million, before deduction of expenses payable by the Company of $350,000.
The Underwriters exercised an option to purchase 1,350,000 additional shares
of Common Stock, resulting in additional proceeds to the Company of
approximately $16 million.
1995 Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which nonqualified stock options to purchase common stock may be
granted to officers and other key employees. Under the Plan, options to
purchase 4,000,000 shares of common stock may be granted at an exercise price
determined by the Board of Directors. Options granted under the 1995 Plan vest
over a five year period from date of grant, except that the vesting of certain
options are subject to acceleration upon the occurrence of certain events.
Options under the 1995 Plan expire six years from date of grant. The total
weighted average contractual life of options outstanding at July 31, 1999 was
2.3 years.
A summary of option activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Options Price
---------- ---------
<S> <C> <C>
Outstanding at July 31, 1996.............................. 3,905,104 $1.48
Granted................................................. 320,000 3.60
Exercised............................................... (203,200) 0.02
Terminated.............................................. (382,688) 0.86
----------
Outstanding at July 31, 1997.............................. 3,639,216 1.37
----------
Granted................................................. -- --
Exercised............................................... (1,260,368) 0.17
Terminated.............................................. (424,160) 0.63
----------
Outstanding at July 31, 1998.............................. 1,954,688 1.56
----------
Granted................................................. -- --
Exercised............................................... (274,880) 0.67
Terminated.............................................. (7,200) 0.58
----------
Outstanding at July 31, 1999.............................. 1,672,608 $1.71
----------
Exercisable at July 31, 1999.............................. 1,061,440 $1.68
==========
</TABLE>
F-20
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock options
outstanding at July 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
1995 Stock Average
Option Remaining Weighted- Weighted-
Plan Range of Number Contractual Average Number Average
Exercise Outstanding at Life Exercise Exercisable at Exercise
Prices July 31, 1999 (years) Price July 31, 1999 Price
------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.58 584,272 2.0 $0.01 329,744 $0.0039
$2.40 - $2.40 882,336 2.5 $2.40 705,696 $2.4000
$2.84 - $3.97 206,000 2.2 $3.56 26,000 $3.3702
--------- ---------
1,672,608 1,061,440
========= =========
</TABLE>
Pursuant to the License Agreement, CMG@Ventures has agreed to sell to the
Company a number of shares of common stock equal to the shares issuable upon
exercise of options granted under the 1995 Plan prior to the initial public
offering at a price equal to the exercise price of the options as such options
are exercised.
The Company has recorded deferred compensation expense of approximately
$610,000 for the difference between the grant price and the estimated fair
value (determined by independent valuations or by reference to third party
transactions) of certain of the Company's stock options granted. This amount
is being amortized over the vesting period of the individual options on a
straight-line basis, determined separately for each portion of the options
that vest in each year. Deferred compensation expense recognized for the year
ended July 31, 1999, 1998 and 1997 was approximately $47,000, $47,000 and
$142,000, respectively.
1996 Stock Option Plan
On February 2, 1996, the 1996 Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors. Pursuant to the 1996 Plan, 4,000,000 shares
of common stock may be issued upon exercise of options. On June 27, 1997, the
Company's Board of Directors voted to authorize an additional 8,800,000 shares
for grant under the 1996 Plan. On September 9, 1998 the Company's Board of
Directors voted to authorize an additional 12,000,000 shares for grant under
the 1996 Plan. Additionally, the Board of Directors approved an amendment to
the 1996 Plan, which provides that the shares authorized under the 1996 Plan
will increase annually, beginning on August 1, 1999, in an amount equal to 5%
of the Company's issued and outstanding shares as of each fiscal year end.
Under the 1996 Plan, incentive stock options may be granted to employees and
officers of the Company and non-qualified stock options may be granted to
consultants, employees and officers of the Company. The exercise price of such
incentive stock options cannot be less than the fair market value of the
common stock on the date of grant, or less than 110% of fair market value in
the case of employees or officers holding 10% or more of the voting stock of
the Company. The Compensation Committee of the Board of Directors has the
authority to select optionees and to determine the terms of the options
granted. Options granted under the 1996 Plan on June 30, 1999 or prior
generally vest over a five year period from date of grant. Options granted
under the 1996 Plan on July 1, 1999 or later generally vest over a four year
period from date of grant. Options under the 1996 Plan expire ten years from
the date of grant and certain options are subject to acceleration of vesting
upon the occurrence of certain events. The total weighted average contractual
life of options outstanding at July 31, 1999, was 8.2 years.
F-21
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the 1996 Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at July 31, 1996......................... 212,000 $ 3.92
Granted............................................ 4,999,688 2.99
Exercised.......................................... -- --
Terminated......................................... (457,600) 3.29
----------
Outstanding at July 31, 1997......................... 4,754,088 2.97
----------
Granted............................................ 6,895,800 11.30
Exercised.......................................... (709,192) 2.90
Terminated......................................... (716,400) 4.07
----------
Outstanding at July 31, 1998......................... 10,224,296 7.68
----------
Granted............................................ 13,429,588 38.51
Exercised.......................................... (1,491,960) 6.89
Terminated......................................... (1,071,300) 13.70
----------
Outstanding at July 31, 1999......................... 21,090,624 $27.06
==========
Exercisable at July 31, 1999......................... 845,843 $ 8.02
==========
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at July 31, 1999.
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
1996 Stock Option Number Remaining Average Number Average
Plan Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices July 31, 1999 Life (years) Price July 31, 1999 Price
- ----------------- -------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $1.45 100,000 7.0 $ 1.45 40,000 $ 1.45
$1.46 - $2.59 786,814 7.1 $ 2.24 79,601 $ 2.26
$2.59 - $2.79 539,950 6.7 $ 2.77 67,750 $ 2.77
$2.79 - $3.94 668,300 7.4 $ 3.11 89,900 $ 3.04
$3.94 - $5.38 2,054,932 7.8 $ 4.32 245,892 $ 4.28
$5.38 - $12.50 2,350,900 8.0 $ 9.83 75,500 $ 9.74
$12.51 - $25.00 5,735,166 7.9 $14.43 207,200 $15.35
$25.01 - $40.00 818,000 9.0 $29.62 40,000 $28.03
$40.01 - $55.00 5,258,686 8.9 $46.57 -- --
$55.01 - $65.50 2,777,876 9.4 $65.27 -- --
---------- -------
21,090,624 845,843
========== =======
</TABLE>
In September 1996, the Company canceled 338,928 options previously granted
to employees under the 1995 Plan and 1996 Plan at various exercise prices and
granted an equivalent number of additional options to those same employees
pursuant to the 1996 Plan at an exercise price of $2.40 per share. No
compensation expense was recognized by the Company as the exercise price of
these options on the date of grant was at or above fair market value.
F-22
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1995 Tripod Stock Option Plan
In connection with the acquisition of Tripod, the Company assumed the 1995
Stock Option Plan under which incentive stock options and nonqualified stock
options to purchase common stock may be granted to officers, key employees and
advisors. Under the Plan, options to purchase 735,852 shares of common stock
were reserved for grants. Options under the 1995 Tripod Stock Option Plan vest
over a four year period from date of grant. Options under the 1995 Tripod
Stock Option Plan expire ten years from the date of grant. The total weighted-
average contractual life of options outstanding at July 31, 1999 was
approximately 8.3 years.
A summary of option activity under the 1995 Tripod Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at February 12, 1998...................... 735,852 $0.33
Granted............................................. -- --
Exercised........................................... (268,984) 0.32
Terminated.......................................... (49,640) 0.41
--------
Outstanding at July 31, 1998.......................... 417,228 0.32
--------
Granted............................................. -- --
Exercised........................................... (220,766) 0.31
Terminated.......................................... (76,264) 0.37
--------
Outstanding at July 31, 1999.......................... 120,198 $0.31
--------
Exercisable at July 31, 1999.......................... 38,628 $0.31
========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 Tripod Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
Tripod 1995 Stock Option Average Weighted- Weighted-
Plan Range of Exercise Number Remaining Average Number Average
Prices Outstanding at Contractual Exercise Exercisable Exercise
- ------------------------ July 31, 1999 Life (years) Price at July 31, 1999 Price
-------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.25 - $0.38 119,592 8.2 $0.31 38,628 $0.31
$0.38 - $1.00 606 10.4 $0.77 -- $0.77
------- ------
120,198 38,628
======= ======
</TABLE>
1995 and 1996 WiseWire Stock Option Plans
In connection with the acquisition of WiseWire, the Company assumed the 1995
and 1996 Stock Option Plan under which incentive stock options and
nonqualified stock options to purchase common stock may be granted to
officers, key employees and advisors. Under these plans, the Company may grant
either incentive stock options or non-qualified stock options. The employee
plan was adopted in 1995 and is restricted to Company employees. These options
generally have a term of ten years from the date of grant with 20% vesting
after a brief probationary period and the remainder vesting over a four-year
period. The non-employee plan was adopted in 1996 and is intended primarily
for directors or other non-employees. Options granted under the non-employee
plan typically vest immediately. The total weighted average contractual life
of options outstanding under the 1995 and 1996 WiseWire Stock Option Plans at
July 31, 1999 was approximately 6.9 and 7.4 years, respectively.
F-23
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the 1995 WiseWire Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at April 30, 1998......................... 420,548 $1.34
Granted............................................. -- --
Exercised........................................... (126,048) 1.01
Terminated.......................................... (54,192) 3.19
---------
Outstanding at July 31, 1998.......................... 240,308 1.35
---------
Granted............................................. -- --
Exercised........................................... (139,016) 0.98
Terminated.......................................... (33,678) 1.92
---------
Outstanding at July 31, 1999.......................... 67,614 $1.82
=========
Exercisable at July 31, 1999.......................... 8,579 $2.91
=========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 WiseWire Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
WiseWire Average Weighted- Weighted-
1995 Stock Option Number Remaining Average Number Average
Plan Range of Exercise Outstanding at Contractual Exercise Exercisable Exercise
Prices July 31, 1999 Life (years) Price at July 31, 1999 Price
- ---------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.50 - $ 1.00 38,414 7.0 $0.67 5,401 $0.67
$2.50 - $26.88 29,200 6.9 $3.33 3,178 $6.72
------ -----
67,614 8,579
====== =====
</TABLE>
A summary of option activity under the 1996 WiseWire Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at April 30, 1998.......................... 42,068 $6.60
Granted.............................................. -- --
Exercised............................................ -- --
Terminated........................................... (26,932) 6.55
-------
Outstanding at July 31, 1998........................... 15,136 6.68
-------
Granted.............................................. -- --
Exercised............................................ (4,964) 6.68
Terminated........................................... -- --
-------
Outstanding at July 31, 1999........................... 10,172 $6.68
=======
Exercisable at July 31, 1999........................... 10,172 $6.68
=======
</TABLE>
F-24
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
under the 1996 WiseWire Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
WiseWire Average Weighted- Weighted-
1996 Stock Option Number Remaining Average Number Average
Plan Range of Exercise Outstanding at Contractual Exercise Exercisable Exercise
Prices July 31, 1999 Life (years) Price at July 31, 1999 Price
- ---------------------- -------------- ------------ --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$5.35 - $8.02 10,172 7.4 $6.68 10,172 $6.68
====== ======
</TABLE>
1995 WhoWhere? Stock Option Plan
In connection with the acquisition of WhoWhere?, the Company assumed the
1995 Stock Option Plan under which incentive stock options and nonqualified
stock options to purchase common stock may be granted to officers, key
employees and advisors. Under this plan, the Company may grant either
incentive stock options or non-qualified stock options. These options vest
over a four year period from date of grant. These options generally have a
term of ten years from the date of grant. Upon consummation of the acquisition
of WhoWhere? by the Company, vesting of all outstanding options accelerated by
six months. The total weighted average contractual life of options outstanding
under the 1995 WhoWhere? Stock Option Plans at July 31, 1999 was approximately
6.4 years.
A summary of option activity under the 1995 WhoWhere? Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at August 13, 1998........................ 1,922,784 $4.01
Granted............................................. -- --
Exercised........................................... (869,126) 2.95
Terminated.......................................... (439,764) 3.40
---------
Outstanding at July 31, 1999.......................... 613,894 $5.94
=========
Exercisable at July 31, 1999.......................... 211,729 $6.47
=========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 WhoWhere? Stock Option Plan at July 31, 1999:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
------------------------------------ --------------------------
WhoWhere Weighted-
1995 Stock Average
Option Remaining Weighted- Weighted-
Plan Range of Number Contractual Average Number Average
Exercise Outstanding at Life Exercise Exercisable Exercise
Prices July 31, 1999 (years) Price at July 31, 1999 Price
- ---------------- -------------- ----------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.50 59,988 7.6 $ 0.46 26,984 $ 0.46
$0.51 - $6.55 242,562 7.8 $ 1.96 59,486 $ 1.68
$6.56 - $13.10 311,344 5.1 $10.10 125,259 $10.04
------- -------
613,894 211,729
======= =======
</TABLE>
F-25
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 Non-Employee Director Stock Option Plan
On February 2, 1996, the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") was approved by the Board of Directors. The Director Plan
authorizes the issuance of a maximum of 400,000 shares of common stock. The
Director Plan is administered by the Board of Directors. Under the Director
Plan each non-employee director first elected to the Board of Directors after
the completion of the initial public offering will receive an option for
10,000 shares on the date of his or her election. The exercise price per share
for all options granted under the Director Plan will be equal to the fair
market value of the common stock as of the date of grant. All options vest in
three equal installments beginning on the first anniversary of the date of
grant. Options under the Director Plan will expire ten years from the date of
grant and are exercisable only while the optionee is serving as a director of
the Company. As of July 31, 1999, 120,000 options had been granted at an
exercise price of $2.88 and $4.50 per share and remained outstanding under the
Director Plan, of which 93,334 were exercisable.
1996 Employee Stock Purchase Plan
On February 2, 1996, the 1996 Employee Stock Purchase Plan ("1996 Purchase
Plan") was adopted by the Company's Board of Directors. The 1996 Purchase Plan
authorizes the issuance of a maximum of 1,000,000 shares of common stock and
is administered by the Compensation Committee of the Board of Directors. All
employees of the Company who have completed six months of service with the
Company are eligible to participate in the 1996 Purchase Plan with the
exception of those employees who own 5% or more of the Company's stock and
directors who are not employees of the Company may not participate in this
plan. Employees elect to have deducted from 1%-10% of their base compensation.
The exercise price for the option is the lesser of 85% of the fair market
value of the common stock on the first or last business day of the purchase
period (6 months). An employee's rights under the 1996 Purchase Plan terminate
upon his or her voluntary withdrawal from the Plan at any time or upon
termination of employment.
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123 with
respect to its stock-based compensation. The effects of applying SFAS No. 123
in this pro forma disclosure may not be representative of the effects on
reported income or loss for future years. SFAS 123 does not apply to awards
prior to 1995. The Company anticipates additional awards in future years. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the grant date fair value in accordance with SFAS 123, the
Company's net loss and net loss per share for the years ended July 31, 1999,
1998 and 1997 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------------------- -----------------------------
Net Loss Loss Per Share Net Loss Loss Per Share
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Year ended July 31,
1999................... $(52,043,564) $(0.60) $(132,022,235) $(1.53)
Year ended July 31,
1998................... $(28,439,484) $(0.46) $ (35,442,185) $(0.57)
Year ended July 31,
1997................... $ (6,619,190) $(0.12) $ (9,588,118) $(0.17)
</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 1999, 1998 and 1997; volatility of 115% for 1999, 100%
for 1998 and 70% for 1997; dividend yield of 0% for 1999, 1998 and 1997;
weighted average risk-free interest rate of 6.00% in 1999, 5.48% in 1998 and
6.25% in 1997. The weighted average grant date fair values of options granted
in 1999, 1998 and 1997 were $8.24, $2.44 and $0.81, respectively.
F-26
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8.Income Taxes
The company did not record any provision for federal and state income taxes
through July 31, 1999. The actual tax expense for 1999, 1998 and 1997 differs
from "expected" tax expense (computed by applying the statutory U.S. federal
corporate tax rate of 34% to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------
1999 1998 1997
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax benefit................. $(17,695) $(9,669) $(2,251)
Nondeductible amounts and other differences:
In Process Research and Development........... -- 5,875 --
Goodwill amortization......................... 16,881 2,301 --
Other......................................... 126 85 (326)
Change in valuation allowance for deferred taxes
allocated to income tax expense................ 688 1,408 2,577
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
At July 31, 1999 and 1998 deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax
and financial reporting purposes. The sources and tax effects of these
temporary differences are presented below:
<TABLE>
<CAPTION>
July 31,
------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis of developed technology.............. $ 5,259 $ 2,806
Financial basis in excess of income tax basis of avail-
able-for-sale securities................................ 12,582 --
-------- --------
Total deferred liabilities................................. 17,841 2,806
-------- --------
Deferred tax assets:
Deferred Revenue......................................... 2,086 2,169
Reserves................................................. 4,977 2,307
Tax in excess of book basis for differences in equity
investments............................................. (2,410) 2,164
Net operating losses and credit carryforwards............ 57,050 15,979
Other.................................................... 2,639 594
-------- --------
Total gross deferred tax assets............................ 64,342 23,213
Less valuation allowance................................... (46,501) (20,407)
-------- --------
Net deferred tax asset..................................... 17,841 2,806
-------- --------
Net deferred income taxes.................................. $ -- $ --
======== ========
</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 $46,501,000 and $20,407,000 for July 31, 1999 and
1998 respectively, have been established for deferred tax assets.
At July 31, 1999, the Company had approximately $151,418,000 of federal and
state net operating loss carryforwards which will begin to expire in 2007 for
federal purposes and 2004 for state purposes. Utilization of
F-27
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the net operating losses may be subject to an annual limitation imposed by
change in ownership provisions of Section 382 of the Internal Revenue Code and
similar state provisions.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and recognized subsequent
to the acquisitions will be applied first to reduce to zero, any goodwill and
other noncurrent intangible assets related to the acquisitions. Any remaining
benefits would be recognized as reduction of income tax expense. As of July
31, 1999, $21,098,000 of the Company's deferred asset pertains to acquired
companies, the future benefits of which will be applied first to reduce to
zero any goodwill and other noncurrent intangible related to the acquisitions
prior to reducing the Company's income tax expense. Deferred tax assets and
related valuation allowance of approximately $23,370,000 relate to certain
operating loss carryforwards resulting from the exercise of employee stock
options, the tax benefit of which, when recognized, will be accounted for as a
credit to additional paid-in capital rather than a reduction of income tax.
The Company's deferred tax liability relates solely to the difference in
bases of acquired assets as well as the tax effects of unrealized gains of
available-for-sale securities. A portion or all of net operating loss
carryforwards which can be utilized in any year may be limited by changes in
ownership of the Company, pursuant to Section 382 of the Internal Revenue Code
and similar statutes.
9. Related Party Transactions
In connection with the formation of the Company, the Company, CMU,
CMG@Ventures and CMG Information Services, Inc. ("CMGI") entered into a
license agreement ("License Agreement") pursuant to which CMU granted the
Company a perpetual, exclusive (with certain limited exceptions), worldwide
license to use the Lycos Internet search and indexing technology and the Lycos
Catalog. The Company paid licensing fees and additional payments equal to 50%
of certain cash receipts, as defined, totaling approximately $1,250,000. All
amounts due under the License Agreement were paid as of July 31, 1996. The
Company also issued 4,000,000 shares of common stock in connection with this
Agreement. The License Agreement was fully amortized as of July 31, 1998.
On February 9, 1996, the Company sold 366,320 shares and 160,000 shares of
common stock and options to acquire 238,904 shares and 104,344 shares of
Common Stock to CMU and Dr. Michael Mauldin, respectively, for an aggregate
purchase price of $328,950, pursuant to the exercise of preemptive rights
granted to these parties in the License Agreement. These preemptive rights
were exercised in connection with the issuance of shares of common stock
pertaining to the Company's acquisition of Point Communications on October 12,
1995. The options granted to Dr. Mauldin and CMU have an exercise price of
$0.50 per share and became fully vested upon completion of the Company's
initial public offering in April 1996.
In addition to amounts paid to CMU in connection with the License
Agreement, the Company was also required to pay to CMU an additional $525,000
pursuant to two licenses granted by CMU which were assigned to the Company.
In April 1998 the remaining carrying value of the License Agreement of
approximately $831,000 was written off as it was not considered to have any
remaining future economic benefit.
10. Litigation
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant
to which, among other things, Lycos would have been merged into
F-28
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a subsidiary of USA Networks. In May 1999, the parties to the proposed
transaction terminated the merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle
County, by shareholders of the Company allegedly on behalf of all common
stockholders of the Company. The complaints request, among other things, that
the proposed transaction be enjoined or that rescissionary damages be awarded
to the purported class and that plaintiffs be awarded all costs and fees,
including attorneys' fees. Although the proposed merger has since been
terminated, the suits have not been dismissed. The Company believes that the
allegations in the complaints are without merit and intends to contest them
vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District
Court for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities laws through alleged misrepresentations and omissions relating to
the announced transaction with USA Networks. The consolidated complaint seeks
an unspecified award of damages. The Company believes that the allegations in
the consolidated complaint are without merit and intends to contest them
vigorously.
The Company is also subject to legal proceedings and claims which arise in
the ordinary course of its business.
In the opinion of management, the amount of ultimate liability with respect
to all of the above actions will not materially affect the financial position,
results of operations or cash flows of the Company.
11. Subsequent Events (unaudited)
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the Agreement) with Quote.com, Inc., a California corporation
("Quote.com") in a stock-for-stock transaction. On December 6, 1999 the
Company completed the closing of the merger and Quote.com became a wholly-
owned subsidiary of the Company. As a result, all outstanding shares of Common
Stock and Preferred Stock of Quote.com were converted into an aggregate of
1,346,630 shares of Common Stock of the Company. Additionally, the Company
converted all outstanding Quote.com stock options and warrants into
approximately 239,000 Lycos options and warrants.
The acquisition of Quote.com will be accounted for as a purchase. The
purchase price will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. Intangible assets will be
amortized over a period up to five years. Results of operations for Quote.com
will be included with those of the Company for periods subsequent to the date
of acquisition.
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
Developed technology, goodwill and other intangible
assets.................................................. $108,300,000
Other assets, principally cash........................... 7,126,000
Liabilities assumed...................................... (14,426,000)
------------
$101,000,000
============
</TABLE>
Lycos Asia Joint Venture
In September 1999, the Company established Lycos Asia as the basis for a
joint venture agreement with Singapore Telecommunications Limited (SingTel) to
create a localized version of the Lycos Network services to
F-29
<PAGE>
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be offered in Singapore, Hong Kong, China, Taiwan, India and certain other
countries in Southeast Asia. The joint venture is owned 50% by Lycos and 50%
by SingTel, a telecommunications provider in Singapore. The investment will be
accounted for under the equity method and accordingly, the Company will
recognize 50% of the net losses and profits of Lycos Asia when realized.
Acquisition of Gamesville, Inc.
On December 3, 1999 the Company completed the closing of the Gamesville,
Inc. ("Gamesville") merger in a stock-for-stock transaction and Gamesville
became a wholly-owned subsidiary of the Company. Under the terms of the
acquisition, which will be accounted for as a pooling of interests, the
Company exchanged 3,605,044 shares of Lycos Common Stock for all outstanding
shares of Common Stock and Preferred Stock of Gamesville.
Additionally, the Company converted all outstanding Gamesville stock options
and warrants into approximately 423,085 Lycos options and warrants.
12. Selected Quarterly Financial Information (unaudited)
The following table sets forth selected quarterly financial information for
the years ended July 31, 1999 and 1998. The operating results for any given
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
------------------------------------- ---------------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- -------- -------- -------- ------- ------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $21,784 $ 30,552 $ 35,082 $ 45,103 $9,303 $12,603 $ 15,129 $19,025
Gross profit............ 19,484 24,112 27,939 35,259 7,524 9,884 10,382 15,757
Net income (loss)....... (3,596) (13,753) (13,302) (21,393) 107 301 (22,052) (6,796)
Basic and diluted net
income (loss) per
share.................. $ (0.04) $ (0.16) $ (0.15) $ (0.24) $ 0.00 $ 0.00 $ (0.71) $ (0.19)
</TABLE>
F-30
<PAGE>
LYCOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $163,039,067 $152,970,244
Accounts receivable, net......................... 30,183,953 24,639,514
License fees receivable.......................... 83,101,473 71,843,202
Prepaid expenses and other current assets........ 6,655,510 8,680,831
------------ ------------
Total current assets........................... 282,980,003 258,133,791
------------ ------------
Property and equipment, less accumulated
depreciation...................................... 6,634,600 7,471,230
Long-term license fees receivable.................. 44,537,500 48,029,100
Investments........................................ 43,340,401 48,000,570
Intangible assets, net............................. 477,445,508 505,682,024
Other assets....................................... 4,419,580 7,325,353
------------ ------------
Total assets................................... $859,357,592 $874,642,068
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable--current........................... $ 887,837 $ 2,589,271
Accounts payable................................. 3,983,660 1,381,721
Accrued expenses................................. 25,894,868 22,438,326
Deferred revenues................................ 79,329,241 64,016,249
------------ ------------
Total current liabilities...................... 110,095,606 90,425,567
Notes payable...................................... 2,060,493 2,599,729
Deferred revenues.................................. 42,544,375 55,934,152
------------ ------------
44,604,868 58,533,881
Commitments and contingencies...................... -- --
Stockholders' equity:
Common stock..................................... 980,808 967,071
Additional paid-in capital....................... 811,426,773 801,494,011
Deferred compensation............................ (58,169) (69,802)
Accumulated deficit.............................. (119,817,822) (92,295,457)
Treasury stock, at cost.......................... (3,286,293) (3,286,293)
Accumulated other comprehensive income........... 15,411,821 18,873,090
------------ ------------
Total stockholders' equity..................... 704,657,118 725,682,620
------------ ------------
Total liabilities and stockholders' equity..... $859,357,592 $874,642,068
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Advertising....................................... $ 39,014,806 $17,274,840
Electronic commerce, license and other............ 17,019,096 7,509,279
------------ -----------
Total revenues.................................. 56,033,902 24,784,119
Cost of revenues.................................... 11,671,154 5,300,325
------------ -----------
Gross profit.................................... 44,362,748 19,483,794
Operating expenses:
Research and development.......................... 9,276,672 5,303,566
Sales and marketing............................... 30,156,272 16,170,301
General and administrative........................ 5,435,334 2,486,226
Amortization of intangible assets................. 28,236,516 11,135,885
------------ -----------
Total operating expenses........................ 73,104,794 35,095,978
------------ -----------
Operating loss...................................... (28,742,046) (15,612,184)
Interest income, net................................ 1,699,681 1,896,420
Gain on sale of investments......................... -- 10,119,831
------------ -----------
Loss before income taxes............................ (27,042,365) (3,595,933)
Provision for income taxes.......................... 480,000 --
------------ -----------
Net loss............................................ $(27,522,365) $(3,595,933)
============ ===========
Basic and diluted net loss per share................ $ (0.29) $ (0.04)
============ ===========
Shares used in computing basic and diluted net loss
per share.......................................... 95,569,318 83,819,899
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE>
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net loss.......................................... $(27,522,365) $ (3,595,933)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred compensation........... 11,633 11,634
Depreciation.................................... 1,205,688 885,683
Amortization of intangible assets............... 28,236,516 11,135,885
Allowance for doubtful accounts................. 1,672,157 (107,018)
Gain on sale of investments..................... -- (10,119,831)
Changes in operating assets and liabilities:
Accounts receivable............................. (7,216,596) (2,495,311)
License fees receivable......................... (7,766,671) (962,810)
Prepaid expenses and other current assets....... 2,025,321 (12,075,451)
Other assets.................................... 2,905,773 (1,505,584)
Accounts payable................................ 2,601,939 (3,447,969)
Accrued expenses................................ 3,456,542 (3,480,814)
Deferred revenues............................... 1,923,215 2,557,124
------------ ------------
Net cash provided by (used in) operating
activities....................................... 1,533,152 (23,200,395)
------------ ------------
Investing activities
Purchase of property and equipment................ (369,058) (166,423)
Acquisition costs paid............................ -- (1,114,101)
Cash proceeds from sale of investment............. -- 12,158,790
Cash acquired through acquisitions................ -- 1,906,467
Investment in affiliates.......................... (1,101,099) (1,511,951)
------------ ------------
Net cash provided by (used in) investing
activities....................................... (1,470,157) 11,272,782
------------ ------------
Financing activities
Proceeds from exercise of stock options........... 11,831,894 778,953
Proceeds from issuance of common stock under ESPP. 414,604 82,522
Proceeds from note receivable..................... -- 623,438
Payments on notes payable......................... (2,240,670) (2,514,331)
------------ ------------
Cash provided by (used in) financing activities... 10,005,828 (1,029,418)
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 10,068,823 (12,957,031)
------------ ------------
Cash and cash equivalents at beginning of period.. 152,970,244 153,728,200
------------ ------------
Cash and cash equivalents at end of period........ $163,039,067 $140,771,169
============ ============
Schedule of non-cash financing and investing
activities:
Issuance of common stock upon acquisition of
WhoWhere? Inc..................................... -- $157,994,762
Assets and liabilities recorded upon acquisition
Of WhoWhere? Inc.;
Accounts receivable............................. -- 2,345,834
Prepaids........................................ -- 1,302,490
Property and equipment.......................... -- 2,914,397
Notes receivable................................ -- 623,438
Other assets.................................... -- 25,351
Notes payable................................... -- 5,185,591
Accounts payable................................ -- 1,588,709
Accrued expenses................................ -- 1,661,306
Deferred revenues............................... -- 1,945,682
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33
<PAGE>
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
Lycos, Inc., ("Lycos" or the "Company") is a global Internet navigation and
community network that offers globally branded media properties and aggregated
content distributed primarily through the Web. Under the "Lycos Network"
brand, Lycos provides guides to online content, aggregated third-party
content, Web search and directory services and community and personalization
features. Lycos seeks to draw a large number of viewers to its Websites by
providing multiple destinations for identifying, selecting and accessing
resources, services, content and information on the Web. The Company was
formed in June 1995 by CMG@Ventures L.P., a wholly-owned subsidiary of CMGI,
Inc. The Company operates in one industry segment, generating revenue from
selling advertising, electronic commerce and licensing its products and
services. The Company's fiscal year end is July 31.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, these financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of these interim
periods. Certain information and related footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes the disclosures in these financial statements are adequate to
make the information presented not misleading. These financial statements
should be read in conjunction with the Company's audited financial statements
for the year ended July 31, 1999, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the interim periods shown are not necessarily indicative of the
results for any future interim period or for the entire fiscal year.
2. Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from
the Company's Websites. The Company's license and product revenues are derived
principally from product licensing fees and fees from maintenance and support
of its products. Electronic commerce, license and product revenues are
generally recognized upon delivery provided that no significant Company
obligations remain and collection of the receivable is probable. In cases
where there are significant remaining obligations, the Company defers such
revenue until those obligations are satisfied. Fees from maintenance and
support of the Company's products including revenues bundled with the initial
licensing fees are deferred and recognized ratably over the service period.
Deferred revenues are comprised of license and electronic commerce fees to
be earned in the future on noncancelable agreements at the balance sheet date.
F-34
<PAGE>
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments
In September 1999, the Company established Lycos Asia as the basis for a
joint venture agreement with Singapore Telecommunications Limited (SingTel) to
create a localized version of the Lycos Network services to be offered in
Singapore, Hong Kong, China, Taiwan, India and certain other countries in
Southeast Asia. The joint venture is owned 50% by Lycos and 50% by SingTel, a
telecommunications provider in Singapore. The investment will be accounted for
under the equity method and accordingly, the Company will recognize 50% of the
net losses and profits of Lycos Asia when realized. The Company is committed
to provide a total of $25 million of capital funding to the joint venture.
During November 1999 the Company contributed $5 million of cash to the joint
venture.
4. Comprehensive Income (Loss)
Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustment and unrealized gains and losses on available-for-sale
securities. Comprehensive loss was $30,983,634 and $3,516,077 for the quarters
ended October 31, 1999 and 1998, respectively. The difference between net loss
and comprehensive loss is due to $(3,461,269) and $79,856 of unrealized
(losses) gains on marketable securities classified as available-for-sale in
the quarters ended October 31, 1999 and 1998, respectively. The $3.5 million
unrealized loss on marketable securities for the quarter ended October 31,
1999 is net of an approximate $2.3 million tax benefit from stock option
exercises, which is accounted for as a credit to additional paid-in capital
rather than a reduction of income tax.
5. Income Taxes
The Company's effective income tax rate has been established after
adjustment for amortization of intangible assets and certain other items which
are not deductible for tax purposes. This effective income tax rate may change
during the remainder of 2000 if operating results differ significantly from
the current operating projections.
6. Reclassifications
Certain amounts in the quarter ended October 31, 1998 have been
reclassified to permit comparison to the current period presentation.
7. Litigation
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant
to which, among other things, Lycos would have been merged into a subsidiary
of USA Networks. In May 1999, the parties to the proposed transaction
terminated the merger by mutual agreement.
Prior to the termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle
County by shareholders of Lycos allegedly on behalf of all common stockholders
of Lycos. The complaints requested, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and fees, including
attorney's fees. Since the proposed merger was terminated, the suits have been
inactive. We believe that the allegations in the complaints are without merit
and, as a result of the termination of the proposed merger, are now moot.
F-35
<PAGE>
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also prior to the termination of the proposed merger, certain purported
securities class action lawsuits were filed in the United States District
Court for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States
securities laws through alleged misrepresentations and omissions relating to
the announced transaction with USA Networks. The consolidated complaint seeks
an unspecified award of damages. We believe that the allegations in the
consolidated complaint are without merit and intend to contest them
vigorously. On October 22, 1999, we filed a motion with the court to have the
lawsuit dismissed for failure to adequately allege violations of the
securities laws.
A former employee of Lycos has brought suit in Federal District Court in
California, seeking compensatory and punitive damages, unpaid and lost wages,
attorneys' fees and prejudgment interest based on alleged gender
discrimination, harassment, retaliation, wrongful discharge, breach of implied
contract, fraud, and wage and hour violations. The matter is currently
scheduled for trial in March 2000. We believe that the allegations in the
complaint are without merit, and we have contested, and will continue to
contest, them vigorously.
In November 1999, AIWF Trust, a former shareholder of WiseWire Corporation,
filed a lawsuit in the Court of Common Pleas of Allegheny County,
Pennsylvania, against WiseWire, representatives of former shareholders of
WiseWire, and Lycos, as WiseWire's alleged successor in interest. In this
lawsuit, AIWF Trust alleged that pursuant to a 1996 subscription agreement
between AIWF Trust and WiseWire, AIWF Trust was entitled to 2,500,000 shares
of WiseWire common stock instead of the 25,000 shares it received. AIWF Trust
seeks the equivalent of 2,500,000 shares of WiseWire common stock in Lycos
common stock, which amounts to approximately 748,000 shares of Lycos common
stock. Lycos believes that the allegations in the complaint are without merit
and intends to contest them vigorously. In addition, Lycos has asserted a
claim against the escrow deposit created in connection with Lycos' acquisition
of WiseWire, which currently contains approximately 329,000 shares of Lycos
common stock.
The Company is also subject to legal proceedings and claims which arise in
the ordinary course of its business.
In the opinion of management, the amount of ultimate liability with respect
to all of the above actions will not materially affect the financial position,
results of operations or cash flows of the Company.
8. Subsequent Events
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the Agreement) with Quote.com, Inc., a California corporation
("Quote.com") in a stock-for-stock transaction. On December 6, 1999 the
Company completed the closing of the merger and Quote.com became a wholly-
owned subsidiary of the Company. As a result, all outstanding shares of Common
Stock and Preferred Stock of Quote.com were converted into an aggregate of
1,346,630 shares of Common Stock of the Company. Additionally, the Company
converted all outstanding Quote.com stock options and warrants into
approximately 239,000 Lycos options and warrants.
The acquisition of Quote.com will be accounted for as a purchase. The
purchase price will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. Intangible assets will be
amortized over a period up to five years. Results of operations for Quote.com
will be included with those of the Company for periods subsequent to the date
of acquisition.
F-36
<PAGE>
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
Developed technology, goodwill and other intangible
assets.................................................. $108,300,000
Other assets, principally cash........................... 7,126,000
Liabilities assumed...................................... (14,426,000)
------------
$101,000,000
============
</TABLE>
Acquisition of Gamesville, Inc.
On December 3, 1999 the Company completed the closing of the Gamesville,
Inc. ("Gamesville") merger in a stock-for-stock transaction and Gamesville
became a wholly-owned subsidiary of the Company. Under the terms of the
acquisition, which will be accounted for as a pooling of interests, the
Company exchanged 3,605,044 shares of Lycos Common Stock for all outstanding
shares of Common Stock and Preferred Stock of Gamesville. Additionally, the
Company converted all outstanding Gamesville stock options and warrants into
approximately 423,085 Lycos options and warrants.
Investment in Lycos Japan Joint Venture
During November 1999 the Company and Sumitomo Corporation each invested an
additional $14.5 million in Lycos Japan. A new partner, Kadokawa Publishing
Co., Ltd. also joined the joint venture via an investment of approximately
$7.3 million, representing an approximate 12% ownership interest. As a result
of the additional investments and new partner, the Company's ownership of the
joint venture changed to approximately 35%, while Sumitomo's ownership changed
to approximately 44%. The Company accounts for this investment under the
equity method of accounting. For the three months ended October 31, 1999 the
Company did not record any losses in the joint venture as the Company's
carrying value of the Lycos Japan joint venture was zero. As a result of the
additional investment, the Company has increased its carrying value and may
realize additional equity losses in the joint venture in periods subsequent to
the additional investment.
Investment in Lycos Asia Joint Venture
During November 1999 the Company invested approximately $5.0 million in
Lycos Asia, a joint venture owned 50% by Lycos. Under the joint venture
agreement, the Company is committed to providing aggregate capital investments
of $25 million to Lycos Asia. The Company accounts for this investment under
the equity method of accounting. For the three months ended October 31, 1999
the Company did not record any losses in the joint venture as the Company's
carrying value of the Lycos Asia joint venture was zero. As a result of the
investment, the Company has increased its carrying value and may realize
equity losses in the joint venture in periods subsequent to the additional
investment.
Investment in iCOMS
On November 23, 1999, the Company entered into an agreement with iCOMS,
Inc. pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series
C Preferred Stock representing approximately 14% ownership in iCOMS. At the
same time, the Company entered into a Services Agreement with iCOMS pursuant
to which iCOMS will provide certain operational, engineering and merchant
support services to the Company in connection with the Company's LYCOShop e-
commerce initiative. The Company issued 166,080 unregistered shares of Common
Stock in exchange for iCOMS' Series C Preferred Stock and for the services to
be rendered by iCOMS under the Services Agreement. The Company accounts for
its investment in iCOMS on the cost method.
F-37
<PAGE>
[Graphic of a black Labrador retriever in a sitting position with one front paw
upraised. The dog appears on a yellow background.]
[On the bottom of the page is a black border containing the Lycos "Go Get It!"
slogan in a yellow oval. The Lycos web address appears in yellow text below the
yellow oval.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Lycos will pay all expenses incident to the offering and sale to the public
of the shares being registered other than any commissions and discounts of
underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $120,120
NASD filing fee................................................. 30,500
NASDAQ National Market listing fee.............................. 17,500
Accounting fees and expenses.................................... 100,000
Legal fees and expenses......................................... 300,000
Printing expenses............................................... 120,000
Miscellaneous expenses.......................................... 111,880
--------
Total....................................................... $800,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, Lycos'
Amended and Restated Certificate of Incorporation, as amended, includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, the
Delaware General Corporation Law and Lycos' Amended and Restated By-laws
provide for indemnification of Lycos' directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
Lycos, and with respect to any criminal action or proceeding, actions that the
indemnitee has no reasonable reason to believe were unlawful.
Lycos has purchased insurance with respect to, among other things, the
liabilities that may arise under the provisions referred to above. The
directors and officers of Lycos also are insured against certain liabilities,
including certain liabilities arising under the Securities Act of 1933, as
amended, which might be incurred by them in such capacities and against which
they are not indemnified by Lycos.
Lycos has entered into separate indemnification agreements with its
directors and officers. The indemnification agreements create certain
indemnification obligations of Lycos in favor of the directors and officers
and, as permitted by applicable law, will clarify and expand the circumstances
under which a director or officer will be indemnified.
Item 16. Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Certificate for shares of common stock (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-1 (Reg.
No. 333-1354)).
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP.
23.1 Consent of KPMG LLP, independent accountants to Lycos, Inc.
23.2 Consent of KPMG LLP, independent accountants to Wired Ventures, Inc.
23.3 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1
</TABLE>
Power of Attorney (included on signature page).
II-1
<PAGE>
Item 17. Undertakings
A. Undertaking Regarding Filings Incorporating Subsequent Exchange Act
Documents by Reference
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. Undertaking in Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
C. Undertaking Pursuant to Rule 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waltham, Commonwealth of Massachusetts, on this 4th
day of January 2000.
LYCOS, INC.
/s/ Robert J. Davis
By: _________________________________
Robert J. Davis
President and Chief Executive
Officer
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS THAT each person whose signature appears
below constitutes and appoints Robert J. Davis and Edward M. Philip and each of
them, with the power to act without the other, as attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendment or post-effective amendment to this Registration Statement or under
Rule 462(b) of the Securities Act of 1933, as amended, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Robert J. Davis President, Chief January 4, 2000
_________________________________ Executive Officer and
Robert J. Davis Director (Principal
Executive Officer)
/s/ Edward M. Philip Chief Operating Officer January 4, 2000
_________________________________ and Chief Financial
Edward M. Philip Officer (Principal
Financial and
Accounting Officer)
/s/ John M. Connors, Jr. Director January 4, 2000
_________________________________
John M. Connors, Jr.
/s/ Richard H. Sabot Director January 4, 2000
_________________________________
Richard H. Sabot
/s/ Daniel J. Nova Director January 4, 2000
_________________________________
Daniel J. Nova
/s/ Peter A. Lund Director January 4, 2000
_________________________________
Peter A. Lund
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Certificate for shares of common stock (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-1
(Reg. No. 333-1354)).
5.1 Opinion of Testa, Hurwitz & Thibeault, LLP.
23.1 Consent of KPMG LLP, independent accountants to Lycos, Inc.
23.2 Consent of KPMG LLP, independent accountants to Wired Ventures, Inc.
23.3 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
</TABLE>
<PAGE>
EXHIBIT 1.1
5,000,000 SHARES
LYCOS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
January ., 2000
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Allen & Company Incorporated
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Ladies and Gentlemen:
1. Introductory. Lycos, Inc., a Delaware corporation ("COMPANY"),
proposes to issue and sell 5,000,000 shares ("FIRM SECURITIES") of its common
stock, par value $0.01 per share ("SECURITIES") and also proposes to issue and
sell to the Underwriters (as defined below), at the option of the Underwriters,
an aggregate of not more than 750,000 additional shares ("OPTIONAL SECURITIES")
of its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "OFFERED SECURITIES". The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-.) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (i) has been
declared effective under the Securities Act of 1933, as amended ("ACT") and
is not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("INITIAL REGISTRATION STATEMENT") has been declared effective, either (i)
an additional registration statement ("ADDITIONAL REGISTRATION STATEMENT")
relating to the Offered Securities may have been filed with the
<PAGE>
2
Commission pursuant to Rule 462(b) ("RULE 462(B)") under the Act and, if so
filed, has become effective upon filing pursuant to such Rule and the
Offered Securities all have been duly registered under the Act pursuant to
the initial registration statement and, if applicable, the additional
registration statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "EFFECTIVE TIME" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives to the several Underwriters named
herein ("REPRESENTATIVES") that it does not propose to amend such
registration statement, the date and time as of which such registration
statement, or the most recent post-effective amendment thereto (if any)
filed prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing pursuant to
Rule 462(c), or (ii) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as the
case may be, is declared effective by the Commission. If an additional
registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the Representatives
that it proposes to file one, "EFFECTIVE TIME" with respect to such
additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "EFFECTIVE DATE" with respect to the initial registration statement
or the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended at
its Effective Time, including all material incorporated by reference
therein, including all information contained in the additional registration
statement (if any) and deemed to be a part of the initial registration
statement as of the Effective Time of the additional registration statement
pursuant to the General Instructions of the Form on which it is filed and
including all information (if any) deemed to be a part of the initial
registration statement as of its Effective Time pursuant to Rule 430A(b)
("RULE 430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
<PAGE>
3
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including all
information (if any) deemed to be a part of the additional registration
statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter
referred to as the "ADDITIONAL REGISTRATION STATEMENT". The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "REGISTRATION STATEMENTS" and individually
as a "REGISTRATION STATEMENT". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, including all
material incorporated by reference in such prospectus, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be prepared
or distributed in reliance on Rule 434 under the Act.
(b) The Commission has not issued any order preventing or suspending
the use of the Prospectus or any preliminary prospectus contained in the
Initial Registration Statement or instituted any proceedings for that
purpose. If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
rules and regulations of the Commission ("RULES AND REGULATIONS") and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act
and the Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional Registration
Statement in which the Prospectus is included, each Registration Statement
and the Prospectus will conform, in all respects to the requirements of the
Act and the Rules and Regulations, and neither of such documents includes,
or will include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform in all
respects to the requirements of the Act and the Rules and Regulations,
neither of
<PAGE>
4
such documents will include any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading, and no Additional Registration Statement
has been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the Prospectus
based upon written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being
understood and agreed that the only such information is that described as
such in Section 7(b) hereof.
(c) The Company has not distributed and, prior to the later of (a) any
Closing Date (as defined herein) and (b) the completion of the distribution
of the Offered Securities, will not distribute any offering material in
connection with the offering of the Offered Securities other than a
Registration Statement, any preliminary prospectus contained therein or the
Prospectus or any amendment or supplement thereto.
(d) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified will not have a material adverse effect on the
condition (financial or other), business, prospects, properties or results
of operations of the Company and its subsidiaries taken as a whole
("MATERIAL ADVERSE EFFECT").
(e) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company, except where the failure to be so qualified
will not have a Material Adverse Effect, is duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business
requires such qualification; all of the issued and outstanding capital
stock of each subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the capital stock
of each subsidiary owned by the Company, directly or through subsidiaries,
is owned free from any liens, encumbrances and defects.
(f) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined
<PAGE>
5
below), such Offered Securities will have been, validly issued, fully paid
and nonassessable and will conform to the description thereof contained in
the Prospectus; and no stockholder of the Company has any preemptive rights
with respect to the Securities. The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. There are no
outstanding options, warrants or other rights granted to or by the Company
to purchase Securities or other securities of the Company other than as
described in the Prospectus.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(h) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to cause any securities of the Company owned or to be owned by such
person to be registered pursuant to a Registration Statement filed by the
Company under the Act covering the Offered Securities which have not been
fully satisfied or waived.
(i) The Offered Securities have been approved for listing on The Nasdaq
Stock Market's National Market, subject to notice of issuance.
(j) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required to be obtained or
made by the Company for the consummation of the transactions contemplated
by this Agreement in connection with the issuance and sale of the Offered
Securities, except such as have been obtained and made under the Act and
such as may be required under state securities laws or the by-laws and
rules of the National Association of Securities Dealers, Inc. ("NASD") in
connection with the purchase and distribution by the Underwriters of the
Offered Securities.
(k) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is subject, or
the charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
<PAGE>
6
(l) This Agreement has been duly authorized, executed and delivered by
the Company.
(m) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(n) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(o) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(p) The Company and each of its subsidiaries have the right to use all
trademarks, trade names, trade secrets, servicemarks, inventions, patent
rights, mask works, copyrights, licenses, software codes, audiovisual
works, formats, algorithms, underlying data, know-how, confidential
information and other intellectual property (collectively, "INTELLECTUAL
PROPERTY RIGHTS") required to operate its business as presently being
conducted and proposed to be conducted as described in the Prospectus, and
the Company and each of its subsidiaries have all required approvals and
governmental authorizations now used in, or which are necessary for the
fulfillment of their respective obligations or the conduct of their
respective businesses as now conducted or proposed to be conducted as
described in the Prospectus; and neither the Company nor any of its
subsidiaries is infringing any intellectual property rights of others, and
there is no claim being made against the Company or any of its subsidiaries
regarding any infringement of or conflict with asserted rights of others
with respect to any intellectual property rights, that, if determined
adversely to the Company or any of its subsidiaries, could individually or
in the aggregate have a Material Adverse Effect. The Company has
agreements in place with each employee, consultant or other person or party
engaged by the Company or any subsidiary providing for the assignment to
the Company or any of its subsidiaries, as the case may be, of all
intellectual property and exploitation rights in the work performed and the
protection of the trade secrets and confidential information of the
Company, each of its subsidiaries and of third parties which have been
developed by such person for or on behalf of the Company or any
<PAGE>
7
of its subsidiaries. The Company's and its subsidiaries' computer software
(the "SOFTWARE") is "MILLENNIUM COMPLIANT". For the purposes of this
Agreement "Millennium Compliant" means: (a) the functions, calculations,
and other computing processes of the Software (collectively, "PROCESSES")
perform in an accurate manner regardless of the date in time on which the
Processes are actually performed and regardless of the date input to the
Software, and whether or not the dates are affected by leap years; (b) the
Software can accept, store, sort, extract, sequence, and otherwise
manipulate date inputs and date values, and return and display date values,
in a materially accurate manner regardless of the dates used or format of
the date input; (c) the Software will function without interruptions caused
by the date in time on which the Processes are actually performed or by the
date input to the Software; (d) the Software accepts and responds to four
(4) digit year date input in a manner that resolves any material
ambiguities as to the century in an accurate manner; and (e) the Software
displays, prints and provides electronic output of date information in ways
that are unambiguous as to the determination of the century.
(q) Except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic
or foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively,
"ENVIRONMENTAL LAWS"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.
(r) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against the Company, any of its subsidiaries
or any of their respective properties that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect, or would materially and adversely affect
the ability of the Company to perform its obligations under this Agreement;
and no such actions, suits or proceedings are threatened or, to the
Company's knowledge, contemplated.
(s) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries, including any historical financials of an
entity prior to the time it was acquired by the Company, as of the dates
shown and their results of operations and cash flows for the periods shown,
and such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied on a
<PAGE>
8
consistent basis and the schedules included in each Registration Statement
present fairly the information required to be stated therein; and the
assumptions used in preparing the pro forma financial statements included
in each Registration Statement and the Prospectus provide a reasonable
basis for presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma adjustments
give appropriate effect to those assumptions, and the pro forma columns
therein reflect the proper application of those adjustments to the
corresponding historical financial statement amounts.
(t) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change in the condition (financial or other),
business, prospects, properties or results of operations of the Company and
its subsidiaries taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(u) The Company and each of its subsidiaries has filed all foreign,
federal, state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure so to
file would not have a Material Adverse Effect) and the Company and each of
its subsidiaries has paid all material taxes required to be paid by it and
any other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as
described in the Registration Statement or the Prospectus and for which
failure to pay would not have a Material Adverse Effect.
(v) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(w) Neither the Company, nor any of its affiliates, has taken or may
take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the shares of the
Securities to facilitate the sale or resale of the Offered Securities.
(x) KPMG LLP, who have certified the financial statements filed with
the Commission as part of each Registration Statement, are independent
public accountants as required by the Act and the Rules and Regulations.
The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (a) transactions are executed in
accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to
<PAGE>
9
maintain accountability for assets; and (c) access to assets is permitted
only in accordance with management's general or specific authorization.
(y) The Company and each of its subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(z) The Company and each of its subsidiaries are in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"REPORTABLE EVENT" (as defined in ERISA) has occurred with respect to any
"PENSION PLAN" (as defined in ERISA) for which the Company or any of its
subsidiaries would have any liability; the Company and each of its
subsidiaries have not incurred and do not expect to incur liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal from,
any "pension plan" or (ii) Section 412 or 4971 of the Internal Revenue Code
of 1986, as amended, including the regulations and published
interpretations thereunder ("CODE"); and each "pension plan" for which the
Company and each of its subsidiaries would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified
in all material respect and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(aa) Except as set forth in each Registration Statement and the
Prospectus, there are no agreements, claims, payments, issuances,
arrangements or understandings, whether oral or written, for services in
the nature of finder's, consulting or origination fees with respect to the
sale of the Offered Securities or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company or any of
its officers, directors, shareholders, partners, employees, subsidiaries or
affiliates that may affect the Underwriters' compensation as determined by
the NASD.
(bb) Except as set forth in each Registration Statement (including
without limitation the documents incorporated by reference therein) and the
Prospectus, no officer, director or shareholder of the Company or any
"AFFILIATE" or "ASSOCIATE" (as these terms are defined in Rule 405 under
the Act) of any of the foregoing persons or entities has or has had, either
directly or indirectly (a) an interest in any person or entity that (x)
furnishes or sells services or products which are furnished or sold or that
are proposed to be furnished or sold by the Company, or (y) purchases from
or sells or furnishes to the Company any goods or services, or (b) a
beneficial interest in any contract or agreement to which the Company is a
party or by which it may be bound or affected. Except as set forth in each
Registration Statement and the Prospectus under the caption "Certain
Transactions" and "Management", there are no existing or proposed
agreements,
<PAGE>
10
arrangements, understandings or transactions, between or among the Company
and any officer, director, principal shareholder of the Company or any
partner, affiliate or associate of any of the foregoing persons or
entities.
(cc) The minute books of the Company and each of its subsidiaries made
available to the Underwriters contain a complete summary of all meetings
and actions of the directors and shareholders of each of these entities
since the time of its incorporation and reflect accurately and fairly in
all respects all transactions referred to in such minutes.
(dd) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes and the Company
agrees to comply with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such business.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $. per share, the respective numbers of
shares of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn
to the order of the Company, at the office of Cravath, Swaine & Moore, Worldwide
Plaza, 825 Eighth Avenue, New York, New York 10019-7475, at 10:00 A.M., New York
time, on ., 2000 or at such other time not later than seven full business days
thereafter as CSFBC and the Company determine, such time being herein referred
to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the Securities
Exchange Act of 1934, as amended ("EXCHANGE ACT"), the First Closing Date (if
later than the otherwise applicable settlement date) shall be the settlement
date for payment of funds and delivery of securities for all the Offered
Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the above office of Cravath, Swaine & Moore at least
24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase, and the Company shall sell, all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Company agrees to sell to the Underwriters the number of
shares of Optional Securities specified in such notice and the Underwriters
agree, severally and not jointly, to
<PAGE>
11
purchase such Optional Securities. Such Optional Securities shall be purchased
for the account of each Underwriter in the same proportion as the number of
shares of Firm Securities set forth opposite such Underwriter's name bears to
the total number of shares of Firm Securities (subject to adjustment by CSFBC to
eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the above office of Cravath, Swaine & Moore. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the above
office of Cravath, Swaine & Moore at a reasonable time in advance of such
Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement
<PAGE>
12
and an additional registration statement is necessary to register a portion
of the Offered Securities under the Act but the Effective Time thereof has
not occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance with
Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, on or prior to the time the Prospectus is printed
and distributed to any Underwriter, or will make such filing at such later
date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) The Company will comply with the Act, the Exchange Act and the
Rules and Regulations so as to permit the completion of the distribution of
the Offered Securities as contemplated in this Agreement, each Registration
Statement and the Prospectus. If, at any time when a prospectus relating
to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, any event occurs as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will promptly notify CSFBC of such event and will promptly prepare
and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "AVAILABILITY DATE" means the
<PAGE>
13
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"AVAILABILITY DATE" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement, each related preliminary prospectus, and, so long
as a prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York time,
on the business day following the later of the execution and delivery of
this Agreement or the Effective Time of the Initial Registration Statement.
All other documents shall be so furnished as soon as available. The Company
will pay the expenses of printing and distributing to the Underwriters all
such documents.
(f) The Company, through counsel for the Underwriters, will arrange
for the qualification of the Offered Securities for sale under the laws of
such jurisdictions as CSFBC designates and will continue such
qualifications in effect so long as required for the distribution.
(g) During the period of three years hereafter, upon request, the
Company will furnish to the Representatives and, upon request, to each of
the other Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives, upon request, (i) as soon as
available, a copy of each report and any definitive proxy statement of the
Company filed with the Commission under the Exchange Act or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as CSFBC may reasonably request.
(h) For a period of 60 days after the date on which shares of
Securities are first sold by the Underwriters to the public pursuant to a
Registration Statement, the Company will not, without the prior written
consent of CSFBC: (i) offer, sell, contract to sell, pledge, transfer, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise dispose
of, directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any additional shares of its
Securities or securities convertible into or exchangeable or exercisable
for any shares of Securities (including, without limitation, any shares of
Securities which the undersigned may be deemed to beneficially own in
accordance with the rules and regulations promulgated under the Exchange
Act); (ii) enter into any swap or any other agreement or transaction that
transfers, in whole or in part, directly or indirectly, any of the economic
consequences of ownership of shares of Securities or any securities
convertible into, or exercisable or exchangeable for, shares of Securities;
(iii) publicly disclose the
<PAGE>
14
intention to make any such offer, sale, pledge, transfer, disposition of or
filing with respect to any security described in (i) or (ii) above; or (iv)
engage in any hedging transaction with respect to the Securities that may
have an impact on the market price of the Securities. Notwithstanding the
preceding sentence, the Company may issue up to 250,000 shares of
Securities in the aggregate in connection with any acquisition or series of
acquisitions (including options and warrants assumed by the Company in
connection with any acquisition), make grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof or issuances
of Securities pursuant to the exercise of such options or the exercise of
any other employee stock options outstanding on the date hereof [and file
any registration statements required to be filed in connection with its
proposed investment in Fast Search & Transfer ASA].
(i) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, including, without limitation, (i)
any filing fees and other expenses (including fees and disbursements of
counsel) incurred in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, (ii) the filing
fee incident to, and the reasonable fees and disbursements of counsel to
the Underwriters in connection with, the review by the NASD of the Offered
Securities, (iii) any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the Offered
Securities and (iv) expenses incurred in distributing preliminary
prospectuses and the Prospectus (including any amendments and supplements
thereto) to the Underwriters.
(j) The Company shall apply the net proceeds of its sale of the
Offered Securities as set forth in the Prospectus.
(k) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(l) If at any time during the 25-day period after a Registration
Statement becomes effective or during the period prior to any Closing Date,
any rumor, publication or event relating to or affecting the Company shall
occur as a result of which in the Representatives' reasonable judgment the
market price of the Securities has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after notice from the Representatives advising the Company to the
effect set forth above, forthwith prepare, consult with the Representatives
concerning the substance of, and disseminate a press release or other
public statement reasonably satisfactory to the Representatives, responding
to or commenting on such rumor, publication or event.
<PAGE>
15
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received letters, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall
be on or prior to the date of this Agreement or, if the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, shall be prior to the filing of the amendment
or post-effective amendment to the registration statement to be filed
shortly prior to such Effective Time), of KPMG LLP, as independent
accountants for each of the Company and Wired Ventures, Inc., in form and
substance satisfactory to the Representatives, together with signed or
reproduced copies of such letters for each of the Underwriters containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain information contained in each Registration Statement and the
Prospectus.
In the event that the letters referred to above sets forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (i) such letter shall be accompanied
by a written explanation of the Company as to the significance thereof,
unless the Representatives deem such explanation unnecessary, and (ii) such
changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impractical or inadvisable to proceed with the
purchase and delivery of the Offered Securities as contemplated by such
Registration Statement, as amended as of the date hereof.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by
CSFBC. If the Effective Time of the Additional Registration Statement (if
any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CSFBC. If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of
this Agreement. Prior to such Closing
<PAGE>
16
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any
suspension or limitation of trading in securities generally on the New York
Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on
any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the Company,
to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Securities of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; the Company has authorized and outstanding capital
<PAGE>
17
stock as set forth under the caption "Capitalization" in the
Prospectus as of the date specified therein; the certificates for the
Offered Securities, assuming they are in the form filed with the
Commission, are in due and proper form; and no stockholder of the
Company has any preemptive rights with respect to the Securities
pursuant to any Delaware state or Federal statute, the Company's
Certificate of Incorporation, By-laws, or to such counsel's knowledge,
any agreement with the Company;
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or other securities obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such
capital stock;
(iv) There are no contracts, agreements or understandings known
to such counsel between the Company and any person granting such
person the right to cause any securities of the Company owned or to be
owned by such person to be registered pursuant to the Registration
Statement filed by the Company under the Act covering the Offered
Securities which have not been fully satisfied or waived;
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the
issuance or sale of the Offered Securities, except such as have been
obtained and made under the Act and such as may be required under
state securities laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of
the Offered Securities;
(vi) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or, to
the knowledge of such counsel, any order of any governmental agency or
body or any court having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any agreement
or instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is
subject, or the charter or by-laws of the Company or any such
subsidiary, and the Company has the corporate power and authority to
authorize, issue and sell the Offered Securities as contemplated by
this Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion,
<PAGE>
18
the Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such counsel,
no stop order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Act, and each Registration Statement and the Prospectus, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; in connection with the preparation of the Registration
Statements and the Prospectus, such counsel have participated in
conferences with officers and representatives of the Company, the
Underwriters, counsel for the Underwriters and the independent
accountants of the Company, at which conferences such counsel made
inquiries of such persons and others and discussed the contents of the
Registration Statements and the Prospectus, and that, while the
limitations inherent in the verification of factual matters and the
character of determinations involved in the registration process are
such that such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statements or the Prospectus,
subject to the foregoing and based on such participation, inquiries
and discussions, such counsel have no reason to believe that any part
of a Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present in all
material respects the information required to be shown; and such
counsel do not know of any legal or governmental proceedings or
investigations pending or threatened to which the Company or any of
its subsidiaries is a party or to which the property of the Company or
any of its subsidiaries is subject that are required to be described
in any Registration Statement or the Prospectus and are not described
therein or any statutes, regulations, contracts or other documents
that are required to be described in any Registration Statement or the
Prospectus or to be filed as exhibits to, or incorporated by reference
in, any Registration Statement that are not described therein or filed
as required; it being understood that such counsel need express no
opinion as to the financial statements, including the notes and
schedules thereto, or other accounting, statistical
<PAGE>
19
or financial data contained in the Registration Statements or the
Prospectus;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company;
(ix) All of the Offered Securities have been duly authorized and
accepted for quotation on The Nasdaq Stock Market's National Market,
subject to official notice of issuance; and
(vi) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(e) The Representatives shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to
pass upon such matters. In rendering such opinion, Cravath, Swaine & Moore
may rely as to the incorporation of the Company upon the opinion of Testa,
Hurwitz & Thibeault, LLP referred to above.
<PAGE>
20
(f) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers shall
state that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; the Initial
Registration Statement has been declared effective by the Commission and no
stop order suspending the effectiveness of any Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole except as set forth in or contemplated by the Prospectus
or as described in such certificate; such officer has carefully examined
each Registration Statement and the Prospectus and, in his opinion, as of
the Effective Date of the Initial Registration Statement (and, if
applicable, the Additional Registration Statement), the statements
contained in the Registration Statements and the Prospectus were true and
correct, and such Registration Statement and Prospectus did not omit to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading, and since the Effective Date of the
Registration Statements, no event has occurred which should have been set
forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment.
(g) The Representatives shall have received a letter, dated such
Closing Date, of KPMG LLP, as independent accountants for the Company,
which meets the requirements of subsection (a) of this Section, except that
the specified date referred to in such subsection will be a date not more
than three business days prior to such Closing Date for the purposes of
this subsection.
<PAGE>
21
If any of the conditions hereinabove provided for in this Section 6 shall not
have been fulfilled when and as required by this Agreement to be fulfilled, the
obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the First Closing Date and each Optional Closing Date.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
<PAGE>
22
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person or entity, if any, who controls such Underwriter within the meaning of
Section 15 of the Act, against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
-----------------
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person or entity, if
any who controls the Company within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: [(i) the second to last paragraph on the cover page; and (ii) the
table, the first sentence and the concession and reallowance figures appearing
in the fourth paragraph and the information contained in the ninth and tenth
paragraphs, each under the caption "Underwriting"].
(c) Promptly after receipt by an indemnified party under this
<PAGE>
23
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) above. In case any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Notwithstanding the
preceding sentence, if an indemnified party reasonably determines that there may
be legal defenses available to it which are different from or in addition to
those available to such indemnifying party, then counsel to the indemnified
party shall be entitled to conduct the defense on behalf of the indemnified
party (and the indemnifying party shall be liable for the legal and other
expenses of such counsel in connection therewith) to the extent reasonably
determined by such counsel to protect the interests of the indemnified party, it
being understood that both of such counsel will cooperate with each other to
conduct the defense of such action as efficiently as possible. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as
<PAGE>
24
the total net proceeds from the offering (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in addition
to any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing
<PAGE>
25
Date and arrangements satisfactory to CSFBC and the Company for the purchase of
such Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 9
(provided that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and will be
mailed, delivered or telegraphed and confirmed as follows:
To the Underwriters and/or Representatives:
-------------------------------------------
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Attention: Investment Banking Department-Transactions Advisory Group
To the Company:
--------------
Lycos, Inc.
400-2 Totten Pond Road
Waltham, Massachusetts 02154
Attention: Jeffrey M. Snider, Esq.
<PAGE>
26
With a copy to:
--------------
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, Massachusetts 02110
Attention: Kenneth J. Gordon, Esq.
provided, however, that any notice to an Underwriter pursuant to Section 7 will
- -----------------
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
<PAGE>
27
If the foregoing is in accordance with the Representatives' understanding of
our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Lycos, Inc.
By
---------------------------------------
Name:
Title:
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Allen & Company Incorporated
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC,
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By: Credit Suisse First Boston Corporation
By
----------------------------------------
Name:
Title:
<PAGE>
28
SCHEDULE A
NUMBER OF
FIRM
UNDERWRITER SECURITIES
- ----------- ----------
Credit Suisse First Boston Corporation............................
Goldman, Sachs & Co. .............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated................
Allen & Company Incorporated. ....................................
Bear, Stearns & Co. Inc. .........................................
Hambrecht & Quist LLC.............................................
---------
Total.......................................................... 5,000,000
=========
<PAGE>
Exhibit 5.1
Testa, Hurwitz & Thibeault, LLP
ATTORNEYS AT LAW
125 High Street
Boston, Massachusetts 02110-2704
Office (617) 248-7000
Fax (617) 248-7100
January 4, 2000
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
RE: Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Lycos, Inc., a Delaware corporation (the "Company"), and
have represented the Company in connection with the preparation and filing of
the Company's Registration Statement on Form S-3 (the "Registration
Statement"), relating to the public offering of an aggregate of up to 5,750,000
shares of the Company's common stock, $.01 par value per share (the "Common
Stock"), of which (a) 5,000,000 shares will be issued and sold to certain
underwriters (the "Underwriters") represented by Credit Suisse First Boston
Corporation, Goldman, Sachs & Co., Merrill Lynch & Co., Allen & Company, Inc.,
Bear, Stearns & Co., Inc. and Hambrecht & Quist by the Company; and (b) up to
750,000 shares may be purchased by the underwriters from the Company to cover
over-allotments, if any. Such shares, together with any shares of Common Stock
registered under a registration statement related to the offering contemplated
by the Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended (a "462(b)
Registration Statement"), are collectively referred to herein as the "Shares."
The Shares are to be sold by the Company to the Underwriters pursuant to an
Underwriting Agreement substantially in the form filed as Exhibit 1.1 to the
Registration Statement.
We have reviewed the corporate proceedings taken by the Board of Directors
of the Company with respect to the authorization and issuance of the Shares. We
have also examined and relied upon originals or copies, certified or otherwise
authenticated to our satisfaction, of all corporate records, documents,
agreements or other instruments of the Company and have made all investigations
of law and have discussed with the Company's officers all questions of fact
that we have deemed necessary or appropriate.
Based upon and subject to the foregoing, we are of the opinion that the
Shares to be issued and sold by the Company have been duly and validly
authorized and, when sold in the manner contemplated by the Underwriting
Agreement and upon receipt by the Company of payment therefor as provided in
the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and any 462(b) Registration Statement and to the
reference to our firm in the Prospectus contained in the Registration Statement
under the caption "Legal Matters."
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Lycos, Inc.:
We consent to the use of our reports included herein and incorporated by
reference in this registration statement on Form S-3 of Lycos, Inc. and to the
reference to our firm under the headings "Selected Consolidated Historical
Financial Data" and "Experts" in the prospectus, and the heading "Selected
Supplemental Consolidated Financial Data" in the Form 8-K/A filed January 4,
2000 which is incorporated by reference in this registration statement.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
January 4, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Lycos, Inc.:
We consent to the incorporation by reference in the registration statement
on Form S-3 of Lycos, Inc. of our report dated February 26, 1999, relating to
the consolidated balance sheets of Wired Ventures, Inc. and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations and comprehensive income (loss), minority interest and stockholders'
(deficit) equity and cash flows for each of the years in the three-year period
ended December 31, 1998, which report appears in the Form 8-K of Lycos, Inc.
dated July 15, 1999.
/s/ KPMG LLP
KPMG LLP
San Francisco, California
January 4, 2000
