===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20939
CNET, INC.
(Name of small business issuer in its charter)
DELAWARE 13-3696170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CHESTNUT STREET
SAN FRANCISCO, CA 94111
(Address of principal executive officers) (zip code)
TELEPHONE NUMBER (415) 395-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of July 31, 1998 there were 16,934,377 shares of the registrant's common
stock outstanding.
===============================================================================
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
CNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $41,621,518 $22,553,988
Accounts receivable, net. . . . . . . . . . 10,266,153 9,149,762
Other current assets. . . . . . . . . . . . 1,248,422 1,134,957
Restricted Cash . . . . . . . . . . . . . . 1,266,011 1,599,113
------------- -------------
Total current assets . . . . . . . . . 54,402,104 34,437,820
Property and equipment, net. . . . . . . . . . . 16,006,468 19,553,537
Other assets . . . . . . . . . . . . . . . . . . 7,216,992 4,270,321
------------- -------------
$77,625,564 $58,261,678
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $3,569,378 $3,567,783
Accrued liabilities . . . . . . . . . . . . 7,206,608 10,080,504
Current portion of long-term debt . . . . . 1,044,057 1,358,772
------------- -------------
Total current liabilities. . . . . . . 11,820,043 15,007,059
Long-term debt . . . . . . . . . . . . . . . . . 2,101,398 2,611,815
------------- -------------
Total liabilities. . . . . . . . . . . 13,921,441 17,618,874
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 1,578 1,468
Additional paid in capital. . . . . . . . . 122,872,795 94,697,595
Accumulated deficit . . . . . . . . . . . . (59,170,250) (54,056,259)
------------- -------------
Total stockholders' equity . . . . . . 63,704,123 40,642,804
------------- -------------
$77,625,564 $58,261,678
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Television. . . . . . . . . . . . . . $1,897,992 $1,695,207 $3,650,281 $3,475,002
Internet. . . . . . . . . . . . . . . 11,168,838 6,618,816 19,177,520 11,157,165
------------ ----------- ------------ ------------
Total Revenues . . . . . . . . . . 13,066,830 8,314,023 22,827,801 14,632,167
Cost of revenues:
Television. . . . . . . . . . . . . . 1,790,496 1,694,008 3,537,496 3,467,710
Internet. . . . . . . . . . . . . . . 5,831,623 3,885,918 11,120,572 7,590,429
------------ ----------- ------------ ------------
Total cost of revenues . . . . . . 7,622,119 5,579,926 14,658,068 11,058,139
------------ ----------- ------------ ------------
Gross profit . . . . . . . . . . . . . . 5,444,711 2,734,097 8,169,733 3,574,028
Operating expenses:
Sales and marketing . . . . . . . . . 3,261,860 2,661,133 5,741,148 5,014,401
Development . . . . . . . . . . . . . 641,015 3,674,224 1,417,317 6,207,622
General and administrative. . . . . . 1,406,123 1,459,833 3,050,582 2,804,380
Warrant compensation expense. . . . . - - - 7,000,000
------------ ----------- ------------ ------------
Total operating expenses . . . . . 5,308,998 7,795,190 10,209,047 21,026,403
------------ ----------- ------------ ------------
Operating income(loss) . . . . . . . . . 135,713 (5,061,093) (2,039,314) (17,452,375)
Other income:
Equity earnings (losses). . . . . . . (4,967,862) (1,062,976) (8,647,499) (1,811,930)
Gain on sale of equity investments. . 5,123,052 11,026,736 5,123,052 11,026,736
Interest income (expense), net. . . . (37,447) 113,383 161,306 365,416
------------ ----------- ------------ ------------
Total other income (expense). . . . . 117,743 10,077,143 (3,363,141) 9,580,222
------------ ----------- ------------ ------------
Net income (loss) . . . . . . . . . . $253,456 $5,016,050 ($5,402,455) ($7,872,153)
============ =========== ============ ============
Basic net income (loss) per share. . . . $0.02 $0.36 ($0.36) ($0.57)
============ =========== ============ ============
Diluted net income (loss) per share. . . $0.02 $0.32 ($0.36) ($0.57)
============ =========== ============ ============
Shares used in calculating
basic per share data . . . . . . . . . 15,123,596 13,913,394 14,955,307 13,913,394
============ =========== ============ ============
Shares used in calculating
diluted per share data . . . . . . . . 16,883,139 15,492,180 14,955,307 13,913,394
============ =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . .($5,402,455) ($7,872,153)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . 3,246,872 2,146,418
Amortization of program costs. . . . . . . . . 2,018,533 3,639,729
Allowance for doubtful accounts. . . . . . . . 440,852 156,338
Reserve for joint venture. . . . . . . . . . . - (1,665,299)
Warrant compensation expense. . . . . . . . . - 7,000,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . (2,391,140) (11,784,130)
Other current assets. . . . . . . . . . . . 191,671 (589,706)
Other assets. . . . . . . . . . . . . . . . (225,410) (113,663)
Accounts payable. . . . . . . . . . . . . . 421,266 828,889
Accrued liabilities . . . . . . . . . . . . (2,220,006) 2,833,811
------------ ------------
Net cash used in operating activities. . (3,919,817) (5,419,766)
------------ ------------
Cash flows from investing activities:
Purchases of equipment, excluding capital leases. (2,443,433) (5,611,911)
Purchases of programming assets . . . . . . . . . (1,857,279) (3,389,746)
Loan to joint venture . . . . . . . . . . . . . . - (1,455,643)
------------ ------------
Net cash used in investing activities. . (4,300,712) (10,457,300)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of stock . . . . . . . 25,984,438 -
Net proceeds from employee stock purchase plan. . 408,693 334,184
Net proceeds from exercise of options . . . . . . 1,720,062 527,743
Principal payments on capital leases. . . . . . . (178,269) (79,090)
Principal payments on equipment note. . . . . . . (646,865) (65,352)
------------ ------------
Net cash provided by financing activities 27,288,059 717,485
------------ ------------
Net increase (decrease) in cash and cash equivalent 19,067,530 (15,159,581)
Cash and cash equivalents at beginning of period . 22,553,988 20,155,935
------------ ------------
Cash and cash equivalents at end of period . . . .$41,621,518 $4,996,354
============ ============
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . $130,721 $46,283
============ ============
Supplemental disclosure of noncash transactions:
Investment. . . . . . . . . . . . . . . . . . . . $3,066,449 $ -
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods
presented. These condensed financial statements should be read
in conjunction with the audited consolidated financial
statements included in the Company's most recent annual report
on Form 10-K, as filed with the Securities and Exchange
Commission which contains additional financial and operating
information and information concerning the significant
accounting policies followed by the Company.
The condensed consolidated results of operations for the
three and six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the current year
or any other period.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which
established standards for reporting and disclosures of
comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods
to be provided for comparative purposes. The Company has not
determined the manner in which it will present the information
required by SFAS No. 130 in its annual consolidated financial
statements for the year ending December 31, 1998. The
Company's total comprehensive income (loss) for all periods
presented herein would not have differed from those amounts
reported as net income (loss) in the consolidated statements
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments in
annual financial statements and requires those enterprises to
report selected information about operating segments in
interim financial reports issued to stockholders. SFAS No.
131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet
determined whether it has any separately reportable business
segments.
Net Loss Per Share
Basic net loss per share is computed using the weighted-
average number of common shares outstanding during the period.
Diluted net loss per share is computed using the weighted-
average number of common shares and common equivalent shares
from stock options outstanding, when dilutive, using the
treasury stock method. In the six months ended June 30, 1998
there were 2,650,950 options outstanding that could
potentially dilute basic earnings per share ("EPS") in the
future that were not included in the computation of diluted
EPS because to do so would have been antidilutive for that
period.
(2) Balance Sheet
Restricted Cash
Restricted cash balance relates to certain deposits in
escrow for leasehold improvements and as collateral for
letters of credit relating to security deposits.
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
June 30, December 31,
1998 1997
------------- -------------
Computer equipment. . . . . . . . . . . . . . $10,674,381 $11,769,291
Production equipment. . . . . . . . . . . . . 2,315,725 2,241,597
Office equipment, furniture & fixtures. . . . 2,534,401 2,230,267
Software. . . . . . . . . . . . . . . . . . . 1,503,529 1,745,660
Leasehold improvements. . . . . . . . . . . . 7,193,769 7,193,769
Other . . . . . . . . . . . . . . . . . . . . 1,434,996 1,533,198
------------- -------------
25,656,801 26,713,782
Less accumulated depreciation
and amortization. . . . . . . . . . . . . 9,650,333 7,160,245
------------- -------------
$16,006,468 $19,553,537
============= =============
ACCRUED LIABILITIES
A summary of accrued liabilities follows:
June 30, December 31,
1998 1997
------------- -------------
Compensation and related benefits . . . . . . $2,018,664 $2,594,386
Advertising . . . . . . . . . . . . . . . . . 1,039,135 619,101
Deferred Revenue. . . . . . . . . . . . . . . 1,022,397 3,233,681
Lease abandonment . . . . . . . . . . . . . . 1,187,442 1,300,000
Other . . . . . . . . . . . . . . . . . . . . 1,938,970 2,333,336
------------- -------------
$7,206,608 $10,080,504
============= =============
(3) Snap! Divestiture
Pursuant to an agreement dated June 4, 1998 among the Company, NBC
Multimedia, Inc., a Delaware corporation ("NBC Multimedia"), and Snap!
LLC, a Delaware limited liability company (the "LLC"), the Company and
NBC Multimedia agreed to form the LLC to operate the Snap! Internet
portal service, which was previously operated as a division of the
Company. In connection with the formation and initial capitalization
of the LLC, which was completed on June 30, 1998, the Company
contributed to the LLC substantially all of its assets used exclusively
in the operation of the Snap! service. Initially, the LLC will be
owned 81% by the Company and 19% by NBC Multimedia, however, NBC
Multimedia has an option to increase its ownership stake in the LLC to
60%. The accompanying financial statements present Snap!'s financial
results using the equity method of accounting effective January 1,
1998.
(4) Commitments
In September 1997, the Company entered into a lease for
approximately 97,000 square feet of additional office space in San
Francisco, California. The lease, which commenced on June 1, 1998, has
a ten year term. As security against Lessor tenant improvements, the
Company issued a letter of credit in the amount of $3.3 million. The
letter of credit is secured by $3.3 million of the $5.0 million
operating line of credit. In conjunction with the formation of the
Snap! LLC the Company assigned the lease to the LLC. In addition to
the lease assignment, the LLC has agreed to secure the lease with a
$3.3 million letter of credit which will replace the Company's letter
of credit.
(5) BuyDirect Divestiture
BUYDIRECT.COM (BuyDirect) was a wholly owned division of the
Company that distributed electronic software. On March 31, 1998, the
Company contributed its ownership in BuyDirect, and net assets related
to BuyDirect of approximately $600,000, to a new venture that is
separately owned and operated by BuyDirect's existing management group.
As part of the transaction, the Company received a 19% ownership
interest in the new venture. As a part of the agreement CNET licensed
certain technology to BuyDirect and also entered into a multi-year
arrangement with the new venture to provide marketing and promotion in
exchange for $5.4 million in cash payable through April 30, 2000. For
the six months ended June 30, 1998, the Company recognized $830,000 in
revenues related to advertising purchased by BuyDirect and to the
licensing of technology.
(6) U.Vision Acquisition
On May 12, 1998, the Company completed the acquisition of
U.Vision Inc., a California corporation ("U.Vision"), through a merger
between U.Vision and a wholly-owned acquisition subsidiary of the
Company (the "Merger"), in which the Company issued 544,965 shares of
common stock in exchange for all of the outstanding shares of U.Vision.
U.Vision owned and operated ComputerESP (www.computeresp.com), a
pricing and availability engine for buying computer products on the
Internet. Subsequent to the merger, the Company relaunched ComputerESP
as CNET Shopper.com. The Company recorded this transaction using the
pooling-of-interests accounting method and recorded the financial
results of U.Vision in its financial statements effective April 1,
1998. The financial statements of the Company prior to April 1, 1998
have not been adjusted for the financial results of U.Vision as the
impact was not material. The shares used in calculating the basic and
diluted per share data have been adjusted in prior periods to reflect
the U.Vision transaction.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
CNET: The Computer Network is a media company focused on
providing original Internet content and television programming relating
to information technology and the Internet. CNET Television includes
the Digital Domain, a two hour programming block which includes CNET
Central, The New Edge, Cool Tech and The Web. CNET Television also
produces the nationally syndicated program TV.com. The Company's CNET
Online division includes the following nine technology-focused Internet
sites: CNET.com, News.com, Gamecenter.com, Shareware.com, Search.com,
Builder.com, Download.com, Computers.com and Shopper.com.
The Company's revenues, cost of revenues and operating expenses
have grown substantially since the Company's inception, and the Company
has incurred net losses of $59.2 million. These losses reflect
substantial expenditures to develop and launch the Company's various
Internet sites and television programs. In addition, the Company
believes that newly launched services require a certain period of
growth before they begin to achieve adequate revenues to support their
operations. The increase in television programming and Internet sites
has also required increased sales and marketing expenses as well as
increased general and administrative costs. As the Company's audience
for its Internet sites and television programs grows, management
believes it will be able to attract additional advertising customers
and increased advertising revenues.
The Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by start-up companies in the
television programming industry and in the new and rapidly evolving
market for Internet products, content and services. To address these
risks, the Company must, among other things, effectively develop new
relationships and maintain existing relationships with its advertising
customers, their advertising agencies and other third parties, provide
original and compelling content to Internet users and television
viewers, develop and upgrade its technology, respond to competitive
developments and attract, retain and motivate qualified personnel.
There can be no assurance that the Company will succeed in addressing
such risks and the failure to do so could have a material adverse
effect on the Company's business, financial condition or operating
results. Additionally, the limited operating history of the Company
makes the prediction of future operating results difficult or
impossible, and there can be no assurance that the Company's revenues
will increase or even continue at their current level or that the
Company will achieve or maintain profitability or generate cash from
operations in future periods. Since inception, the Company has incurred
significant losses and, as of June 30, 1998, had an accumulated deficit
of $59.2 million. The Company may continue to incur losses in the
future.
Results of Operations
Revenues
Total Revenues
Total revenues were $13.1 million and $8.3 million for the three months
and $22.8 million and $14.6 million for the six months ended June 30,
1998 and 1997, respectively.
Television Revenues
Television revenues were $1.9 million and $1.7 million for the
three months and $3.7 million and $3.5 million for the six months ended
June 30, 1998 and 1997, respectively. Pursuant to an amended agreement,
effective July 1, 1996, between the Company and USA Networks, USA
Networks licensed the right to carry the Digital Domain on its networks
for an initial one-year term for a fee equal to the cost of production
of those programs up to a maximum of $5.2 million. In January 1997,
USA Networks agreed to extend the agreement for an additional year
beginning July 1, 1997 and revenues were again limited to the costs of
producing such programs, subject to a maximum amount of $5.5 million.
During the second quarter of 1998, the Company and USA Networks entered
into an agreement for an additional year of programming beginning July
1, 1998. The agreement added a fourth program to the Digital Domain
called Cool Tech and decreased the length of The Web from 60 minutes to
30 minutes. Revenues are limited to the costs of production, subject
to a maximum of $5.9 million.
Prior to March 1, 1998, the Company had an agreement with Trans World
International ("TWI"), whereby the Company produced a television
program, TV.com, which was exclusively distributed by TWI. Revenue
from the distribution of TV.com was first used to offset costs of
distribution and production, with any excess being shared equally by
CNET and TWI. Beginning March 1, 1998, the Company assumed
responsibility for the sale of advertisements on TV.com and began
paying a distribution fee to TWI.
Internet Revenues
Total Internet revenues were $11.2 million and $6.6 million for
the three months and $19.2 million and $11.2 million for the six months
ended June 30, 1998 and 1997, respectively. All Internet revenues were
attributable to the Company's CNET Online division as the Company
divested a portion of its ownership in Snap! and began accounting for
Snap!'s financial results under the equity method retroactively to
January 1, 1998. Internet revenues consist primarily of revenues
derived from the sale of advertisements on pages delivered to users of
the Company's Internet sites. The delivery of an advertisement is
recognized by the Company as an "impression." Advertising revenues are
derived principally from arrangements with the Company's advertising
customers that provide for a guaranteed number of impressions.
Advertising rates vary depending primarily on the particular Internet
site on which advertisements are placed, the type and total number of
impressions purchased and the length of the advertiser's commitment.
Advertising revenues are recognized in the period in which the
advertisements are delivered. The Company's ability to sustain or
increase revenues for Internet advertising will depend on numerous
factors, which include, but are not limited to, the Company's ability
to increase its inventory of delivered Internet pages on which
advertisements can be displayed and its ability to maintain or increase
its advertising rates.
The increase in revenues for CNET Online of $4.6 million for the three
month and $8.0 million for the six month periods of 1998 compared to
the similar periods in 1997 was attributable to increased pages
delivered and increased advertisements sold on its sites. Average
daily pages delivered on the Company's CNET Online sites were
approximately 6.4 million for each of the three month and six month
periods ended June 30, 1998 as compared to 3.8 million for the three
month and 3.5 million for the six month periods ended June 30, 1998, or
an increase of 68% for the three month and 83% for the six month
periods. In addition, Internet revenues include non-advertising
revenues of $1.0 million and $1.1 million for the three months and $2.1
million and $1.7 million for the six months ended June 30, 1998 and
1997, respectively. Non-advertising revenues include fees earned from
Company sponsored trade shows, electronic commerce revenues, content
licensing revenues, technology licensing and consulting.
A portion of the Company's Internet revenues were derived from
barter transactions whereby the Company delivered advertisements on its
Internet sites in exchange for advertisements on the Internet sites of
other companies. Barter transactions accounted for $611,000 and
$472,000 for the three months and $1.1 million and $496,000 for the six
months ended June 30, 1998 and 1997, respectively.
Television operations accounted for 15% and 20% of total revenues
and Internet operations accounted for 85% and 80% of total revenues for
the three months ended June 30, 1998 and 1997, respectively.
Television operations accounted for 16% and 24% of total revenues and
Internet operations accounted for 84% and 76% of total revenues for the
six months ended June 30, 1998 and 1997,respectively. The Company
expects to experience fluctuations in television and Internet revenues
in the future that may be dependent on many factors, including demand
for the Company's Internet sites and television programming, and the
Company's ability to develop, market and introduce new and enhanced
Internet content and television programming.
Cost of Revenues
Total Cost of Revenues
Total cost of revenues were $7.6 million and $5.6 million for the
three months and $14.7 million and $11.1 million for the six months
ended June 30, 1998 and 1997, respectively. Cost of revenues includes
costs associated with the production and delivery of the Company's
television programming and the production of its Internet sites. The
principal elements of cost of revenues for the Company's television
programming have been the production costs of its television programs,
which primarily consist of payroll and related expenses for the
editorial and production staff and costs for facilities and equipment.
The principal elements of cost of revenues for the Company's Internet
sites have been payroll and related expenses for the editorial,
production and technology staff, as well as costs for facilities and
equipment.
Cost of Television Revenues
Cost of television revenues were $1.8 million and $1.7 million
for the three month period and $3.5 million for each of the six month
periods ended June 30, 1998 and 1997, representing approximately 94%
and 100% of the related revenues for the three month period and 97% and
100% for the six month period ended June 30, 1998.
Cost of Internet Revenues
Cost of Internet revenues were $5.8 million and $3.9 million for
the three months and $11.1 million and $7.6 million for the six months
ended June 30, 1998 and 1997, representing 52%, 59%, 58% and 68% of the
related revenues, respectively. All Internet cost of revenues were
attributable to the Company's CNET Online division due to the Company's
divestiture of Snap!. The increase of $1.9 million for the three
months and $3.5 million for the six months ended June 30, 1998 as
compared to the same periods in 1997 was primarily attributable to $1.6
million and $2.5 million, respectively, of costs associated with an
Internet site that was launched in November 1997, and costs associated
with a Company sponsored trade show held in April 1998.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and
related expenses, consulting fees and advertising expenses. Sales and
marketing expenses were $3.3 million and $2.7 million for the three
months and $5.7 million and $5.0 million for the six months ended June
30, 1998 and 1997, representing 25%, 32%, 25% and 34% of total
revenues, respectively. The increase in sales and marketing expenses
for the three months and six months ended June 30, 1998 compared to the
same periods in 1997 were primarily attributable to increases in
salaries and related expenses and increases in advertising expenses.
Development
Development expenses consist of expenses relating to technology
and creative design staff who are involved in the research and
development of new or improved technologies to enhance the performance
of the Company's Internet sites, as well as expenses incurred in the
development of new Internet sites. Development expenses for technology
and creative design enhancements and for development of new Internet
sites include payroll and related expenses for editorial, production
and technology staff, as well as costs for facilities and equipment.
Costs associated with the development of a new Internet site are
recognized as development expenses until the new site begins generating
revenue.
Development expenses were $641,000 and $3.7 million for the three
months and $1.4 million and $6.2 million for the six months ended June
30, 1998 and 1997, representing 5%, 44%, 6% and 42% of total revenues,
respectively. The decrease in development expenses of approximately
$3.0 million for the three months and $4.8 million for the six months
ended June 30, 1998 as compared to the same period in 1997 was
primarily attributable to decreased activities related to the
development of new Internet sites. During 1997, the Company incurred
development expenses related to the development of Snap! of $2.7
million for the three month period and $4.6 million for the six month
period ended June 30, 1997, respectively.
General and Administrative
General and administrative expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees and other general corporate expenses. General and
administrative expenses were $1.4 million and $1.5 million for the
three months and $3.1 million and $2.8 million for the six months ended
June 30, 1998 and 1997, representing 11%, 18%, 13% and 19% of total
revenues, respectively.
Unusual Items
In January 1997, the Company incurred a one-time, non-cash
expense of $7.0 million related to an amendment to the warrant
agreement with USA Networks whereby the Company agreed that the
warrants held by USA Networks will vest in full on December 31, 2006,
to the extent that they have not previously vested. Additionally, USA
Networks exercised its option to extend its agreement with the Company
to carry the Company's three television programs through June 30, 1998.
Equity Earnings (Losses)
Equity losses consist of losses accounted for under the equity
method of accounting from the Company's joint venture with E!
Entertainment and from the Company's investment in Snap!. Total equity losses
were $5.0 million and $1.1 million for the three months and $8.6 million and
$1.8 million for the six months ended June 30, 1998 and 1997,
respectively. Losses related to the Snap! LLC were recorded using the
equity method of accounting effective January 1, 1998 and were $5.0
million for the three month period and $8.6 million for the six month
period ended June 30, 1998. The loss for the three month period ended
June 30, 1998 of $5.0 million for Snap! included $1.0 million in
revenues, $3.4 million in cost of revenues and $2.6 million in
operating expenses. The loss for the six month period ended June 30,
1998 of $8.6 million included $1.9 million in revenues, $5.8 million in
cost of revenues and $4.7 million in operating expenses.
Gain On Sale Of Equity Investments
Gain on sale of equity investments consists primarily of gains on the
sale of the Company's 50% equity position in the joint venture with E!
Entertainment, which was sold in June 1997, and gain on the sale of a
portion of the Company's equity interest in Vignette Corporation in
June 1998.
Liquidity and Capital Resources
Net cash used in operating activities of $3.9 million and $5.4
million for the six months ended June 30, 1998 and 1997, respectively,
was primarily attributable to net losses in such periods. Net cash
used in investing activities of $4.3 million and $10.5 million for the
six months ended June 30, 1998 and 1997 respectively, was primarily
attributable to purchases of equipment and programming assets. Cash
flows provided by financing activities of $27.3 million for the six
months ended June 30, 1998 consisted primarily of proceeds from the
issuance of common stock.
The Company currently has obligations under notes payable and
capital leases of $3.1 million. Such obligations were incurred to
finance equipment purchases and are payable through June 2001.
As of June 30, 1998, the Company's principal source of liquidity
was approximately $41.6 million in cash and cash equivalents. In
addition, the Company has a $5.0 million line of credit from a bank
secured by accounts receivable. As of June 30, 1998, the Company had
used $3.3 million of the operating line of credit as security for a
letter of credit. The line of credit is subject to certain financial
covenants. At June 30, 1998, the Company was in compliance with the
financial covenants. The Company believes that these funds will be
sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. However, any
projections of future cash needs and cash flows are subject to
substantial uncertainty. See "Additional Factors That May Affect
Future Results" below. If currently available cash and cash generated
by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional equity or
debt securities. The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's
stockholders. There can be no assurance that financing will be
available to the Company in amounts or on terms acceptable to the
Company.
Seasonality and Cyclicality
The Company believes that advertising sales in traditional media,
such as television, are generally lower in the first and third calendar
quarters of each year than in the respective preceding quarters and
that advertising expenditures fluctuate significantly with economic
cycles. Depending on the extent to which the Internet is accepted as
an advertising medium, seasonality and cyclicality in the level of
advertising expenditures generally could become more pronounced for
Internet advertising. Seasonality and cyclicality in advertising
expenditures generally, or with respect to Internet-based advertising
specifically, could have a material adverse effect on the Company's
business, financial condition or operating results.
Additional Factors That May Affect Future Results
The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may adversely
affect the Company's quarterly operating results attributable to its
Internet operations include the level of use of the Internet, demand
for Internet advertising, seasonal trends in both Internet use and
advertising placements, the addition or loss of advertisers,
advertising budgeting cycles of individual advertisers, the level of
traffic on the Company's Internet sites, the amount and timing of
capital expenditures and other costs relating to the expansion of the
Company's Internet operations, the introduction of new sites and
services by the Company or its competitors, price competition or
pricing changes in the industry, technical difficulties or system
downtime, general economic conditions and economic conditions specific
to the Internet and Internet media. Quarterly operating results
attributable to the Company's television operations are generally
dependent on the costs incurred by the Company in producing its
television programming. If the cost of producing television programs
for USA Networks exceeds the maximum licensing fee payable by USA
Networks, the Company could incur a gross deficit with respect to its
television operations. Further, the size and demographic
characteristics of the Company's viewing audience may be adversely
affected by the popularity of competing television programs, including
special events, the time slots chosen for the Company's programs by the
cable network carrying such programs and the popularity of programs
immediately preceding the Company's programs. As a result of the
Company's strategy to cross market its television and Internet
operations, the Company believes that any decrease in the number of
viewers of its television programs will have a negative effect on the
usage of its Internet sites. Accordingly, a decrease in viewership of
the Company's television programs could have a material adverse effect
on the Company's business, financial condition or operating results.
Due to all of the foregoing factors, it is likely that the
Company's operating results may fall below the expectations of the
Company, securities analysts or investors in some future quarter. In
such event, the trading price of the Common Stock would likely be
materially and adversely affected.
Certain information in this Quarterly Report may contain
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "forward-looking statements" for
purposes of these provisions, including any projections of earnings,
revenues, expenses or other financial items, any statements of the
plans and objectives of management for future operations, any
statements concerning proposed new services, any statements regarding
future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. Although the Company
believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such
expectations or any of its forward-looking statements will prove to be
correct, and actual results could differ materially from those
projected or assumed in the Company's forward-looking statements. The
Company's future financial condition and results, as well as any
forward-looking statements, are subject to inherent risks and
uncertainties, including those summarized in this section. Additional
information concerning these and other risk factors is contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, a copy of which may be obtained from the Company upon
request.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 12, 1998, the Company completed the acquisition of
U.Vision Inc., a California corporation ("U.Vision"), through a merger
between U.Vision and a wholly-owned acquisition subsidiary of the
Company. Pursuant to such merger, the Company issued 544,965 shares of
its Common Stock to U.Vision's stockholders. No underwriters were
involved in the transaction, and the Company did not pay any
underwriting discounts or commissions. The issuance of shares in this
transaction was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof.
On June 30, 1998, the Company completed the sale of 812,800
shares of Common Stock to National Broadcasting Company, Inc. ("NBC")
pursuant to a Stock Purchase Agreement, dated as of June 4, 1998,
between the Company and NBC. The aggregate purchase price for the
shares sold in such transaction was $26,212,800 ($32.25 per share). No
underwriters were involved in the transaction, and the Company did not
pay any underwriting discounts or commissions. The sale of shares to
NBC was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1998, the Company held its annual meeting of
stockholders (the "Annual Meeting"). At the Annual Meeting, the
Company submitted the following matters to a vote of its stockholders:
(i) the election of John C. Colligan and William Savoy as Class II
directors to serve until the expiration of their terms and until their
successors are elected and qualified; (ii) the approval of an amendment
to the Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock, $.0001 par value per share ("Common
Stock"), from 25,000,000 shares to 50,000,000 shares (the "Charter
Amendment"); (iii) the approval of an amendment to the CNET, Inc. 1997
Stock Option Plan to increase the number of shares of Common Stock
authorized for issuance thereunder from 1,000,000 shares to 2,500,000
shares (the "Plan Amendment"); and (iv) the ratification of the
selection of KPMG Peat Marwick LLP as the Company's independent
auditors for fiscal year 1998. At the Annual Meeting, the stockholders
elected the Class II directors noted above, approved the Charter
Amendment, approved the Plan Amendment and ratified the selection of
KPMG Peat Marwick LLP as the Company's independent auditors. The vote
of the stockholders with respect to each such matter was as follows:
(i) Election of Class II directors:
John C. Colligan - 9,433,117 votes for; 1,745 votes
withheld.
William Savoy - 9,433,117 votes for; 1,745 votes withheld.
(ii) Approval of the Charter Amendment:
8,719,344 votes for; 715,518 votes against; no abstentions.
(iii) Approval of the Plan Amendment:
9,171,437 votes for; 259,575 votes against; 3,850
abstentions.
(iv) Ratification of selection of independent auditors:
9,433,621 votes for; 1,241 votes against; no abstentions.
A proper proposal submitted by a stockholder of the Company in
accordance with applicable rules and regulations for presentation at the
Company's 1999 annual meeting that is received at the Company's principal
executive office by December 24, 1998 will be included in the Company's proxy
statement and form of proxy for such meeting. Proxies solicited by the Company
with respect to such meeting will confer discretionary authority to vote on
any matter as to which the Company has not received notice by March 16,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 --Certificate of Amendment of Certificate of Incorporation
of CNET, Inc.
10.1 --CNET, Inc. Amended and Restated 1997 Stock Option Plan.
10.2 --Agreement and Plan of Merger, dated as of May 7, 1998, by and
among CNET, Inc., CNET Acquisition Corp., U.Vision Inc.
and the stockholders of U.Vision Inc. (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K filed May 22,
1998).
10.3 --Contribution Agreement, dated as of June 4, 1998, by and among
the Company, NBC and Snap! LLC (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed July 15, 1998).
10.4 --Amended and Restated Limited Liability Company Agreement of
Snap! LLC, dated as of June 30, 1998, by and among the Company
and NBC Multimedia, Inc. (filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K filed July 15, 1998).
10.5 --Stock Purchase Agreement, dated as of June 4, 1998, by and
between the Company and NBC (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed July 15, 1998).
10.6 --Agreement, dated as of July 1, 1998, between USA Networks
and the Company.
27 --Financial Data Schedules
(b) Reports on Form 8-K
On May 22, 1998, the Company filed a Current Report on Form 8-K
in connection with the acquisition of U.Vision Inc.
On June 15, 1998, the Company filed a Current Report on Form 8-K
in connection with its announcement of the agreement with NBC and NBC
Multimedia, Inc. related to the formation of Snap! LLC.
On July 15, 1998, the Company filed a Current Report on Form 8-K
with respect to the closing of its transaction with NBC and NBC
Multimedia, Inc. related to Snap! LLC and the sale of Common Stock to
NBC.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CNET, INC.
(Registrant)
/s/ Douglas N. Woodrum
________________________
Douglas N. Woodrum
Executive Vice President,
Chief Financial Officer
August 13, 1998
Date
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
CNET, INC.
CNET, Inc., a corporation organized and existing under the
Delaware General Corporation Law (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: that the Board of Directors of the Corporation at a special
meeting of the Board of Directors called for such purpose, duly adopted
resolutions by unanimous vote setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said
amendment to be advisable, and directing that said amendment be
submitted to the stockholders of said corporation for their
consideration. The resolution setting forth the proposed amendment is
as follows:
RESOLVED, that the Board of Directors of the Corporation
hereby adopts, approves, and declares advisable a proposal to
amend the Certificate of Incorporation of the Corporation, which
proposed amendment would strike in its entirety paragraph (A) of
Article IV of the Certificate of Incorporation of the Corporation
and insert in its place a new paragraph (A) of Article IV, as
follows:
"The total number of shares of capital stock that the Corporation
shall have the authority to issue is Fifty Five Million
(55,000,000), consisting of (a) Fifty Million (50,000,000) shares
of Common Stock, $.0001 par value per share, and (b) Five Million
(5,000,000) shares of Preferred Stock, $.01 par value per share."
SECOND: that thereafter, stockholders of said corporation, which
hold the necessary number of shares as required by statute, duly adopted
and approved said amendment at the annual meeting of the stockholders of
the Company pursuant to Section 222 of the Delaware General Corporation
Law.
THIRD: that said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Board of Directors of the Company has
caused this Certificate of Amendment to be signed by David Overmyer, its
Vice President, as of June 3, 1998.
CNET, INC.,
a Delaware corporation
By: /s/ David Overmyer
David Overmyer,
Vice President
CNET, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
1. Purpose of the Plan. This Plan shall be known as the CNET,
Inc. 1997 Stock Option Plan. The purpose of the Plan is to attract and
retain the best available personnel for positions of substantial
responsibility and to provide incentives to such personnel to promote
the success of the business of CNET, Inc. and its subsidiaries.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" pursuant to Section 422 of the Internal
Revenue Code of 1986, as amended from time to time, while certain other
options granted under the Plan will constitute nonqualified options.
2. Definitions. As used herein, the following definitions
shall apply:
"Board" means the Board of Directors of the Corporation.
"Common Stock" means the Common Stock, $.0001 par value per
share, of the Corporation. Except as otherwise provided herein, all
Common Stock issued pursuant to the Plan shall have the same rights as
all other issued and outstanding shares of Common Stock, including, but
not limited to, voting rights, the right to dividends, if declared and
paid, and the right to pro rata distributions of the Corporation's
assets in the event of liquidation.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means the committee described in Section 18 that
administers the Plan or, if no such committee has been appointed, the
full Board.
"Consultant" means any consultant or advisor who renders
bona fide services to the Corporation or one of its Subsidiaries, which
services are not in connection with the offer or sale of securities in a
capital-raising transaction.
"Corporation" means CNET, Inc., a Delaware corporation.
"Date of Grant" means the date on which an Option is granted
pursuant to this Plan or, if the Board or the Committee so determines,
the date specified by the Board or the Committee as the date the award
is to be effective.
"Employee" means any officer or other employee of the
Corporation or one of its Subsidiaries (including any director who is
also an officer or employee of the Corporation or one of its
Subsidiaries).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Price" means the option price for a share of
Common Stock subject to an Option.
"Fair Market Value" means the closing sale price (or average
of the quoted closing bid and asked prices if there is no closing sale
price reported) of the Common Stock on the trading day immediately prior
to the date specified as reported by the principal national exchange or
trading system on which the Common Stock is then listed or traded. If
there is no reported price information for the Common Stock, the Fair
Market Value will be determined by the Board or the Committee, in its
sole discretion. In making such determination, the Board or the
Committee may, but shall not be obligated to, commission and rely upon
an independent appraisal of the Common Stock.
"Insider" means any officer, director, or 10% stockholder of
the Corporation.
"Non-Employee Director" means an individual who is a "non-
employee director" as defined in Rule 16b-3 under the Exchange Act.
"Nonqualified Option" means any Option that is not a
Qualified Option.
"Option" means a stock option granted pursuant to Section 6
of this Plan.
"Optionee" means any Employee, Consultant or director who
receives an Option.
"Outside Director" means an individual who is an "outside
director" within the meaning of Treasury Regulation 1.162-27(e)(3).
"Plan" means this CNET, Inc. 1997 Stock Option Plan, as
amended from time to time.
"Qualified Option" means any Option that is intended to
qualify as an "incentive stock option" within the meaning of Section 422
of the Code.
"Rule 16b-3" means Rule 16b-3 of the rules and regulations
under the Exchange Act, as Rule 16b-3 may be amended from time to time,
and any successor provisions to Rule 16b-3 under the Exchange Act.
"Subsidiary" means any now existing or hereinafter organized
or acquired company of which at least fifty percent (50%) of the issued
and outstanding voting stock is owned or controlled directly or
indirectly by the Corporation or through one or more Subsidiaries of the
Corporation.
3. Term of Plan. The Plan has been adopted by the Board
effective as of April 16, 1997. To permit the granting of Qualified
Options under the Code, and to qualify awards of Options hereunder as
"performance based" under Section 162(m) of the Code, the Plan will be
submitted for approval by the stockholders of the Corporation by the
affirmative votes of the holders of a majority of the shares of Common
Stock then issued and outstanding, for approval no later than the next
annual meeting of stockholders. If the Plan is not so approved by the
stockholders of the Corporation, then any Options previously granted
under the Plan will be Nonqualified Options, regardless of whether the
option agreements relating thereto purport to grant Qualified Options.
The Plan shall continue in effect until terminated pursuant to Section
18.
4. Shares Subject to the Plan. Except as otherwise provided in
Section 17 hereof, the aggregate number of shares of Common Stock
issuable upon the exercise of Options granted pursuant to this Plan
shall be 2,500,000 shares. Such shares may either be authorized but
unissued shares or treasury shares. The Corporation shall, during the
term of this Plan, reserve and keep available a number of shares of
Common Stock sufficient to satisfy the requirements of the Plan. If an
Option should expire or become unexercisable for any reason without
having been exercised in full, then the shares that were subject thereto
shall, unless the Plan has terminated, be available for the grant of
additional Options under this Plan, subject to the limitations set forth
above.
5. Eligibility. Qualified Options may be granted under Section
6 of the Plan to such Employees of the Corporation or its Subsidiaries
as may be determined by the Board or the Committee. Nonqualified
Options may be granted under Section 6 of the Plan to such Employees,
Consultants and directors of the Corporation or its Subsidiaries as may
be determined by the Board or the Committee. Subject to the limitations
and qualifications set forth in this Plan, the Board or the Committee
shall also determine the number of Options to be granted, the number of
shares subject to each Option grant, the exercise price or prices of
each Option, the vesting and exercise period of each Option, whether an
Option may be exercised as to less than all of the Common Stock subject
thereto, and such other terms and conditions of each Option, if any, as
are consistent with the provisions of this Plan. In connection with the
granting of Qualified Options, the aggregate Fair Market Value
(determined at the Date of Grant of a Qualified Option) of the shares
with respect to which Qualified Options are exercisable for the first
time by an Optionee during any calendar year (under all such plans of
the Optionee's employer corporation and its parent and subsidiary
corporations as defined in Section 424(e) and (f) of the Code, or a
corporation or a parent or subsidiary corporation of such corporation
issuing or assuming an Option in a transaction to which Section 424(a)
of the Code applies (collectively, such corporations described in this
sentence are hereinafter referred to as "Related Corporations")) shall
not exceed $100,000 or such other amount as from time to time provided
in Section 422(d) of the Code or any successor provision.
6. Grant of Options. Except as provided in Section 18, the
Board or the Committee shall determine the number of shares of Common
Stock to be offered from time to time pursuant to Options granted
hereunder and shall grant Options under the Plan. The grant of Options
shall be evidenced by Option agreements containing such terms and
provisions as are approved by the Board or the Committee and executed on
behalf of the Corporation by an appropriate officer. The aggregate
number of shares of Common Stock with respect to which Options may be
granted to any single Participant during a calendar year shall not
exceed the number of shares subject to the Plan referred to in Section
4. Any Options that are granted and subsequently lapse or are cancelled
or forfeited will nonetheless count against this limit. For this
purpose, repricing of an Option shall be considered as the cancellation
of the Option and the grant of a new Option.
7. Time of Grant of Options. The Date of Grant of an Option
under the Plan shall be the date on which the Board or the Committee
awards the Option or, if the Board or the Committee so determines, the
date specified by the Board or the Committee as the date the award is to
be effective. Notice of the grant shall be given to each Optionee
promptly after the date of such grant.
8. Price. The Exercise Price for each share of Common Stock
subject to an Option granted pursuant to Section 6 of the Plan shall be
determined by the Board or the Committee at the Date of Grant; provided,
however, that (a) the Exercise Price for any Option shall not be less
than 100% of the Fair Market Value of the Common Stock at the Date of
Grant, and (b) if the Optionee owns on the Date of Grant more than 10
percent of the total combined voting power of all classes of stock of
the Corporation or its parent or any of its subsidiaries, as more fully
described in Section 422(b)(6) of the Code or any successor provision
(such stockholder is referred to herein as a "10-Percent Stockholder"),
the Exercise Price for any Qualified Option granted to such Optionee
shall not be less than 110% of the Fair Market Value of the Common Stock
at the Date of Grant.
9. Vesting. Subject to Section 11 of this Plan, each Option
shall vest or be subject to forfeiture in accordance with the provisions
set forth in the applicable Option agreement. The Board or the
Committee may, but shall not be required to, permit acceleration of
vesting or termination of forfeiture provisions upon any sale of the
Corporation or similar transaction. An Option agreement may contain
such additional provisions with respect to vesting as the Board or the
Committee may specify.
10. Exercise. An Optionee may pay the Exercise Price of the
shares of Common Stock as to which an Option is being exercised by the
delivery of cash, check or, at the Corporation's option, by the delivery
of shares of Common Stock having a Fair Market Value on the exercise
date equal to the Exercise Price.
If the shares to be purchased are covered by an effective
registration statement under the Securities Act of 1933, as amended, any
Option granted under the Plan may be exercised by a broker-dealer acting
on behalf of an Optionee if (a) the broker-dealer has received from the
Optionee or the Corporation a fully- and duly-endorsed agreement
evidencing such Option, together with instructions signed by the
Optionee requesting the Corporation to deliver the shares of Common
Stock subject to such Option to the broker-dealer on behalf of the
Optionee and specifying the account into which such shares should be
deposited, (b) adequate provision has been made with respect to the
payment of any withholding taxes due upon such exercise, and (c) the
broker-dealer and the Optionee have otherwise complied with Section
220.3(e)(4) of Regulation T, 12 CFR Part 220, or any successor
provision.
11. When Qualified Options May be Exercised. No Qualified
Option shall be exercisable at any time after the expiration of ten (10)
years from the Date of Grant; provided, however, that if the Optionee
with respect to a Qualified Option is a 10-Percent Stockholder on the
Date of Grant of such Qualified Option, then such Option shall not be
exercisable after the expiration of five (5) years from its Date of
Grant. In addition, if an Optionee of a Qualified Option ceases to be
an employee of the Corporation or any related corporation for any
reason, such Optionee's vested Qualified Options shall not be
exercisable after (a) 90 days following the date such Optionee ceases to
be an employee of the Corporation or any related corporation, if such
cessation of service is not due to the death or permanent and total
disability (within the meaning of Section 22(e)(3) of the Code) of the
Optionee, or (b) twelve months following the date such Optionee ceases
to be an employee of the Corporation or any related corporation, if such
cessation of service is due to the death or permanent and total
disability (as defined above) of the Optionee. Upon the death of an
Optionee, any vested Qualified Option exercisable on the date of death
may be exercised by the Optionee's estate or by a person who acquires
the right to exercise such Qualified Option by bequest or inheritance or
by reason of the death of the Optionee, provided that such exercise
occurs within both the remaining option term of the Qualified Option and
twelve months after the date of the Optionee's death. This Section 11
only provides the outer limits of allowable exercise dates with respect
to Qualified Options; the Board or the Committee may determine that the
exercise period for a Qualified Option shall have a shorter duration
than as specified above.
12. Option Financing. Upon the exercise of any Option granted
under the Plan, the Corporation may, but shall not be required to, make
financing available to the Optionee for the purchase of shares of Common
Stock pursuant to such Option on such terms as the Board or the
Committee may specify.
13. Withholding of Taxes. The Board or the Committee shall make
such provisions and take such steps as it may deem necessary or
appropriate for the withholding of any taxes that the Corporation is
required by any law or regulation of any governmental authority to
withhold in connection with any Option including, but not limited to,
withholding the issuance of all or any portion of the shares of Common
Stock subject to such Option until the Optionee reimburses the
Corporation for the amount it is required to withhold with respect to
such taxes, canceling any portion of such issuance in an amount
sufficient to reimburse the Corporation for the amount it is required to
withhold or taking any other action reasonably required to satisfy the
Corporation's withholding obligation.
14. Conditions Upon Issuance of Shares. The Corporation shall
not be obligated to sell or issue any shares upon the exercise of any
Option granted under the Plan unless the issuance and delivery of shares
complies with all provisions of applicable federal and state securities
laws and the requirements of any national exchange or trading system on
which the Common Stock is then listed or traded.
As a condition to the exercise of an Option, the Corporation
may require the person exercising the Option or receiving the grant to
make such representations and warranties as may be necessary to assure
the availability of an exemption from the registration requirements of
applicable federal and state securities laws.
The Corporation shall not be liable for refusing to sell or
issue any shares covered by any Option if the Corporation cannot obtain
authority from the appropriate regulatory bodies deemed by the
Corporation to be necessary to sell or issue such shares in compliance
with all applicable federal and state securities laws and the
requirements of any national exchange or trading system on which the
Common Stock is then listed or traded. In addition, the Corporation
shall have no obligation to any Optionee, express or implied, to list,
register or otherwise qualify the shares of Common Stock covered by any
Option.
No Optionee will be, or will be deemed to be, a holder of
any Common Stock subject to an Option unless and until such Optionee has
exercised his or her Option and paid the purchase price for the subject
shares of Common Stock. Each Qualified Option under this Plan shall be
transferable only by will or the laws of descent and distribution and
shall be exercisable during the Optionee's lifetime only by such
Optionee. Each Nonqualified Option under this Plan shall be
transferable only by will, the laws of descent and distribution,
pursuant to a domestic relations order issued by a court of competent
jurisdiction, or to a trust established by the Optionee for estate
planning purposes.
15. Restrictions on Shares. Shares of Common Stock issued
pursuant to the Plan may be subject to restrictions on transfer under
applicable federal and state securities laws. The Board may impose such
additional restrictions on the ownership and transfer of shares of
Common Stock issued pursuant to the Plan as it deems desirable; any such
restrictions shall be set forth in any Option agreement entered into
hereunder.
16. Modification of Options. Except as provided in Section 18
of this Plan, at any time and from time to time, the Board or the
Committee may execute an instrument providing for modification,
extension or renewal of any outstanding Option, provided that no such
modification, extension or renewal shall impair the Option without the
consent of the holder of the Option. Notwithstanding the foregoing, in
the event of such a modification, substitution, extension or renewal of
a Qualified Option, the Board or the Committee may increase the exercise
price of such Option if necessary to retain the qualified status of such
Option.
17. Effect of Change in Stock Subject to the Plan. In the event
that each of the outstanding shares of Common Stock (other than shares
held by dissenting stockholders) shall be changed into or exchanged for
a different number or kind of shares of stock of the Corporation or of
another corporation (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares or
otherwise), or in the event a stock split or stock dividend occurs, then
there shall be substituted for each share of Common Stock then subject
to Options or available for Options the number and kind of shares of
stock into which each outstanding share of Common Stock (other than
shares held by dissenting stockholders) shall be so changed or
exchanged, or the number of shares of Common Stock as is equitably
required in the event of a stock split or stock dividend, together with
an appropriate adjustment of the Exercise Price. The Board may, but
shall not be required to, provide additional anti-dilution protection to
an Optionee under the terms of the individual's Option agreement.
18. Administration.
(a) The Plan shall be administered by the Board or by a
committee of the Board comprised solely of two or more Outside Directors
appointed by the Board (the "Committee"). Options may be granted under
Section 6, only (i) by the Board as a whole, or (ii) by majority
agreement of the members of the Committee; provided that, if the
Committee does not consist entirely of Non-Employee Directors, then
Options may be granted to Insiders under Section 6 only by the Board as
a whole. Option agreements, in the forms as approved by the Board or
the Committee, and containing such terms and conditions consistent with
the provisions of this Plan as are determined by the Board or the
Committee, may be executed on behalf of the Corporation by the Chairman
of the Board, the President or any Vice President of the Corporation.
The Board or the Committee shall have complete authority to construe,
interpret and administer the provisions of this Plan and the provisions
of the Option agreements granted hereunder; to prescribe, amend and
rescind rules and regulations pertaining to this Plan; to suspend or
discontinue this Plan; and to make all other determinations necessary or
deemed advisable in the administration of the Plan. The determinations,
interpretations and constructions made by the Board or the Committee
shall be final and conclusive. No member of the Board or the Committee
shall be liable for any action taken, or failed to be taken, made in
good faith relating to the Plan or any award thereunder, and the members
of the Board or the Committee shall be entitled to indemnification and
reimbursement by the Corporation in respect of any claim, loss, damage
or expense (including attorneys' fees) arising therefrom to the fullest
extent permitted by law.
(b) Although the Board or the Committee may suspend or
discontinue the Plan at any time, all Qualified Options must be granted
within ten (10) years from the effective date of the Plan or the date
the Plan is approved by the stockholders of the Corporation, whichever
is earlier.
(c) Each Outside Director will be eligible to receive
automatic grants of Options as follows:
(i) Each Outside Director will automatically be
granted Nonqualified Options to purchase 20,000 shares of
Common Stock (the "Initial Grant") on the date such Outside
Director is first elected to the Board.
(ii) On June 30 of each year, each Outside Director
then serving on the Board will automatically be granted
Nonqualified Options to purchase 5,000 shares of Common
Stock (each, an "Annual Grant"). The number of shares
subject to Initial Grants and Annual Grants will be adjusted
in accordance with Section 17.
(iii) The purchase price for Common Stock subject to
Initial Grants and Annual Grants will be 100% of the Fair
Market Value of the Common Stock on the Date of Grant.
(iv) All Options granted under this Section 18(c)
will be evidenced by Option agreements substantially in the
form of Exhibit A hereto.
(v) All Options granted under this Section 18(c)
will be exercisable on and after the Date of Grant until the
earlier of (A) ten years after the Date of Grant, or (B) 90
days after the date such Outside Director is no longer a
director of the Corporation or an officer or employee of the
Corporation or a Related Corporation; provided that Common
Stock issuable upon exercise of such Options will be subject
to a repurchase option in favor of the Corporation, as set
forth in the applicable Option agreement, until such shares
vest, which will occur in equal monthly installments during
the 48 months following the Date of Grant.
(vi) This Section 18(c) may not be amended more than
once every six months, other than to comport with changes in
the Code or in the Employee Retirement Income Security Act
of 1974, as amended, or changes in the rules promulgated
thereunder, or other applicable law, unless, at the time of
amendment, such limitation on amendments is not necessary in
order for the Plan to comply with the requirements of Rule
16b-3 or the Corporation is not then subject to the
provisions of Section 16 of the Exchange Act.
(vii) Notwithstanding the foregoing, to the extent an
Outside Director receives an automatic grant of Nonqualified
Options under Section 18(c) of the Corporation's 1994 Stock
Option Plan, as amended, such director is not eligible to
receive a duplicate grant of Nonqualified Options under this
Section 18(c).
(d) Subject to any applicable requirements of Rule 16b-3
or of any national exchange or trading system on which the Common Stock
is then listed or traded, and subject to the stockholder approval
requirements of sections 422 and 162(m)(4)(C) of the Code, the Board may
amend any provision of this Plan in any respect in its discretion.
19. Continued Employment Not Presumed. Nothing in this Plan or
any document describing it nor the grant of any Option shall give any
Optionee the right to continue in the employment of the Corporation or
affect the right of the Corporation to terminate the employment of any
such person with or without cause.
20. Liability of the Corporation. Neither the Corporation, its
directors, officers or employees or the Committee, nor any Subsidiary
which is in existence or hereafter comes into existence, shall be liable
to any Optionee or other person if it is determined for any reason by
the Internal Revenue Service or any court having jurisdiction that any
Qualified Option granted hereunder does not qualify for tax treatment as
an incentive stock option under Section 422 of the Code.
21. Governing Law. The Plan shall be governed by and construed
in accordance with the laws of State of Delaware and the United States,
as applicable, without reference to the conflict of laws provisions
thereof.
22. Severability of Provisions. If any provision of this Plan
is determined to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect the remaining provisions
of the Plan, but such invalid, illegal or unenforceable provision shall
be fully severable, and the Plan shall be construed and enforced as if
such provision had never been inserted herein.
Exhibit A
CNET, INC.
STOCK OPTION AGREEMENT
Optionee:
Effective Date of
Grant:
Number of Shares
Subject to
Option:
Exercise Price
per Share:
WHEREAS, pursuant to the CNET, Inc. 1997 Stock Option Plan (the
"Plan"), the Optionee identified above is eligible to receive an
automatic grant of an option to purchase shares of the Company's common
stock, par value $.0001 per share (the "Common Stock");
NOW, THEREFORE, in consideration of the Optionee's service as a
director of the Company and the mutual agreements and covenants
contained in this Stock Option Agreement (the "Agreement"), the Company
hereby grants to Optionee a non-qualified stock option (the "Option") to
purchase the number of shares of Common Stock set forth above, at the
per share exercise price set forth above, on the terms and conditions
and subject to the restrictions set forth in this Agreement and in the
Plan.
1. General Provisions
Subject to the other terms and provisions hereof, this Option is
exercisable in full, as to all of the shares of Common Stock subject
hereto, immediately upon grant and will remain exercisable until the
earlier of (a) ten years after the Effective Date of Grant, or (b) 90
days after the date the Optionee is no longer a director of the Company
or an officer or employee of the Company or a Related Corporation. The
Company may suspend for a reasonable period or periods the time during
which this Option may be exercised if, in the opinion of the Company,
such suspension is required to enable the Company to remain in
compliance with regulatory requirements relating to the issuance of
shares of Common Stock.
The Option is subject to the provisions of the Plan, which is
incorporated in its entirety into this Agreement by this reference. A
copy of the Plan has been provided to the Optionee by the Company, and
the Optionee hereby acknowledges receipt of the Plan. Additional copies
of the Plan are available from the Company upon request. All defined
terms contained herein have the meanings provided in the Plan, except to
the extent otherwise provided herein.
2. Exercise of Option
The Option may be exercised only by written notice (the "Exercise
Notice") by the Optionee to the Company at its principal executive
office. The Exercise Notice will be deemed given when deposited in the
U. S. mails, postage prepaid, addressed to the Company at its principal
executive office, or when delivered in person to an officer of the
Company at that office. The date of exercise of the Option (the
"Exercise Date") will be the date of the postmark if the notice is
mailed or the date received if the notice is delivered other than by
mail. The Exercise Notice will state the number of shares in respect of
which the Option is being exercised and, if the shares for which the
Option is being exercised are to be evidenced by more than one stock
certificate, the denominations in which the stock certificates are to be
issued. The Exercise Notice will be signed by the Optionee and will
include the complete address and social security number of the Optionee.
The Exercise Notice must be accompanied by payment of the
aggregate Exercise Price of the shares purchased by cash or check
payable to the order of the Company or by delivery of shares of Common
Stock owned by the Optionee, in form satisfactory to the Company,
tendered in full or partial payment of the Exercise Price. If shares of
Common Stock are used to pay part or all of the Exercise Price, the
value of such shares will be the Fair Market Value of the Common Stock
on the Exercise Date.
The certificates for shares of Common Stock as to which the Option
has been exercised will be registered in the name of the Optionee and
will be delivered to the Optionee at the address specified in the
Exercise Notice. In exercising the Option, the Optionee will make
payment or other arrangements (for example, by requesting that the
Company withhold shares of Common Stock otherwise issuable upon such
exercise) satisfactory to the Company for withholding federal and state
taxes, if applicable, with respect to the shares acquired upon exercise
of the Option. In the event the person exercising the Option is a
transferee of the Optionee, the Exercise Notice will be accompanied by
appropriate proof of the right of such transferee to exercise the
Option.
Subject to the limitations expressed herein, the Option may be
exercised with respect to all or a part of the shares of Common Stock
subject to it; provided, however, that no single partial exercise of the
Option will result in the issuance of less than one-fourth (1/4) of the
shares initially subject to the option.
Neither the Optionee nor any person claiming under or through the
Optionee will be or have any rights or privileges of a stockholder of
the Company in respect of any of the shares issuable upon exercise of
the Option, unless and until certificates representing such shares have
been issued (as evidenced by the appropriate entry on the books of the
Company).
3. Repurchase Option
(a) Vesting. The shares of Common Stock issued or
issuable upon exercise of the Option (the "Option Shares") will vest in
48 equal monthly installments, beginning on the first day of the first
month beginning after the Effective Date of Grant, but only for so long
as the Optionee remains a director of the Company; provided that all
remaining unvested Option Shares will vest immediately upon a Sale of the
Company. For such purposes, a "Sale of the Company" means a merger,
consolidation, recapitalization, reorganization or sale, lease or
transfer of all or substantially all of the Company's assets, or the
completion of a tender offer for a majority of the Company's outstanding
Common Stock, if the stockholders of the Company immediately before such
transaction (or one or more persons or entities controlled by such
stockholders) beneficially own, immediately after or as a result of such
transaction, equity securities of the surviving or acquiring entity (or
such entity's parent), possessing less than 51% of the voting power and
equity interest in the surviving or acquiring entity (or its parent).
(b) Restrictions on Transfer. The Optionee may not sell,
pledge or otherwise transfer unvested Option Shares, without the prior
written consent of the Company, and the Company will retain all
certificates evidencing unvested Option Shares on behalf of the
Optionee.
(c) Repurchase Option. If the Optionee ceases to be a
director of the Company prior to the time at which all Option Shares are
vested (unless the Optionee is removed as a director in connection with a
Sale of the Company), the Company will have the option to repurchase any
unvested Option Shares at a price equal to the exercise price paid to
acquire such Option Shares (the "Repurchase Option"). The Company may
exercise the Repurchase Option, in whole or in party, by giving written
notice (the "Repurchase Notice") to the Optionee within 90 days following
the date on which the Optionee ceases to be a director of the Company,
which notice will indicate the number of Option Shares to be repurchased.
If the Company elects to exercise the Repurchase Option, the closing of
the purchase and sale will occur on the 60th day following delivery of
the Repurchase Notice (or such earlier date as may be agreed between the
Company and the Optionee). At such closing, the Company will deliver the
consideration payable to the order of the Optionee, in the form of a
company check, against delivery by the Optionee of certificates
evidencing the Option Shares being so purchased, free and clear of all
liens, claims and encumbrances and endorsed in good form for transfer.
4. Governing Law
The parties agree that this Agreement will be governed by and
construed in accordance with the substantive laws (but not the conflict
of law principles) of the State of Delaware.
5. Entire Agreement
Except for the Plan, this Agreement constitutes the entire
agreement between the parties pertaining to the subject matter contained
herein and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement,
modification or amendment of this Agreement will be binding unless
executed in writing by the party to be charged therewith. No waiver of
any of the provisions of this Agreement will be deemed to constitute a
waiver of any other provision, whether or not similar, nor will any
waiver constitute a continuing waiver.
6. Duplicate Originals
Duplicate originals of this document will be executed by both the
Company and the Optionee, each of which will retain one duplicate
original.
CNET, INC.
By: _________________________
Name: _________________________
Title:
_________________________
ACCEPTED:
________________________________
Name: __________________________
Address: ____________________
____________________
____________________
Telecopy: ___________
AGREEMENT dated as of July 1, 1998 between USA
NETWORKS, a general partnership ("USA") and CNET
INC., a Delaware corporation (the "Contractor"),
with respect to the grant to USA of certain rights
in the series of four, thirty-minute television
programs entitled "CNET CENTRAL," "THE WEB," "THE
NEW EDGE," and a fourth series (the "Fourth
Series") which is presently untitled (each such
program a "Program," and collectively, the
"Programs" or the "Series").
1. The Programs. (a) Contractor represents and warrants that it is
the sole creator of the Programs, and that it owns and controls the
exclusive right to distribute and license the Programs. Contractor
hereby grants to USA the exclusive right to transmit, and authorize the
transmission of, the Programs during the Term (as defined in Section 4
below) throughout the United States, its territories and possessions,
including Puerto Rico and, on a nonexclusive basis, all U.S. Armed
Forces Bases throughout the world (the "Territory"). USA, however, may
transmit the Programs only over the USA Network program service and/or
the Sci Fi Channel program service (the "USA networks") in the English
and/or Spanish language to each of its affiliates for transmission by
such affiliates. Such affiliates may consist of CATV, MDS, MMDS,
SMATV, MATV, DBS and TRVO dishes or any similar services now known or
hereafter created. During the Term, and for thirty (30) days
thereafter, Contractor shall not transmit or otherwise authorize the
transmission of the Programs (or any promotions or advertisements of
any kind or nature for future transmissions of the Programs within the
Territory by Contractor or third parties), in any language, by any
other means within the Territory, including, without limitation, over-
the-air television networks, over-the-air television stations, basic or
pay cable program services, locally-originated cable channels, via
personal computers, video on demand or similar technologies.
Notwithstanding the foregoing, Contractor, after the date such Program
is scheduled to be transmitted the first time on the USA Network
program service and/or the Sci-Fi Channel program service, as the case
may be, (a) may authorize the transmission of any "CNet Central"
Program, solely within the San Francisco ADI on a local broadcast
station, (b) may transmit excerpts of any Program (not to exceed five
minutes (5:00) in aggregate in length) on any on-line computer service
owned by Contractor, and (c) may transmit excerpts of any Program (not
to exceed one minute and thirty seconds (1:30) in the aggregate for
each Program) in connection with the promotion and advertising of such
Program or the Series on the USA networks (or local broadcast station)
or for sale on a syndicated basis into local news markets. In
connection with subsection (a) above, Contractor shall advise USA, in
writing, at least thirty (30) days prior to the first such broadcast as
to the local broadcast station in the San Francisco ADI on which the
"CNet Central Programs" will be transmitted.
(b) Each Program shall have an aggregate content time of
twenty-two minutes twenty-five seconds (22:25) and shall have four (4)
program segments, and three (3) commercial breaks represented by
crystal black slugs. Each of the Programs shall consist generally of a
magazine style format containing various segments on the topics of
computer technology, digital technology and related subjects, shall
include software and hardware reviews and news about the computer
industry and computer technology. Contractor shall deliver to USA
thirty-two (32) original "CNet Central" Programs, twenty-six (26)
original "The Web" Programs, twenty-six (26) original "The New Edge"
Programs, twenty-six (26) original Fourth Series Programs, and twenty
(20) refreshed "CNet Central" Programs (edited and revised from
Programs previously delivered, including updated wrap arounds and
news), in accordance with the provisions of Section 8 below, so as to
accommodate USA's transmission schedule of one original or refreshed
"CNet Central" Program and one original or repeat Program of each other
Series each week of the Term. Contractor agrees, at its cost, to edit
any original Program of each Series other than "CNet Central," as may
be requested by USA so that if, and when, it is transmitted on a repeat
basis later in the Term, the Program will be up-to-date. The number of
original or refreshed "CNet Central" Programs and the number of
original and updated repeat Programs of each other Series to be
delivered during each broadcast quarter during the Term and the order
in which they are to be delivered shall be determined jointly by USA
and Contractor and shall be confirmed in writing to USA by Contractor
at least thirty (30) days prior to the commencement of the applicable
broadcast quarter.
(c) Subject to USA's prior written approval of the
particular advertisers, which shall not be unreasonably withheld,
Contractor may incorporate up to two, fifteen seconds (0:15) of closing
billboards in each Program, so long as the billboards are produced by
Contractor and provided to advertisers as part of a value-added media
package. Contractor hereby acknowledges that any disapproval by USA of
any billboards which, in USA's judgment, are competitive with USA's
efforts to sell commercial advertising time within or adjacent to the
Programs shall not be deemed to be unreasonable.
2. Production. (a) Contractor shall consult with USA
throughout the pre-production, production, and post-production
processes for the Programs in a manner similar to its consultation with
respect to the Programs previously produced for USA. USA shall have
significant input into the creative development of the Programs with
the understanding that all Programs will be produced in a manner
similar to the way the "CNet Central," "The Web," and "The New Edge"
series have been produced to date (i.e. a professionally-produced
program designed to both entertain and educate). USA shall have the
right to approve the content of each Program, such approval not to be
unreasonably withheld. In the event USA disapproves of any Program,
USA shall so advise Contractor, in writing, setting forth the reasons
for any such disapproval. Contractor either (a) shall promptly cure
such defects in the Program and deliver the cured Program to USA (on a
mutually-agreed upon date, no later than five (5) days after notice of
USA's disapproval), or (b) shall promptly provide USA with a substitute
Program (on a mutually-agreed upon date, no later than five (5) days
after notice of USA's disapproval).
(b) Subject to USA's prior approval (not to be unreasonably
withheld), Contractor may include within the Programs a reasonable
number of cross-promotions for Contractor's online sites, comparable to
the cross-promotions included in Programs previously produced for USA
during the first six months of 1998.
3. Practices and Standards. (a) Contractor represents and
warrants that the Programs shall conform to the program practices and
standards of the USA networks from time-to-time established (which
conform generally to U.S. broadcast standards) including, without
limitation, restrictions as to language, nudity and excessive violence
and shall be the same standards applicable to similar types of
programming transmitted on the USA networks. USA shall have the right,
in its sole discretion, to edit and/or time compress each of the
Programs, and/or delete any portion(s) thereof, (i) to ensure that each
such Program meets the program practices and standards of the
applicable USA networks, and/or (ii) to conform the Programs, if
necessary, to the aggregate running time set forth in Section 1(b)
above. Contractor shall reimburse USA for the cost of any editing
required above. In no event, shall any credits in the Programs be
deleted or changed (provided they are of customary length), including,
without limitation, any credits of Contractor or copyright notices
(however, USA may reduce the size of the end credits and/or copyright
notices so that they can be displayed on a split screen).
(b) USA shall have the right to create, or cause to be
created, Spanish language versions of the Programs (either dubbed or
subtitled) for transmission in accordance with the terms of this
Agreement. Upon Contractor's request, USA shall supply copies of such
versions to Contractor, at no charge, and Contractor may use such
versions for transmissions outside the Territory. In the event that
Contractor creates or causes any Spanish language versions of the
Programs to be created, Contractor shall provide copies of same to USA,
at no additional charge, for USA's transmission in accordance with the
terms of this Agreement.
4. Term. The term of this Agreement shall be for a period of
one year, commencing July 1, 1998 and ending June 30, 1999 (the
"Term"). USA and Contractor agree to negotiate exclusively with one
another for a period of sixty (60) days commencing January 1, 1999 with
respect to an extension of this Agreement with respect to the Series.
In no event shall Contractor negotiate with any third party with
respect to the Series prior to or during such exclusive negotiation
period. In the event that the parties are unable to reach a final
agreement during such period, then Contractor, on the last day of such
period, shall submit to USA its final offer, in writing (the "Offer").
USA then shall have ten (10) business days to accept or reject the
Offer. If USA rejects the Offer, Contractor may enter into
negotiations with third parties with respect to the Series. In the
event that Contractor reaches a tentative agreement pertaining to the
Series with a third party, on terms and conditions less favorable to
Contractor than those contained in the Offer, then USA shall have a
right of first refusal, exercisable within ten (10) business days
following receipt by USA of written notice detailing the terms of the
tentative third-party agreement, as to any such agreement which
Contractor intends to accept. It is understood that USA shall be
required to meet only those terms and conditions contained in the
tentative third party agreement which are reducible to determinable
sums of money. If USA does not meet such terms and conditions,
Contractor will not enter into an agreement with such third party on
terms and conditions less favorable to it than those contained in the
notice of the tentative third-party agreement without again affording
USA a right of first refusal as above provided.
5. Transmissions. USA may transmit each of the Programs an
unlimited number of times on each of the USA networks during the Term
throughout the Territory. Such transmissions may be at such times, on
such dates, and in such order, as USA, in its sole discretion, shall
determine. It is USA's current intent to transmit the Programs, as
part of a consistent two-hour "block" of programming, two (2) times per
week on the Sci-Fi Channel program service (from 9:00 a.m. to 11:00
a.m. on Saturdays and from 12:00 noon to 2:00 p.m. on Sundays), and,
commencing September 14, 1998, one (1) time per week on the USA Network
program service (from 6:00 a.m. to 8:00 a.m. on Sundays). It also is
USA's current intent, prior to September 14, 1998, to transmit the
"CNet Central" Programs two (2) times per week on the USA Network
program service (Mondays (Tuesday mornings) at 1:00 a.m. and Sundays at
6:00 a.m.) Nonetheless, USA shall have no obligation to transmit the
Programs at all; provided it shall remain liable for the payments set
forth in Section 7 below.
6. Additional Rights. (a) In the event that, during the
Term, Contractor desires to develop additional television programming
for satellite-delivered program services, Contractor shall so notify
USA, in writing. USA and Contractor then shall negotiate exclusively
with one another for a period of fifty (50) days, following USA's
receipt of such written notice from Contractor with respect thereto.
In no event may Contractor negotiate with any third party(s) with
respect to such additional television programming prior to or during
such exclusive negotiation period. In the event that the parties are
unable to reach a final agreement during such period, then, on the last
day of such period, Contractor shall submit to USA its final offer, in
writing (the "Offer"). USA then shall have ten (10) business days to
accept or reject the Offer. If USA rejects the Offer, subject to
Section 6(b) below, Contractor shall be free to negotiate with and
enter into agreements with third party(s) with respect to such
additional television programming, provided that the financial terms
and conditions contained in any proposed third party agreement are no
less favorable to Contractor than those contained in the Offer.
Notwithstanding the provisions of this Section 6(a), Contractor need
not comply with these provisions with respect to (i) developing
additional television programming which will be transmitted solely on a
television program service wholly-owned by Contractor either directly
or indirectly (a "Stand-alone Service") or on a television program
service at least thirty percent (30%) of which is owned by Contractor
either directly or indirectly (a "Partially-owned Service"), or (ii)
any television programming developed by third parties using
Contractor's studio and production staff.
(b) In addition to the provisions of Section 6(a) above,
as long as USA is transmitting at least two Contractor-produced
television series on the Sci-Fi Channel program service, one of which
must be the "CNet Central" Series (and the "CNet Central" Series on the
USA Network program service), Contractor may not authorize any
additional "CNet-branded" television programming to be transmitted on
any other cable network within the Territory (other than on a Stand-
alone Service or Partially-owned Service, if any). This Section 6(b)
also shall apply if, during the Term, USA is not so transmitting two
Contractor-produced television series, because Contractor failed to
offer the "CNet Central" Series and at least two other comparable
series of computer-oriented programs for transmission on the Sci-Fi
Channel program service. Nothing in this Section 6(b) shall prohibit
Contractor from running a customary producer credit at the end of a
series it produces.
(c) In the event that, during the Term, Contractor
desires to develop a satellite-delivered programming network, focused
on computers, digital technologies and/or the Internet, it shall so
notify USA in writing and shall negotiate exclusively with USA with
respect thereto for a period of fifty (50) days from the date of such
notice. In no event may Contractor negotiate with any third party(s)
with respect to any such programming network prior to or during such
exclusive negotiation period. In the event the parties fail to reach
an agreement during such exclusive negotiation period and, thereafter,
Contractor intends to enter into an agreement with a third party with
respect to any such programming network, then Contractor shall give USA
at least ninety (90) days prior written notice thereof. In such event,
USA then shall have the right, during such ninety-day period, to
terminate this Agreement, whereupon USA shall cease to have any further
obligations hereunder. Notwithstanding the provisions of this Section
6(c), Contractor need not comply with these provisions with respect to
developing a Stand-alone Service. Also, nothing contained herein shall
restrict Contractor from selling equity or debt securities in
Contractor to any third party.
7. Payment. (a) As full and complete consideration for the
rights granted herein, USA shall pay to Contractor the amount of Five
Million Nine Hundred Two Thousand Nine Hundred Fifty-Eight Dollars
($5,902,958), allocated as follows: Two Million One Hundred Thirty-Six
Thousand Dollars ($2,136,000) with respect to the "CNet Central" Series
($63,000 per each of 32 original Programs and $6,000 for each of 20
refreshed Programs), One Million One Hundred Ninety-Four Thousand Nine
Hundred Eighty-Six Dollars ($1,194,986) with respect to "The Web"
Series ($45,961 per each of 26 original Programs), One Million Two
Hundred Eighty-Five Thousand Nine Hundred Eighty-Six Dollars
($1,285,986) with respect to "The New Edge" Series ($49,461 per each of
26 original Programs), and One Million Two Hundred Eighty-Five Thousand
Nine Hundred Eighty-Six Dollars ($1,285,986) with respect to the Fourth
Series ($49,461 per each of 26 original Programs). This payment is
based on USA's reimbursing Contractor for its costs directly
attributable to the production of each Program, including appropriate
programming and production staff, equipment and facility charges (but
excluding any allocations for Contractor's executive personnel,
corporate administrative costs, or contingencies); not to exceed such
amounts. USA shall have the right to audit such costs. USA shall make
payment to Contractor ten (10) days after each month during the Term,
based on the number of original and refreshed Programs transmitted
during such month. In the event Contractor expended less than any
amount set forth above on any Programs transmitted during a calendar
quarter, then an appropriate adjustment will be made within 30 days
after such calendar quarter. No payment need be made by USA with
respect to any updated Programs.
(b) In further consideration for various marketing
services provided by USA in connection with this Agreement, Contractor
shall pay USA the sum of Seven Hundred Fifty Thousand Dollars
($750,000) in two equal installments of $375,000 each, the first of
which shall be due on January 1, 1999 and the second of which shall be
due on May 30, 1999. USA's disapproval of any closing billboards or
cross-promotions by Contractor pursuant to Sections 1(c) or 2(b) above
shall not in any way affect Contractor's payment obligations pursuant
to this Section 7(b).
8. Delivery. (a) Contractor shall deliver each of the
Programs hereunder to USA at its network control center offices in
Jersey City, New Jersey, or such other location as USA may reasonably
designate, at least three (3) business days prior to the scheduled
transmission of such Program. Delivery of the Programs shall be at
Contractor's sole cost and expense. The Programs shall be on digital
beta videotape, color-balanced, in stereo, fully-titled with audio in
perfect synchronization with the photographic action, meeting the video
and audio technical standards of the applicable USA networks and
complete and suitable in all respects for the transmissions authorized
hereunder. Promptly after receipt of each original videotape, USA
either (i) shall reproduce the Program thereon and promptly return, at
USA's expense, such original videotape to Contractor or (ii) shall
retain the original videotape for the transmissions hereunder. USA
shall pay the cost of any such reproductions it may make of the
original videotape. In the event that the original videotape of any
Program is not of sufficient quality to meet the technical requirements
set forth herein, then USA may reject such original videotape without
any penalty, and Contractor shall promptly provide a corrected or
substitute videotape to USA.
(b) USA may use its reproduction(s) of the Programs, or
any excerpt(s) thereof, for the following purposes: (i) in perpetuity,
for file, reference, audition, sales and publicity purposes, (ii) prior
to and during the Term, to advertise and publicize the Programs, the
USA networks or the cable industry in general, and (iii) during the
Term, for the transmissions authorized hereunder.
9. Commercial Advertising. Each of the Programs shall be
produced in a format so as to have an aggregate running time and
commercial format as set forth in Section 1(b) above. USA shall have
the right to sell all commercial advertising time reserved during and
adjacent to each Program as USA, in its sole discretion, desires. USA
shall be entitled to retain all revenues derived from its sale or use
of commercial advertising time.
10. Representations and Warranties of Contractor. Contractor
represents and warrants that:
(a) Contractor owns or controls the entire and exclusive
distribution and exhibition rights in and to each of the Programs
throughout the Territory, and has the full legal right, power and
authority to enter into and perform this Agreement and to grant the
rights contained herein to USA, including, without limitation, the
right to transmit the Programs as herein provided; there is no
outstanding contract, commitment, arrangement or legal impediment
binding on Contractor of any kind which is in conflict with this
Agreement or which might in any way limit, restrict or impair the
rights granted to USA hereunder; and so long as this Agreement remains
in effect Contractor will not grant, or purport to grant to any person
rights of any kind in the Programs, the exercise of which will derogate
from, or be inconsistent with, the rights granted to USA hereunder;
(b) The Programs licensed herein do not, and the exercise
by USA or by any affiliate of USA of the rights herein granted will
not, infringe upon the common law rights, or the copyright, or the
literary, dramatic, music, motion picture, or patent rights, or the
trademark or trade name, of any person, and do not and will not violate
the private, civil or property rights, or the right of privacy, of any
person;
(c) The synchronization rights for the music contained in
the Programs have been or will be obtained by Contractor hereunder and
USA shall have no liability for any payments in connection therewith;
in addition, Contractor represents and warrants that the performing
rights for the music contained in the Programs are (i) controlled by
ASCAP, BMI or SESAC, (ii) controlled by Contractor, or (iii) in the
public domain. USA agrees that, as between Contractor and USA, in the
event any fees are owing to a performing rights society as set forth in
(i) above with respect to the Programs, USA shall be liable for the
payment of such fees and shall indemnify and hold harmless Contractor
against the payment of any such fees. Contractor shall provide USA
with appropriate cue sheets as to all music included in each of the
Programs;
(d) In the production and making of the Programs, all
applicable collective bargaining agreements and all applicable rules
and regulations of any unions having jurisdiction in the premises were
complied with; all persons who performed services in or in connection
with the Programs received full payment with respect thereto and with
respect to the transmission of the Programs provided in this Agreement;
and no fee, compensation or any other payment whatsoever will ever be
payable by USA to any producer, director, actor, writer or any other
person who performed services in or in connection with the Programs by
reason of the use thereof as provided in this Agreement;
(e) In connection with the Programs distributed hereunder,
USA, any of USA's affiliates, each sponsor and such sponsor's
advertising agency, and each USA licensee, shall have the right and may
grant to others the right, both prior to and during the Term, to
reproduce, print, publish or disseminate in any medium, the portrait,
picture, name, likeness, and voice of, and biographical material
concerning, each person appearing therein and all other persons
connected with the production of the Programs, the title of the
Programs, any music, or excerpts thereof (whether original or
recomposed) in each Programs, Contractor's name and oral and/or visual
portions of the Programs, any excerpt of the script of the Programs or
any artwork or design created by or for Contractor in connection with
the production of the Programs, as news or information, for the
purposes of trade or for advertising purposes; provided, however, no
direct endorsement by any such person of any product or service shall
be used without such person's consent and that any materials used by
USA in accordance with this subsection (e) shall be used by USA in a
manner consistent with how it was presented in the Program(s); and
(f) Contractor shall procure and maintain so long as this
Agreement shall be in effect, and for one year thereafter, at no cost
to USA, a policy of television producer's liability insurance
applicable to all transmissions hereunder, acceptable to USA, in
amounts not to be less than $1,000,000/$3,000,000, insuring USA, all
advertisers having advertising in or in conjunction with the
transmission hereunder of the Programs, and any affiliate of USA,
against any and all liability resulting from the transmission hereunder
of the Programs; such insurance has standard coverage, including, but
not limited to, coverage with respect to defamation, infringement of
rights material to be carried or in the manner of presentation thereof,
infringement of privacy rights, and unauthorized use of materials in
the Programs hereunder; and such policy includes a provision requiring
the insurance company to give USA prompt notice of any revision,
modification or cancellation thereof. Contractor will furnish USA with
a certificate confirming the issuance of such insurance policy.
11. Representations and Warranties of USA. USA hereby
represents and warrants that (a) it is free to enter into and fully
perform the terms and conditions of this Agreement and it has the full
power and authority to do so and (b) there is no outstanding contract,
commitment, arrangement or legal impediment binding on USA of any kind
which is in conflict with this Agreement or which might in any way
limit, restrict, or impair the rights granted to Contractor hereunder.
12. Indemnification. (a) Contractor at all times shall
indemnify and hold harmless USA, its parents and affiliated entities,
their and any of USA's affiliates, from and against any and all claims,
damages, liabilities, costs and expenses, including reasonable counsel
fees, arising out of or based upon any of the following:
(i) the transmission of each of the Programs in
accordance with the terms of this Agreement;
(ii) the authorized use of any materials furnished
by Contractor hereunder; or
(iii) any breach by Contractor of any representation,
warranty, or agreement made by Contractor herein.
(b) USA at all times shall indemnify and hold harmless
Contractor, its parents and affiliated entities, from and against any
and all claims, damages, liabilities, costs and expenses, including
reasonable counsel fees, arising out of or based upon any breach by USA
of any representation, warranty, or agreement made by USA herein.
(c) The indemnifications provided in Section 12(a) and
Section 12(b) above shall be subject to the condition that the party
seeking indemnification shall promptly notify the indemnifying party of
any claim or litigation for which indemnification is sought. The
indemnifying party, at its option, may assume the defense of any such
claim or litigation. If the indemnifying party assumes the defense of
any such claim or litigation, its obligation with respect thereto shall
be limited to holding the indemnified party harmless from and against
any loss, damage or cost caused by or arising out of any judgment or
settlement approved by the indemnifying party in connection therewith.
(d) The party seeking indemnification shall cooperate
fully with the reasonable requests of the indemnifying party in its
participation in, and control of, any compromise, settlement,
litigation or other resolution or disposition of any such claim or
litigation.
13. Force Majeure. If by reason of fire, flood, epidemic,
earthquake, explosion, accident, labor dispute or strike, act of God or
a public enemy, riot or civil disturbance, war (declared or undeclared)
or armed conflict, the failure of satellite, transponder or technical
facilities, any municipal ordinance, any state or federal law,
governmental order or regulation, or any other similar thing or
occurrence not within the parties' control (all such events shall
hereinafter be collectively called "Force Majeure Events"), the
commencement, delivery or transmission of the Programs or any Series is
materially hampered, interrupted or interfered with, USA, upon written
notice to Contractor, may suspend the Term hereof with respect to the
Programs or such Series until such Force Majeure Event has terminated.
If the Term is so suspended, USA may extend the Term with respect to
the Programs for the length of time it is suspended pursuant to this
Section 13; provided, however, if such suspension continues for a
period of six (6) consecutive weeks, USA or Contractor, at any time
thereafter during the suspension period, upon written notice to the
other, may terminate this Agreement with respect to such Series, or, at
USA's option, in its entirety. In the event of a termination by
Contractor hereunder (unless such termination is the result of a Force
Majeure Event preventing USA from transmitting the Programs, as opposed
to a Force Majeure Event preventing Contractor from producing or
delivering the Programs), USA shall be entitled to the benefits of
Sections 6(a) and 6(b) as if the provisions of Section 6(b) had been
satisfied and to the benefits of Section 7(b).
14. Default. In the event of a material breach by either party
hereto (the "defaulting party") of any representation, warranty,
agreement, term, condition or provision of this Agreement, the other
party hereto, in addition to such other rights as it may have, shall
have the right to terminate this Agreement (or in the case of USA, as
to the particular Series, at USA's option) by giving written notice of
termination to the defaulting party; provided, however, that within
fifteen (15) days following its receipt of written notification from
the other party detailing the nature of such material breach and its
intent to terminate this Agreement, the defaulting party, if possible,
may cure such breach and provide written notice thereof to the other
party. In the event USA terminates this Agreement either as to a
particular Series or in its entirety pursuant to this Section 14, USA
still shall be entitled to the benefits of Sections 6(a) and 6(b) as if
the provisions of Section 6(b) had been satisfied.
15. Independent Contractors. The parties hereto expressly
agree that the relationship between them hereunder is that of two
principals dealing with each other as independent contractors subject
to the terms and conditions of this Agreement. Neither party shall
have the right, power, or authority at any time to act on behalf or, or
represent, the other party, but each party hereto shall be separately
and entirely liable for its own debts in all respects.
16. Assignment. Neither party shall assign its rights and
obligations under this Agreement without the prior written consent of
the other. Notwithstanding the foregoing, USA shall have the right,
without the prior written consent of Contractor, to assign this
Agreement to any entity which acquires all or substantially all of
USA's assets, to any entity in which either one of the current general
partners retains a substantial interest, to either of the current
general partners of USA, or to any entity which may acquire all or
substantially all of the assets of either of the current general
partners of USA.
17. Notices. Any and all notices, communications, and demands
required or desired to be given hereunder by either party hereto shall
be in writing and shall be validly given or made if served personally,
by telecopy, or by an overnight delivery service or if deposited in the
United States mail, certified or registered, postage prepaid, return
receipt requested. If such notice or demand is served personally or by
telecopy, service shall be conclusively deemed made on the same day (or
if such day is not a business day, then the next business day); if by
an overnight delivery service, on the next business day; and if by
registered or certified mail in the manner above provided, on the
second subsequent business day. To be effective, any service hereunder
shall be to the addresses set forth below:
CONTRACTOR: CNET, INC.
150 Chestnut Street
San Francisco, California 94111
Attn: Shelby W. Bonnie
Fax: (415) 395-9205
USA: USA NETWORKS
1230 Avenue of the Americas
New York, New York 10020
Attn: President - Operations
Fax: (212) 408-8863
Copy to: USA NETWORKS
2049 Century Park East, Suite 2550
Los Angeles, CA 90067
Attn: President - Programming and
Marketing
Fax: (310) 201-2326
Either party hereto may change its address for the purpose of receiving
notices or demands as herein provided by written notice given in the
manner aforesaid to the other party hereto, which notice of change of
address shall not become effective, however, until the actual receipt
thereof by the other party.
18. New York Law. This Agreement shall be construed,
interpreted and enforced in accordance with and shall be governed by
the laws of the State of New York applicable to agreements entered into
and wholly to be performed therein.
19. Review of Programs. Notwithstanding anything to the
contrary contained herein, and in addition to USA's right to approve
the content of each Program as set forth in Section 3 above, USA may
review any of the Programs delivered hereunder for their technical
quality. In the event that USA, in the exercise of its reasonable
discretion, determines that any of the Programs are not readily
transferable to D-3 digital videotape or that the videotape to which
the Programs is transferred is not of sufficient quality for
transmission as part of the USA networks, USA may reject such Program.
In such event Contractor may, at its option, (a) cure such Program so
as to make it acceptable to USA or (b) provide a substitute Program
which shall be acceptable to USA. In the event of the occurrence of
(a) or (b) above, Contractor shall cure the Program or provide a
substitute Program in a timely manner so as to enable USA to continue
to transmit the Programs in accordance with USA's schedule for the
transmission of such Programs.
20. Confidentiality. USA and Contractor each represents and
warrants that it shall not disclose to any third party (other than its
employees, in their capacity as such) any information with respect to
the financial terms and provisions of this Agreement except (a) to the
extent necessary to comply with the requirements of any guilds or
unions, (b) to the extent necessary to comply with law or the valid
order of a court of competent jurisdiction, in which event the party so
complying shall so notify the other party as promptly as practicable
(and, if possible, prior to making any disclosure) and shall seek
confidential treatment of such information, (c) as part of its normal
reporting or review procedure to its parent company, stockholders,
potential investors, creditors, auditors or its attorneys and such
persons, as the case may be, agree to be bound by the provisions of
this Section 20, (d) in order to enforce its rights pursuant to this
Agreement, or (e) as may be required pursuant to the federal securities
laws or the rules and regulations of the Securities and Exchange
Commission ("SEC"). To the extent this Agreement is described in the
registration statement or any other document filed with the SEC, USA
shall have the right to review and comment on such description (and
Contractor shall use diligent efforts to accommodate such comments
within the time constraints of the offering process).
21. Miscellaneous. (a) This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject
matter hereof, and supersedes all prior agreements, arrangements and
understandings relating to the subject matter hereof.
(b) Any provision herein found by a court of law to be
void or unenforceable shall not affect the validity or enforceability
of any other provision of this Agreement.
(c) Each party hereto shall execute any and all further
documents which either party hereto may deem necessary and proper to
carry out the purposes of this Agreement.
(d) The construction of this Agreement shall not be
construed against the party causing its preparation, but shall be
construed as if both parties prepared this Agreement.
(e) All captions contained herein are for convenience of
reference only.
(f) If so requested by USA, Contractor shall use its best
efforts to have a representative of USA, as selected by USA and
reasonably approved by Contractor, elected to the board of directors of
Contractor throughout the Term.
(g) Throughout the Term, USA shall supply to Contractor
such ratings (including, without limitation, Nielsen ratings) and
results of audience surveys, focus groups and other research involving
the Programs as may be available to USA, or performed by USA, in its
sole discretion, subject to any third-party restrictions on the
disclosure of such information.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
CNET, INC. USA NETWORKS
By: /s/ Shelby W. Bonnie By: /s/ Richard Lynn
Name: Shelby W. Bonnie Name: Richard Lynn
Title: COO Title: VP Business Affairs and General
Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 41,621,518 4,996,354
<SECURITIES> 0 0
<RECEIVABLES> 10,266,153 6,919,969
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 54,402,104 23,196,778
<PP&E> 16,006,468 15,334,202
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 77,625,564 43,349,941
<CURRENT-LIABILITIES> 11,820,043 9,821,817
<BONDS> 0 0
0 0
0 0
<COMMON> 1,578 1,357
<OTHER-SE> 63,702,545 33,086,605
<TOTAL-LIABILITY-AND-EQUITY> 77,625,564 43,349,941
<SALES> 22,827,801 14,632,167
<TOTAL-REVENUES> 22,827,801 14,632,167
<CGS> 14,658,068 11,058,139
<TOTAL-COSTS> 14,658,068 11,058,139
<OTHER-EXPENSES> 10,209,047 21,026,403
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (5,402,455) (7,872,153)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,402,455) (7,872,153)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,402,455) (7,872,153)
<EPS-PRIMARY> ($0.36) ($0.57)
<EPS-DILUTED> ($0.36) ($0.57)
<FN>
<F1> EPS-Basic and EPS-Diluted for previously reported periods has
been restated to comply with SFAS 128.
</TABLE>
