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================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20939
CNET, INC.
(Exact Name of registrant as specified in its charter)
Delaware 13-3696170
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Chestnut Street
San Francisco, CA 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 395-7800
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of class
Common Stock, $0.0001 par value
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of common stock held by non-affiliates,
based on the closing price at which the stock was sold, at March 12, 1999
approximated $1.8 billion.
The total number of shares outstanding of the issuer's common stock
(its only class of equity securities), as of March 12, 1999, was 34,767,270.
Information is incorporated by reference into Part III of this Form
10-K from the registrant's definitive proxy statement for its 1998 annual
meeting of stockholders, which will be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934.
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PART I
ITEM 1. BUSINESS
General
CNET, Inc. is a leading media company. We provide consumers both online
and on television regarding:
o computers
o the Internet
o digital technologies.
We seek to use our editorial, technical, product database and programming
expertise to engage consumers and attract advertisers. Based on the volume of
traffic over our branded online network, we believe that we have an established
leadership position in our market. We earn revenues from a combination of:
o banner and sponsorship advertising on our online network
o sales lead-based advertising services
o advertising sales and licensing fees from our television
programming.
CNET Online
Our online division produces a network of information and services
offered under our CNET brand through CNET.com, our gateway for consumers
interested in information technology and technology products and services. Among
the primary channels that users can access through CNET.com are:
o CNET Search.com, an information source providing smart searches
relating to computer and technological information
o CNET Computers.com, a comprehensive source for computer hardware
information combining broad product listings, descriptions and
reviews
o CNET Shopper.com, an extensive resource for determining where to
buy computer products online with real-time pricing and links to
manufacturers, retailers and resellers
o CNET News.com, a technology information source offering news and
analysis about the Internet and the computer industry
o CNET Builder.com, an information source providing product reviews
and industry news for the Web-builder community
o CNET Gamecenter.com, an extensive gaming resource offering
reviews, download information and links for popular computer
games
o CNET Download.com, a comprehensive software download service.
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Shopping Services
Our shopping services help consumers decide what products to buy and
where to buy them. Our shopping services are a very efficient marketing channel
for sellers of technology products who try to reach a targeted audience of
potential buyers. We provide sales lead-based advertising services through CNET
Computers.com and CNET Shopper.com. We believe that these services are among the
industry's leading information resources for buyers of technology products.
We help the consumer with the beginning phase of a product buying
decision by providing high-quality editorial content, including reviews and
recommendations. We supplement this information with real-time pricing
information from competing vendors covering more than 120,000 products. We also
provide one-click access to these vendors, which enables the consumer to order
the desired product from the supplier of their choice. We believe that our
online database of products and prices is the largest publicly-accessible
computer product database in the world. In March 1999 our shopping services
generated an average of 104,000 leads per day, compared to an average of 90,000
leads per day in December 1998. By generating leads, we mean that users of our
sites can click on links that take them to other websites. Our 1999 merchant
program has 83 participants compared to 70 participants in the fourth quarter of
1998.
CNET Television
Our television division, intended to strengthen our CNET brand and
complement our online division, includes the Digital Domain, a two-hour
programming block broadcast on USA Networks and The Sci-Fi Channel. Digital
Domain includes:
o CNET Central (technology news)
o The Web (Internet and online services)
o Cool Tech (consumer-oriented technology products)
o The New Edge (future technologies).
We also produce TV.com (technology products and news) and Tech Reports
(90-second technology inserts for local news programs). We broadcast CNET
Television programming to more than 75 million households. CNET Television is
syndicated nationally and in 40 international markets.
Our Other Ventures
We currently own approximately 81% of SNAP! LLC ("snap"), a free
Internet directory, search and navigation portal service controlled by NBC
Multimedia, Inc. NBC Multimedia currently owns 19% of snap, but has an option to
increase its ownership to 60%. As a result of this option, we effectively own
approximately 40% of snap. In addition to snap, we own approximately 9%
(approximately 2.3 million shares) of Vignette Corporation (Nasdaq: VIGN), a
manufacturer of Web publishing software ("Vignette"), approximately 3%
(approximately
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750,000 shares) of beyond.com (Nasdaq: BYND), an online reseller of commercial
off-the-shelf computer software, and approximately 9% (approximately 1,350,000
shares of Series C Preferred Stock) of Raging Bull, Inc., a Web-based provider
of business and financial news, commentary and chat forum.
We are a Delaware corporation. Our principal executive offices are
located at 150 Chestnut Street, San Francisco, California 94111, and our
telephone number is (415) 395-7800. We were incorporated in 1992. We launched
CNET.com in June 1995 and since that time we have continued to build our online
content and services.
Our Recent Developments
o Agreement with America Online. On February 9, 1999, we announced an
agreement with America Online, Inc. whereby we will become the
exclusive provider of computer hardware and software buying guides on
the AOL service and on AOL.com. We will also serve as the primary
provider of computer buying guides on CompuServe, Digital City, AOL
Hometown and certain AOL international properties. In addition to
buying guides, we will provide or create a variety of co-branded,
computing-oriented content areas. Under the terms of the agreement, AOL
will receive guaranteed payments from us of $14.5 million over
approximately 27 months. We believe that the agreement provides us with
the opportunity to extend substantially the reach of our
computer-oriented information and shopping services to a new audience
of consumers.
o Acquisition of NetVentures. On February 16, 1999, we acquired
NetVentures, Inc. in a stock-for-stock exchange valued at approximately
$12.5 million. NetVentures owns and operates ShopBuilder
(www.shopbuilder.com), an online store-creation system. With the
acquisition, we intend to develop the capacity to enable small and
midsize computer manufacturers and resellers of unbranded computer
systems, known in the industry as "white box" PCs, to build online
stores and use our online sales channel to market products directly to
customers. In addition, we expect to create the Internet's first
marketplace for unbranded PCs, sales of which make up an estimated 30%
of the $75 billion U.S. PC market, and expand our Shopper.com service
by incorporating a large segment of products and services that to date
have not been readily available online.
o Acquisition of AuctionGate Interactive. On February 19, 1999, we
acquired AuctionGate Interactive, Inc. in a stock-for-stock exchange
valued at approximately $6.5 million. AuctionGate owns and operates
AuctionGate.com, an auction site specializing in computer products.
With the acquisition, we hope to expand our role as an Internet
marketplace linking computer buyers and sellers. The acquisition also
introduces a potential new revenue stream for us, as participating
sellers in the new auction service will be charged listing fees. The
new auction site will allow individual customers, resellers and
manufacturers to auction their used, refurbished, end-of-line and
surplus items. We intend to provide links to the auction service at
relevant areas across our Internet network.
o Agreement with Jenesys. On February 26, 1999, we acquired the assets of
Winfiles.com, a leading software downloading service, from Jenesys LLC
for a total purchase price of
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$11.5 million, payable in cash in two installments of $5.75 million. We
believe that this acquisition will increase the market reach of our
Download.com service.
o Stock Splits. On March 8, 1999, we effected a 2-for-1 split of
our common stock that was distributed in the form of a stock dividend
to our common stock holders as of February 22, 1999. On May 28, 1999,
we effected a 2-for-1 split of our common stock that was distributed in
the form of a stock dividend to our common stock holders as of May 10,
1999 (the "May 1999 Split").
o 144A Offering. On March 8, 1999, we completed a private placement of
$172.9 million of our 5% convertible subordinated notes. The notes are
due on March 1, 2006, and are convertible, at the option of the
noteholder, into shares of our common stock at a conversion price of
$37.40625 per share (as adjusted to reflect the May 1999 Split). The
conversion price equaled 122% of the value of our common stock as of
the date we and the purchasers became irrevocably obligated to complete
the transaction.
o Acquisition of KillerApp. On March 22, 1999, we acquired
KillerApp Corporation in a stock-for-stock exchange valued at
approximately $46 million. KillerApp owns and operates KillerApp.com,
an online comparison shopping service for computers and consumer
electronic products.
o Acquisition of Sumo. On April 30, 1999, we acquired Sumo, Inc., an
Internet service directory provider, in a stock-for-stock exchange
valued at approximately $30 million.
o On May 9, 1999 we entered into an agreement to contribute our effective
40% ownership interest in snap into a new company that will be called
NBC Internet. NBC Internet will result from the merger of snap, the
owner of Snap.com, XOOM.com, Inc. and some Internet related properties
of the National Broadcasting Company, Inc., including NBC.com,
Videoseeker.com, NBC Interactive Neighborhood and a 10% interest in
CNBC.com. Upon the closing of this transaction, we will own
approximately 13% of NBC Internet, which will be a publicly traded
company. We also entered into three year agreement with NBC providing
for broadcast of our television programming primarily on CNBC starting
in October 1999, subject to the closing of the NBC Internet
transaction.
o Marketing Campaign. On July 1, 1999 we announced the launch of an
extensive multimedia advertising campaign. We currently expect to spend
approximately $100.0 million within the next six to eighteen months in
connection with this campaign. The campaign will encompass television,
radio, print, outdoor and online advertising in a number of major
markets and will target information technology professionals,
technology purchase decision makers and technology enthusiasts.
o Acquisition of GDT. On July 23, 1999, we acquired GDT S.A., the
developer of a multi-language database of product images, descriptions
and specifications, in a stock purchase valued at approximately
$50 million.
o Acquisition of Nordby. On July 29, 1999, we acquired Nordby
International, Inc., a provider of customized financial information to
over 350 online and print media partners, in a stock-for-stock exchange
with additional cash consideration for a total purchase price of
approximately $20 million.
Industry Background
We believe that there is a significant opportunity for a trusted,
value-added on-line intermediary to connect buyers and sellers of technology
products online. Buyers of technology products typically research product
capabilities and compare prices before making a purchase decision. Due to its
interactive nature, the Web is emerging as a medium that allows buyers of
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technology products, both individuals and businesses, to complete complex
product and price comparisons on a real-time basis.
We believe that by connecting sellers of technology products with
buyers online, we address a significant market. According to Jupiter
Communications, PC hardware and software products represent the largest
e-commerce category on the Web. Purchases of PC hardware and software are
expected to constitute 45% of the estimated $8 billion projected to be spent by
consumers online in 1999. Forrester Research estimates that 46%, or
approximately $50 billion, of the estimated $108 billion projected to be spent
by businesses online in 1999 will be spent on computers and electronics.
The revenue opportunities that we see emerging on the Internet combine
certain elements of traditional offline businesses such as print, television,
direct marketing and point-of-purchase marketing. We believe that there is a
growing recognition among manufacturers and marketers of technology products and
services of the advantages and increasing importance of reaching and selling to
their customers online.
Strategy
Our objective is to be the largest online computer and technology
network and to create a significant online marketplace connecting buyers and
sellers of technology products and services. Through the end of 1998, we have
focused on improving and broadening our existing content and commerce services.
In early 1999, we began a program of strengthening and expanding these services
through selective content and commerce focused acquisitions.
o We seek to provide compelling content for our users
We seek to provide current, comprehensive and entertaining editorial
content throughout our online network and television programs. Our goal is to
expand our audience of Internet users and television viewers.
o We seek to further develop market awareness and recognition of our
brand
We believe that further development of our CNET brand is a critical
aspect of our efforts to attract and expand our Internet and television
audiences. We seek to promote and reinforce our brand by building on the
strength of our online network through our television programming and through
increased marketing efforts.
o We seek to build on our television programming experience
In addition to using our television programming to promote our CNET
brand, we believe that our experience in developing and producing television
programming complements and strengthens our ability to develop high-quality
Internet content. We believe that the Internet as a communication medium is
similar to a hybrid between television and print and believe that quality
Internet sites should be produced as multimedia offerings, rather than being
written like printed publications.
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o We seek to create value for manufacturers and marketers of technology
products and services
We believe that our Internet users, who have an interest, ability and
willingness to obtain information and purchase products over the Internet, are
generally an attractive audience for technology manufacturers and marketers. We
will continue our efforts to create new marketing programs for manufacturers and
marketers and to provide an efficient means to connect buyers and sellers.
o We seek to create value for our users
We will continue to evaluate acquisitions, which assist in expanding
and strengthening our online content and commerce services. We are continually
exploring opportunities to leverage our brand, infrastructure and existing
audience. For example, recent acquisitions of NetVentures (offers creation of
online technology stores within the CNET network), AuctionGate (allows
individuals, manufacturers and resellers to auction used, refurbished and
surplus technology products), WinFiles (an extension of the downloadable
software channel) and KillerApp (an addition to our shopping services) provides
us with the opportunity to enter new commerce markets and strengthen our
leadership within the downloadable software channel.
o We seek to utilize our technology to enhance content
We seek to capitalize on available technology to create compelling
Internet content, to improve the speed and performance of our Internet network
and to enhance the user's experience through customization and personalization
of content. We strive to improve the attractiveness and usefulness of our
Internet content by using the latest software tools and supporting the latest
technology standards.
CNET Online Network
All of our network channels are offered under the CNET brand and
provide content and commerce services to users interested in information
technology and the Internet. We attracted over 7 million different users in
January 1999 according to Media Metrix.
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We currently operate the following network channels:
<TABLE>
<CAPTION>
LAUNCH DATE DESCRIPTION
------------------------ -------------------------------------------------------
<S> <C> <C>
CNet.com June 1995 The gateway to our network, offers news, product
reviews, feature stories, interviews and other
editorial content about information technology and
the Internet.
Search.com March 1996 Search and navigational channel focused on providing
smart searches focused on computers and technology
information.
News.com September 1996 Editorial channel featuring the latest news and
analysis about the Internet and the computer industry.
Download.com October 1996 Editorial channel, search engine and download
facility focused on software.
Gamecenter.com November 1996 Editorial channel featuring reviews and information
about popular computer games and links to
downloadable games.
Computers.com November 1997 Computer products information channel focused on
what-to buy product reviews and information combined
with broad product listings, updated daily with
real-time pricing and where-to-buy links to
manufacturers, retailers and resellers.
Builder.com November 1997 Product review and industry news for the Web building
community.
Shopper.com June 1998 Broad product listings updated daily with real-time
pricing with where-to-buy links to manufacturers,
retailers and resellers
</TABLE>
CNET.COM. CNET.com was launched in June 1995 and serves as the gateway
for our network. We believe that CNET.com has become a leading source on the
Internet of news, reviews and other editorial content related to information
technology and the Internet.
SEARCH.COM. Launched in March 1996, Search.com provides our users
search functionality focused on providing smart search results related to
computer and technology information.
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NEWS.COM. Launched in September 1996, News.com is an editorial site
focused exclusively on providing daily coverage of breaking news and scheduled
events, in-depth analyses and original reporting related to the computer
industry, the Internet and computer industry personalities. News.com is designed
to provide broad coverage of these industries and to appeal to information
technology professionals, as well as industry participants, corporate
information systems officers and members of the financial community. The channel
competes with weekly computer trade publications by offering more current news
and information and by integrating text, audio and video to deliver high quality
content.
As a complement to our daily news, we produce daily audio reports on
the latest digital news. Using Progressive Networks' RealAudio software (which
users can download through our Internet channels), users can hear the voices of
the newsmakers themselves on the issues of the day, such as a U.S. Congressman
responding to the morning's developments on telecommunications reform or the
president of a technology company announcing a new Internet product.
DOWNLOAD.COM. Launched in October 1996, Download.com provides search,
browse and download software. Download.com is an organized directory of
approximately 14,000 files which have descriptions and can be sorted by the user
to find the most popular titles in a given category Download.com offers a search
engine for users trying to find an ftp site for a specific title across a
database encompassing hundreds of thousands of software titles.
GAMECENTER.COM. Launched in November 1996, Gamecenter.com provides the
latest news and information about popular computer games and serves online game
players with current information and interactive product reviews. Gamecenter.com
also provides links to popular downloads of the newest games, tips and tricks,
and information for connecting with other game players.
COMPUTERS.COM. Launched in November 1997, Computers.com focuses on
providing users the broadest and most in-depth source of real-time computer
products information in a convenient, easy-to-use format. Computers.com is
organized intuitively into categories including: desktops, servers, notebooks,
modems, monitors, memory, storage, printers, graphics, cameras and handhelds.
Within each category, Computers.com gives users the ability to customize
hardware configurations feature-by-feature including by price and manufacturer.
During the customization process, Computers.com provides access to
industry-wide product research for improved decision making prior to purchase.
Throughout the customization process each user has access to Computers.com's
proprietary, comprehensive database of product listings by price and
manufacturer which is updated many times each day. This feature gives users an
efficient means of comparing products. At the point of purchase, Computers.com
helps connect buyers with sellers by providing buyers with an easy-to-use,
extensive database of where-to-buy listings of product manufacturers, retailers
and resellers.
BUILDER.COM. Launched in November 1997, Builder.com is the Internet's
central source for product reviews and industry news for the Web building
community, including designers, developers and producers. The channel features
reviews of Web development tools, industry and
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technology news and downloadable software for Web production. Builder.com also
offers interactive forums.
SHOPPER.COM. Launched in June 1998, Shopper.com is a leading
information resource for buyers of technology products. Shopper.com contains
real-time pricing information from competing vendors covering more than 120,000
products. Shopper.com, similar to Computers.com, provides one-click access to
these vendors which enables the user to order the desired product from the
supplier of their choice. We believe that our online database of products and
prices is the largest publicly-accessible computer product database in the
world.
CNET Television
We produce television programming for viewers interested in information
technology and the Internet. Our television programming is intended to
complement and strengthen our Internet operations by building brand awareness,
attracting new users and generating content that can also be presented through
the Internet. Four of the Company's programs are carried nationally on cable
television through USA Networks and The Sci-Fi Channel, both of which are owned
by USA Networks. One of our programs is aired nationally on broadcast
television. We produce all of our programs in-house, in our San Francisco
headquarters studio. We employ a permanent staff of producers, researchers,
editors and directors to create our programs and hire additional freelance
camera crews and freelance producers as appropriate.
Digital Domain. Four of our programs, CNET Central, The Web, Cool Tech
and The New Edge, are produced in a two hour programming block as The Digital
Domain. The Digital Domain is broadcast two times per week on The Sci-Fi Channel
and once per week on USA Networks. Additionally, CNET Central is aired once per
week locally on KPIX-TV, the San Francisco CBS affiliate. The USA Network
reaches over 75 million cable television homes, and The Sci-Fi Channel (an
affiliate of USA Networks) reaches over 52 million cable homes. Based on Nielsen
Ratings, the four programs reached an average weekly audience of 900,000 viewers
during the fourth quarter of 1998.
CNET Central. Launched in April 1995 as our first television program,
CNET Central covers the latest in news, features and human interest stories
relating to information technology and the Internet. The series includes news
updates from our news staff and demonstrations of new and interesting Internet
sites. CNET Central also covers new product introductions, such as the release
of new games, applications and tools, and related product reviews and
demonstrations. We encourage viewers of the program to visit our Internet
channels for more detailed information and reviews and to download available
software.
The Web. Launched in July 1996, The Web is a half-hour long show
focused on the Internet and online services and is similar in style to CNET
Central, but with increased use of in-studio interviews and demonstrations. The
Web shows viewers the hottest Web sites, explains the latest tools and covers
the Internet culture.
The New Edge. Launched in July 1996, The New Edge is a half-hour
magazine format show that focuses on new technological breakthroughs and how
they will change our lives. Each
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program contains four segments that cover topics from action/adventure and
entertainment, to the healthcare industry and computer science.
Cool Tech. Launched in July 1998, Cool Tech delivers valuable
consumer-oriented information about the newest personal technology products.
TV.com. Launched in September 1996, TV.com is a half-hour program that
offers the latest news, gossip and interviews relating to information technology
and the Internet. We distribute TV.com under a syndication agreement with Trans
World International. TV.com airs nationally on broadcast television in over 115
markets. During the fourth quarter of 1998, TV.com achieved an average weekly
audience of approximately 600,000 viewers.
Using material from our tape library, we also produce 90-second inserts
called Tech Reports, about information technology and the Internet for
syndication to local news operations around the country. We design these inserts
to help promote our CNET brand. They typically feature a host from CNET Central
standing in the CNET studio in front of the CNET logo. The inserts are
syndicated into 34 local markets.
Agreement with USA Networks
From April 1, 1995 through June 30, 1996, USA Networks carried CNET
Central nationally. Under our initial agreement, we paid USA Networks a monthly
fee of approximately $147,000 and received the right to sell all of the
available advertising during the program and to retain all advertising revenues.
In connection with this agreement, we issued USA Networks a warrant to purchase
1,033,500 shares of our common stock at an exercise price of $1.21 per share.
The warrant was scheduled to vest in eight equal quarterly installments
beginning July 1, 1996 if USA Networks continued to carry CNET Central in
accordance with the agreement. USA Networks exercised the warrant with respect
to all 1,033,500 shares in July 1998.
Effective July 1, 1996, we amended the agreement. Under the amended
agreement, USA Networks licensed the right to carry CNET Central, The Web and
The New Edge as the two hour programming block called the Digital Domain, for an
initial one year term and became entitled to sell all available advertising on
the Digital Domain. In exchange, USA Networks agreed to pay a fee which was
limited to our costs of producing the three programs, up to a maximum of $5.2
million for the initial one year term. Effective July 1, 1997, the agreement was
extended for an additional year and fees payable by USA Networks were increased
to a maximum of $5.5 million. In June 1998, USA Networks extended the agreement
with respect to the Digital Domain and added a fourth program, Cool Tech, for an
additional year (until June 30, 1999), during which the fee payable to us is
limited to the costs of producing such programs, subject to a maximum amount of
$5.9 million. This agreement has been extended through September 30, 1999. USA
Networks is not required to carry any of the programming that it purchases from
us under the agreement. We cannot assure you that we will be able to obtain
distribution for our television programming after September 30, 1999. We
recently entered into an agreement with NBC providing for our television
programming to be carried primarily on CNBC starting in October 1999, subject to
the closing of the transaction forming NBC Internet, to which we are a party. We
cannot assure you that the NBC Internet transaction will close, and we therefore
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cannot assure you that our television programming will be carried on CNBC
starting in October 1999. If the NBC Internet transaction does not close, and we
are unable to secure and maintain distribution for our television programming on
acceptable commercial terms, we will be unable to achieve the strategic
objectives of our television programming, which would have a material adverse
effect on our business, prospects, financial condition and operating results.
Pursuant to the amended agreement, we also agreed to modify the vesting
provisions of the warrant previously granted to USA Networks. Under the amended
agreement, the warrant became exercisable with respect to 413,400 shares of
common stock (40% of the total) on July 1, 1996. The warrant became exercisable
with respect to an additional 310,050 shares (30% of the total) on June 30,
1997, based on USA Networks' transmission of the three programs during the first
year of the agreement. The warrant became exercisable with respect to the
remaining 310,050 shares (30% of the total) on June 30, 1998. In connection with
the extension of the agreement in January 1997, we agreed that the warrants will
vest in full on December 31, 2006, to the extent they have not previously
vested. USA Networks exercised the warrant with respect to all 1,033,500 shares
in July 1998.
During the initial one-year term of the amended agreement, which ended
on June 30, 1998, we agreed to pay USA Networks a fee of $750,000 for the right
to cross-market our Internet channels on our television programs produced for
USA Networks. During the 1998-1999 year extension, we will again pay a fee of
$750,000 for the right to continue these cross-marketing activities. We report
these fees as marketing expenses. USA Networks accounted for approximately 10%
of our total revenues during 1998.
Sales and Marketing
At December 31, 1998, we had a sales and marketing staff of 99
full-time employees located in our headquarters in San Francisco, California,
and in a sales office in New York City.
We earn our online revenues from the sale of advertising by our direct
sales organization and from lead-based compensation from our shopping services.
We provide discounts for multiple package purchases and for longer-term
agreements. We also provide a number of services to marketers, including
advertising response tools and advertising targeting. Beginning March 1, 1998,
we began to use our direct sales organization to sell advertisements on TV.com.
We design our marketing activities to promote our CNET brand and to
attract consumers to our online network and television programming. We currently
retain a portion of our inventory of Internet advertising banners on certain of
our channels to promote our own content and commerce services. We also use our
weekly online dispatch newsletters to promote and cross-market our services. Our
marketing programs also include participation in trade shows, conferences,
speaking engagements, print, television, radio and Internet advertising
campaigns and programs to generate exposure in trade magazines and general
interest magazines and newspapers.
On July 1, 1999 we announced the launch of an extensive multimedia
advertising campaign. We currently expect to spend approximately $100.0
million within the next six to eighteen months in
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connection with this campaign. The campaign will encompass television, radio,
print, outdoor and online advertising in a number of major markets and will
target information technology professionals, technology purchase decision makers
and technology enthusiasts.
Technology
We maintain technology offices in Bridgewater, New Jersey and San
Francisco, California, which focus on designing, developing, modifying and
maintaining proprietary and third-party tools to manage and improve our Internet
channels and advertising services. We focus our efforts to develop Internet
channel management technologies on:
o improving the speed and reliability of our Internet network
o creating publishing tools for Internet content
o developing advertisement tracking and management tools
o building an infrastructure for performing advanced traffic and
user analysis
o building commerce tools for our shopping service.
Using our internally developed publishing tools, we are able to
separate our Internet content, which resides in databases, from the presentation
or formatting of the content on the Internet. This separation of content and
presentation allows us to quickly incorporate new presentation technologies into
our channels and to customize the presentation of content. In addition, this
technology also speeds the production process by enabling our editorial staff of
journalists and editors to enter information quickly and to post time-sensitive
material with minimal lead time. We use a modified version of the commercial
Accipiter AdManager system that allows us to customize the delivery of
advertisements by placing advertisements on specific Internet pages based on the
user's method of Internet access and hardware and software configuration. We
have also developed an Advertising Response and Monitoring program, which allows
advertisers to track and test the effectiveness of their Internet-based
marketing programs.
In July 1996, we invested $512,000 in cash and transferred rights to
certain of our proprietary site content management software systems to Vignette,
an Austin, Texas, based software development company, in exchange for a minority
equity interest in Vignette. Vignette is marketing an Internet site management
system to operators of large Internet sites, such as those that we operate. As a
result of our investment in Vignette, certain site management technologies that
were previously proprietary to us are now available to our competitors.
Competition
Competition among content and service providers is intense and is
expected to increase significantly in the future. Our Internet and television
operations compete against a variety of firms that provide content through one
or more media, such as print, broadcast, cable television and the Internet. As
with any other content or service provider, we compete generally with other
content and service providers for the time and attention of consumers and for
advertising revenues. To compete successfully, we must provide sufficiently
compelling and popular Internet content and service and television programming
to attract Internet users and television
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<PAGE> 15
viewers and to attract advertisers hoping to reach such users and viewers.
Within the content niche of information technology and the Internet, we compete
in particular with the publishers of computer-oriented magazines and Internet
services, such as:
o Ziff-Davis Publishing Company
o International Data Group
o CMP Publications.
and with television companies that offer computer-related programming, such as:
o the Cable News Network
o the Discovery Channel
o Jones Computer Network
o Mind Extension University
o MSNBC, a joint venture between Microsoft Corporation and General
Electric's NBC Television Network.
Each of these competitors also offers one or more Internet sites with
content designed to complement its magazines or television programming.
In the overall market for Internet users, we compete with other
Internet content and service providers, including Web directories, search
engines, shareware archives, sites that offer original editorial content,
commercial online services, e-commerce sites and solution providers, and sites
maintained by Internet service providers. These competitors include:
o Excite, Inc.
o Infoseek Corporation
o Lycos, Inc.
o Microsoft Corporation
o Netscape Communications Corporation
o The Walt Disney Company
o Time Warner, Inc.
o Yahoo! Inc.
o America Online, Inc.
o eBay Inc.
o Amazon.com, Inc.
The market for Internet content and services is new, intensely
competitive and rapidly evolving. There are minimal barriers to entry, and
current and new competitors can launch new sites at relatively low cost. In
addition, we compete for the time and attention of Internet users with thousands
of non-profit Internet sites operated by individuals, government and educational
institutions. Existing and potential competitors also include magazine and
newspaper publishers, cable television companies and startup ventures attracted
to the Internet market. Accordingly, we expect competition to persist and
intensify and the number of competitors to increase significantly. As we expand
the scope of our Internet content and services, we will compete
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<PAGE> 16
directly with a greater number of Internet sites, including other online
retailers and direct sellers of computer products and other media companies.
Because the operations and strategic plans of existing and future competitors
are undergoing rapid change, it is difficult for us to anticipate which
companies are likely to offer competitive services in the future. We cannot
assure you that our Internet operations will compete successfully.
With respect to our television operations, we compete directly with
established broadcast and cable television networks and with other distributors
and producers of programming about information technology and the Internet. We
also face potential competition from a wide range of existing broadcast and
cable television companies and from joint ventures between television companies
and computer-oriented magazine publishers or computer hardware or software
vendors, any of which could produce television programming that competes
directly with our television programming. For example, Ziff-Davis recently
launched and is operating a 24 hour cable television network focused on
technology.
Employees
As of December 31, 1998, we had a total of 491 employees, all of whom
are based in the United States. Of the total:
o 262 were involved in our Internet operations
o 99 were engaged in marketing and sales
o 53 were involved in television production
o 21 provided creative services for our Internet and television
operations
o 56 were in administration and finance.
Seven of our employees, who consist of our on-air television talent,
are represented by a labor union, the American Federated Television and Radio
Artists. We have not experienced any work stoppages and we believe that our
relations with our employees is good.
Intellectual Property
Our success and ability to compete is dependent in part on the
protection of our original content for the Internet and television and on the
goodwill associated with our trademarks, trade names, service marks and other
proprietary rights. We rely on copyright laws to protect the original content
that we develop for the Internet and television, including our editorial
features and the various databases of information that we maintain and make
available through our Internet channels. In addition, we rely on federal
trademark laws to provide additional protection for the appearance of our
Internet channels. A substantial amount of uncertainty exists concerning the
application of copyright and trademark laws to the Internet, and we cannot
assure you that existing laws will provide adequate protection for our original
content or our Internet domain names. In addition, because copyright laws do not
prohibit independent development of similar content, we can offer no assurance
that copyright laws will provide any competitive advantage to us.
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<PAGE> 17
We own a federal trademark registration for the name "CNET" for
computer services, namely, providing databases featuring information in the
general fields of entertainment and education. We also own two other federal
trademark registrations for the name "CNET" for use in connection with certain
software applications and consulting services that we acquired by assignment.
Further, we own a federal trademark registration for the CNET logo in connection
with providing entertainment services over electronic communication networks. We
have also filed applications to register the names CNET.com, Shareware.com,
Search.com and Download.com, but no federal registrations have been granted for
such names or marks. We also claim common law protection on certain names and
marks that we have used in connection with our business activities. Two third
parties objected to our application to register the service mark "CNET: The
Computer Network," and, in connection with one of these objections, we agreed
not to use such mark for any real estate or insurance related services. We are
also a defendant in pending litigation concerning our use of the name "Snap" We
cannot assure you that we will be able to secure registration for any of our
marks. We have also invested significant resources in purchasing Internet domain
names for existing and potential Internet sites from the registered owners of
such names. The application of federal trademark law to the protection of
Internet domain names is not certain, and we cannot assure you that we will be
entitled to use such domain names.
We rely on trade secret and copyright laws to protect the proprietary
technologies that we have developed to manage and improve our Internet channels
and advertising services. We cannot assure you that such laws will provide
sufficient protection to us, that others will not develop technologies that are
similar or superior to ours, or that third parties will not copy or otherwise
obtain and use our technologies without authorization. We have filed patent
applications with respect to certain of our software systems, methods and
related technologies. Although two of these applications have matured into U.S.
patents, we can offer no assurance that any other applications will be granted.
In addition, we can offer no assurance that any patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
a competitive advantage for us. We also rely on certain technology licensed from
third parties. We may be required to license additional technology in the future
for use in managing our Internet channels and providing related services to
users and advertising customers. Our ability to generate revenues from Internet
commerce may also depend on data encryption and authentication technologies that
we may be required to license from third parties. We cannot assure you that
these third party technology licenses will be available or will continue to be
available to us. The inability to enter into and maintain any of these
technology licenses could have a material adverse effect on our business,
prospects, financial condition and operating results.
Policing unauthorized use of our proprietary technology and other
intellectual property rights could entail significant expense and could be
difficult or impossible, particularly given the global nature of the Internet
and the fact that the laws of other countries may afford us little or no
effective protection of our intellectual property. In addition, we cannot assure
you that third parties will not bring claims of copyright or trademark
infringement against us or claim that our use of certain technologies violates a
patent. We anticipate an increase in patent infringement claims involving
Internet-related technologies as the number of products and competitors in this
market grows and as related patents are issued. Further, we cannot assure you
that third parties
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<PAGE> 18
will not claim that we have misappropriated their creative ideas or formats or
otherwise infringed upon their proprietary rights in connection with our
Internet content or television programming. Any claims of infringement, with or
without merit, could:
o be time consuming to defend
o result in costly litigation
o divert management attention
o require us to enter into costly royalty or licensing arrangements
o prevent us from using important technologies or methods.
Any of the foregoing could have a material adverse effect on our
business, prospects, financial condition and operating results.
Government Regulation
Although there are currently few laws and regulations directly
applicable to the Internet, a range of new laws and regulations have been
proposed, and could be adopted, covering issues such as privacy, copyrights,
obscene or indecent communications and the pricing, characteristics and quality
of Internet products and services. The federal government and a number of states
have adopted or proposed legislation which, among other things, seek to impose
criminal penalties on anyone that distributes "obscene" or "indecent" material
over the Internet. Although certain provisions of such legislation have been and
may be subject to challenge on constitutional grounds, the manner in which any
such legislation or future federal and state laws will ultimately be interpreted
and enforced and their effect on our operations cannot yet be fully determined.
Any such laws could subject us to substantial liability. For example, we do not
and cannot practically screen the contents of the various Internet sites that
are indexed or accessible through our directories and search engines.
Restrictive laws or regulations could also dampen the growth of the Internet
generally and decrease the acceptance of the Internet as an advertising medium,
and could, thereby, have a material adverse effect on our business, prospects,
financial condition and operating results. Application to the Internet of
existing laws and regulations governing issues such as property ownership, libel
and personal privacy is also subject to substantial uncertainty.
The television industry is subject to extensive regulation at the
federal, state and local levels. In addition, legislative and regulatory
proposals under consideration by Congress and federal agencies may materially
affect the industry and our ability to obtain distribution for our television
programming.
We can offer no assurance that current or new government laws and
regulations, or the application of existing laws and regulations, will not
subject us to significant liabilities, significantly dampen growth in Internet
usage, prevent us from obtaining distribution for our television programming,
prevent us from offering certain Internet content or services or otherwise have
a material adverse effect on our business, prospects, financial condition and
operating results.
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<PAGE> 19
ITEM 2. PROPERTIES
We lease approximately 109,000 square feet of office and studio space
in various facilities in San Francisco, California, that house our principal
administrative, finance, sales, marketing, Internet and television production
operations. In addition, we lease approximately 19,000 square feet of office
space in Bridgewater, New Jersey, that is used primarily by technology
personnel, and approximately 9,000 square feet of office space in New York City,
that is used primarily by sales personnel. We also have short term operating
leases in Irvine, California, Cambridge, Massachusetts and Chicago, Illinois.
Our San Francisco headquarters facility and television production
studio is approximately 54,000 square feet and is leased through December 31,
2004, with a five year renewal option. Our additional San Francisco offices are
located in two buildings under three leases, ranging in size from 11,000 to
32,000 square feet and expire between January 2001 and September 2004. In June
1998, we assigned a lease of approximately 97,000 square feet to snap, however,
we remain primarily liable under the terms of the lease. We believe that the
general condition of our leased real estate is good and that our facilities are
generally suitable for the purposes for which they are being used. We anticipate
that we will be required to lease additional facilities during 1999 to
accommodate anticipated growth.
ITEM 3. LEGAL PROCEEDINGS
In November 1998, Snap Technologies commenced an action against us in
the U.S. District Court for the Northern District of California alleging
trademark infringement and related claims arising from the name of the snap,
portal service. The plaintiffs seek injunctive relief and unspecified damages.
This proceeding is in its initial stages. We intend to defend this case
vigorously, but we cannot assure you that the name of the snap portal service
will be able to continue or on what terms it will be able to continue.
We are from time to time a party to other legal proceedings that arise
in the ordinary course of business. There is no pending or threatened legal
proceeding to which we are a party that, in our opinion, is likely to have a
material adverse effect on our business, prospects, financial condition and
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market ("Nasdaq")
under the symbol "CNET."
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On July 2, 1996, we completed our initial public offering (the "IPO").
The following table sets forth the ranges of high and low trading prices of the
common stock for the quarterly periods indicated, as reported by Nasdaq. The
prices in the table have been adjusted to reflect a 2-for-1 split of our common
stock that was distributed on March 8, 1999 in the form of a stock dividend to
holders of our common stock as of February 22, 1999. The prices in the table
have not been adjusted to reflect the May 1999 Split.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Year ended December 31, 1996:
Third quarter $ 10.25 $ 6.00
Fourth quarter $ 14.50 $ 7.09
Year ended December 31, 1997:
First quarter $ 17.88 $ 9.38
Second quarter $ 17.81 $ 7.88
Third quarter $ 23.25 $ 12.13
Fourth quarter $ 19.88 $ 9.66
Year ended December 31, 1998:
First quarter $ 20.07 $ 11.69
Second quarter $ 35.50 $ 12.63
Third quarter $ 37.00 $ 15.50
Fourth quarter $ 33.00 $ 14.50
</TABLE>
At March 12, 1999, the closing price for our common stock as reported
by Nasdaq, was $86.25 (this number has not been adjusted to reflect the May 1999
Split), and the approximate number of holders of record of the Company's common
stock was 226.
We have never declared or paid a cash dividend on our common stock. We
intend to retain any earnings to cover operating losses and working capital
fluctuations and to fund capital expenditures and expansion. We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The financial data and operating
information do not purport to indicate results of operations as of any future
date or for any future period. The financial data and operating information is
derived from our consolidated financial statements and should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
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(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenues $ 56,432 $ 33,640 $ 14,830 $ 3,500 --
Gross profit (deficit) 26,400 6,923 (503) (2,133) --
Total operating expenses* 23,870 41,060 15,032 6,337 2,772
Operating income (loss) 2,530 (34,138) (15,535) (8,470) (2,772)
Total other income (expense) 70 9,410 (1,413) (137) (54)
Net income (loss) 2,600 (24,728) (16,949) (8,607) (2,827)
Basic net income (loss) per share $ 0.08 $( 0.91) $( 1.06) $( 0.47) $( 0.19)
Diluted net income (loss) per share $ 0.07 $( 0.91) $( 1.06) $( 0.47) $( 0.19)
Shares used in basic per share calculation 31,933 27,224 15,928 18,432 14,907
Shares used in diluted per share calculation 34,853 27,224 15,928 18,432 14,907
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 51,534 $ 22,554 $ 20,156 $ 703 $ 1,224
Working capital 59,787 19,431 20,223 719 871
Total assets 88,354 58,262 39,842 4,657 1,609
Non-current portion of long-term debt 569 2,612 281 467 --
Stockholders' equity $ 76,603 $ 40,643 $ 33,098 $ 2,799 $ 1,192
</TABLE>
*Operating expenses included unusual items consisting of an expense reversal of
$922,000 in 1998 related to a real estate reserve and expenses of $9.0 million
in 1997 related to warrant compensation expense of $7.0 million, a real estate
reserve and a write-off of certain domain names.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our revenues, cost of revenues and operating expenses have grown
substantially and we earned net income of $2.6 million in 1998 and incurred net
losses of $24.7 million and $16.9 million in 1997 and 1996, respectively. The
losses in 1997 and 1996 reflected substantial expenditures to develop and launch
our various Internet channels and television programs. In addition, newly
launched services required a certain period of growth before they began to
achieve adequate revenues to support their operation. The increase in television
programming and Internet channels has also required increased sales and
marketing expenses as well as increased general and administrative costs. As the
audience for our Internet channels and television programs grows we believe that
we will be able to attract additional advertising customers and increased
advertising revenues.
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Results of Operations
Revenues
Total Revenues. Total revenues were $56.4 million, $33.6 million and
$14.8 million for 1998, 1997 and 1996, respectively.
Television Revenues. Revenues attributable to television operations
were $7.1 million, $6.9 million and $4.7 million for 1998, 1997 and 1996,
respectively. From April 1995 through June 1996, television revenues were
derived primarily from the sale of advertising during our CNET Central
television program, which was carried nationally on USA Networks and The Sci-Fi
Channel pursuant to an agreement with USA Networks. Effective July 1, 1996, we
amended our agreement, whereby USA Networks licensed the right to carry the
Digital Domain, a two hour programming block which included CNET Central, The
New Edge and The Web, 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, we entered into an agreement for an
additional year of programming with USA Networks beginning July 1, 1998. The
agreement added a fourth program to the Digital Domain called Cool Tech and
decreased The Web from 60 minutes to 30 minutes. Revenues are limited to the
costs of production, subject to a maximum of $5.9 million.
In August 1996, we entered into an agreement with Golden Gate
Productions, L.P. ("GGP"), whereby we produce a television program, TV.com,
which was exclusively distributed by GGP. Revenue from the distribution of
TV.com was first used to offset costs of distribution and production, with any
excess being shared equally by us and GGP. In August 1997, the assets of GGP
were acquired by a third party, Trans World International ("TWI") who has agreed
to distribute the program under the same terms as the original GGP agreement.
Beginning March 1, 1998, we assumed responsibility for the sale of
advertisements on TV.com and will pay a distribution fee to TWI.
Television revenues increased slightly from 1997 to 1998 primarily due
to the contractual increase with USA Networks for the additional year of
television programming that commenced July 1, 1998. The increase in television
revenues of $2.2 million from 1996 to 1997 was primarily related to twelve
months of distribution of the Digital Domain and TV.com during 1997 as compared
to six months of distribution for the Digital Domain in 1998 and three months of
distribution of TV.com in 1996.
Internet Revenues. Revenues attributable to our Internet operations
were $49.4 million, $26.7 million and $10.1 million for 1998, 1997 and 1996,
respectively. Internet revenues consist primarily of revenues derived from the
sale of advertisements on pages delivered to users of our Internet network.
Advertising programs are generally delivered on either an "impression" based
program or a "performance" based program. An impression based program earns
revenues when an advertisement is delivered to a user of our Internet network. A
performance based program earns revenues when a user of our Internet network
responds to an advertisement by linking to an
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advertisers Internet network. Advertising rates vary depending upon whether a
program is impression or performance based, where advertisements are placed and
the amount and length of the advertiser's commitment. Advertising revenues are
recognized in the period in which the advertisements are delivered. Our ability
to sustain or increase revenues for Internet advertising will depend on numerous
factors, which include, but are not limited to, our ability to increase our
inventory of delivered Internet pages on which advertisements can be displayed
and our ability to maintain or increase advertising rates. In the fourth quarter
of 1998 CNET began generating revenue from lead-based compensation from its
shopping services.
The increases in revenues of $22.7 million from 1997 to 1998 and $16.6
million from 1996 to 1997 was primarily attributable to increased pages
delivered and increased advertisements sold on our network. Average daily pages
delivered in 1998 approximated 6.9 million, an increase of 60% over 4.3 million
average daily pages in 1997. The increased traffic from 1997 to 1998 primarily
relates to an increase in the number of users of our network. A portion of the
increased traffic was related to the addition of Shopper.Com in May, 1998.
Average daily pages delivered on our Internet channels during 1997 approximated
4.3 million pages, an increase of 187% over 1.5 million average daily pages in
1996. The increase in pages delivered was attributable to a full year of
operations for Search.com, News.com, Download.com, and Gamecenter.com, which ran
for 10 months, 4 months, 3 months and 2 months, respectively, in 1996, as well
as increased traffic growth on all of our Internet channels during 1997. In
addition, Internet revenues include non-advertising revenues of $2.7 million,
$5.1 million and $144,000 for 1998, 1997 and 1996 respectively. Non-advertising
revenues include fees earned from Company sponsored trade shows, electronic
commerce revenues, content licensing revenues, technology licensing and
consulting.
During 1998, 1997 and 1996, approximately $3.4 million, $905,000 and
$760,000, respectively, of Internet revenues were derived from barter
transactions whereby we delivered advertisements on our Internet channels in
exchange for advertisements on the Internet sites of other companies. These
revenues and marketing expenses were recognized at the fair value of the
advertisements received and delivered, and the corresponding revenues and
marketing expenses were recognized when the advertisements were delivered.
Revenue Mix. Television operations accounted for 13%, 21% and 32% and
Internet operations accounted for 87%, 79% and 68% of total revenues for 1998,
1997 and 1996, respectively. We expect to experience fluctuations in television
and Internet revenues in the future that may be dependent on many factors,
including demand for our Internet network and television programming, and our
ability to develop, market and introduce new and enhanced Internet content and
television programming.
Significant Customers. USA Networks accounted for approximately 10%,
16% and 19% of total revenues for 1998, 1997 and 1996 respectively, and
Microsoft Corporation accounted for 10% and 12% of total revenues for 1997 and
1996, respectively. There can be no assurance that any of these customers will
continue to account for a significant portion of total revenues in any future
period.
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<PAGE> 24
Cost of Revenues
Total Cost of Revenues. Total cost of revenues were $30.0 million,
$26.7 million and $15.3 million for 1998, 1997 and 1996, respectively. Cost of
revenues includes the costs associated with the production and delivery of our
television programming and the production of our Internet channels. The
principal elements of cost of revenues for our television programming have been
the production costs of our television programs, which primarily consist of
payroll and related expenses for the editorial and production staff, and costs
for facilities and equipment. In addition, prior to June 30, 1996, cost of
revenues for our television programming included the fee payable to USA Networks
under our agreement with USA Networks as then in effect. The principal elements
of cost of revenues for our Internet operations 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 revenues for television
programming were $6.7 million, $6.9 million and $6.2 million, or 95%, 100% and
132% of the related revenues, for 1998, 1997 and 1996, respectively.
Cost of revenues for television programming in 1998 were comparable to
1997. The increase in cost of revenues for television of $700,000 from 1996 to
1997 was primarily related to $1.6 million of additional production costs for
twelve months of production of the Digital Domain and TV.com in 1997 as compared
to six months of production for the Digital Domain in 1996 and three months of
production of TV.com in 1996. The increase in production costs were offset by
$869,000 in fees payable to USA Networks in 1996 under the Company's initial
agreement with USA Networks.
Cost of Internet Revenues. Cost of revenues for Internet operations
were $23.3 million, $19.8 million and $9.1 million or 47%, 74%, and 90% of the
related revenues for 1998, 1997 and 1996, respectively.
The increase in cost of revenues for Internet operations of $3.5
million from 1997 to 1998 was primarily attributable to $2.3 million in costs
associated with an Internet network that was launched in November 1997,
approximately $1.0 million in additional costs associated with Company sponsored
trade shows and increases of approximately $4.0 million related to increased
personnel, facilities and other costs associated with growing its Internet
network. The increases in Internet cost of revenues from 1997 to 1998 were
offset by cost savings resulting from the change in percentage ownership of snap
and BuyDirect which resulted in a reduction of costs of $3.8 million.
The increase in cost of revenues for Internet operations of $10.7
million from 1996 to 1997 was primarily attributable to costs associated with
Internet channels which operated for a full year in 1997, as compared to a
partial year during 1996, and channels which launched in 1997. Channels that
were operational for a partial year in 1996 include CNET.Search.com,
CNET.News.com, CNET.Download.com, CNET.Gamecenter.com, and Buydirect.com, which
were launched in March 1996, September 1996, October 1996, November 1996 and
November 1996, respectively. Channels which launched during 1997 include snap
and Computers.com,
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<PAGE> 25
which launched in September 1997 and November 1997, respectively. The Company
anticipates increases in cost of revenues for Internet production in the future.
Cost of Revenues Mix. Cost of television revenues accounted for 22%,
26% and 41% and cost of Internet revenues accounted for 78%, 74% and 59% of
total cost of revenues for 1998, 1997 and 1996, respectively. This mix of cost
of revenues was impacted by more rapid growth of Internet operations in each of
1998 and 1997. We anticipate that our cost of Internet revenues will continue to
account for an increasing percentage of total cost of revenues in future
periods.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll, sales
commissions, personnel related expenses, consulting fees and advertising
expenses. Sales and marketing expenses were $14.5 million, $11.6 million and
$7.8 million for 1998, 1997, and 1996, respectively. Sales and marketing expense
represented 26%, 34% and 53% of total revenues in 1998, 1997 and 1996,
respectively.
The increase in sales and marketing expenses of $2.9 million from 1997
to 1998 related primarily to increased advertising expenditures of $2.8 million
and increases of approximately $2.2 million in sales and marketing personnel and
their related expenses. The increases were partially offset by a reduction in
sales and marketing expenses resulting from the change in percentage ownership
of snap and BuyDirect, effective December 31, 1997 and March 31, 1998,
respectively. Sales and marketing expenses related to snap and BuyDirect totaled
approximately $2.9 million in 1997.
The increase in sales and marketing expenses of $3.8 million from 1996
to 1997, was attributable to $2.3 million in expenses related to snap, which
were primarily related to advertising costs, and to increased salaries and
related expenses due to an increase in the size of our sales force. We expect
sales and marketing expenses to increase in the future as we may pursue a more
aggressive brand building strategy and as we continue to expand our sales force.
Development
Development expenses include expenses for the development and
production of new Internet channels and research and development of new or
improved technologies, including 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 channel are no longer
recognized as development expenses when the new channel begins generating
revenue.
Development expenses were $3.5 million, $13.6 million and $3.4 million
for 1998, 1997 and 1996, respectively. Development expenses represented 6%, 41%
and 23% of total revenues for 1998, 1997 and 1996, respectively.
During 1997 we incurred expenses of $8.3 million for the development of
snap and $3.8 million for the development of Computers.com. Both services were
launched during the fourth
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quarter of 1997. During 1998, our development efforts were primarily focused on
enhancing our existing Internet network's functionality and performance. The
decrease in development expenses from 1997 to 1998 of $10.1 million relates
primarily to the completion and launch of the snap and Computers.com sites in
late 1997.
The increase in development expenses of $10.2 million from 1996 to 1997
was primarily attributable to the development expenses for snap and
Computers.com incurred in 1997. The increases in development expenses
attributable to snap and Computers.com in 1997 were partially offset by expenses
incurred to develop and launch channels during 1996, such as Download.com and
Buydirect.com.
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
$6.8 million, $6.8 million and $3.8 million for 1998, 1997 and 1996
respectively. General and administrative costs represented 12%, 20% and 25% of
total revenues for 1998, 1997 and 1996, respectively.
General and administrative costs for 1998 were comparable to 1997. The
increase in general and administrative expense of $3.1 million from 1996 to 1997
was primarily attributable to increased salaries and related expenses and other
costs related to facilitating our growth during 1997.
Unusual Items
In the first quarter of 1997, we incurred a one-time, non-cash expense
of $7.0 million related to an amendment to the warrant agreement with USA
Networks whereby we 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 three of our television programs through June 30, 1998.
In the fourth quarter of 1997, we recognized an expense of $1.3 million
related to reorganizing our real estate needs as we had determined that based on
existing and planned headcount we had a significant excess of leased real
estate. Also in the fourth quarter of 1997, we recognized an expense of $700,000
relating to a write-off of Internet domain names that we determined that we
would not use. Through the fourth quarter of 1998, we had incurred expenses of
approximately $379,000 related to reorganizing our real estate needs. During the
fourth quarter of 1998 we completed our planning for 1999 and determined that,
due to expected growth and potential acquisitions, we no longer had excess
leased real estate and would no longer incur expenses related to the
reorganization. We recorded a reversal of the remaining real estate reserve of
$922,000 during the fourth quarter of 1998.
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Other Income (Expense)
Total other income (expense) was $70,000, $9.4 million and ($1.4)
million for 1998, 1997 and 1996, respectively. Other income (expense) consists
of equity losses, gains on the sales of equity investments and net interest
income and interest expense. Equity losses include our interest in snap, our
minority interest in Vignette and our interest in a joint venture E! Online.
Pursuant to an agreement in June 1998, between NBC Multimedia and us, snap, was
formed as a limited liability company, whereby both companies share control. We
have recorded snap's financial results using the equity method of accounting
effective January 1, 1998.
Equity losses were $11.8 million, $2.2 million and $1.9 million for
1998, 1997 and 1996, respectively. All of the equity losses in 1998 were related
to snap. The equity losses in 1997 were attributable to $1.8 million related to
the E! Online joint venture and $417,000 related to our Vignette investment. All
of the equity losses in 1996 related to E! Online.
Gains on the sale of equity investments were $10.5 million and $11.0
million for 1998 and 1997, respectively. The gain on sales of equity investment
in 1998 were primarily attributable to a gain related to the sale of a portion
of our Vignette investment of $9.8 million. The gain on sale of equity
investments in 1997 was related to the sale of all our ownership in E! Online.
Income Taxes
We had net income for 1998 and a net loss for each of 1997 and 1996. As
of December 31, 1998, we had approximately $61 million of net operating loss
carryforwards for federal income tax purposes, which expire between 2008 and
2018. We also have approximately $24 million of net operating loss carryforwards
for state income tax purposes, which expire between 1999 and 2003. We
experienced an "ownership change" as defined by Section 382 of the Internal
Revenue Code in October 1994. As a result of the ownership change, our use of
the federal and state net operating loss carryforwards is subject to limitation.
The ability to use net operating loss carryforwards may be further limited
should we experience another "ownership change" as defined by Section 382 of the
Internal Revenue Code. See Note 3 of Notes to Consolidated Financial Statements.
Income (Loss)
We recorded net income of $2.6 million or $0.7 per diluted share for
1998, compared to net losses of $24.7 million or $0.91 per share and $16.9
million or $1.06 per share for 1997 and 1996, respectively. Net income was $2.6
million for 1998 as compared to a net loss of $24.7 million for 1997. The change
from 1997 to 1998 was attributable to an increase in total revenues of $22.8
million, a reduction of unusual items expense of approximately $8.1 million, a
reduction in other income of $9.3 million and increases to cost of revenues and
operating expenses (excluding unusual items) of $4.0 million. The net loss for
each of the years 1997 and 1996 was primarily attributable to cost of revenues
and operating expenses in excess of total revenues. The increase in net loss of
$7.8 million from 1996 to 1997 was primarily attributable to increased cost of
revenues of $11.4 million, increased sales and marketing expenses of $3.8
million,
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increased development costs of $10.2 million and increased general and
administrative costs of $3.1 million, totaling $28.5 million in increased
expenses, which were offset by an increase of $18.8 million in total revenues.
Liquidity and Capital Resources
As of December 31, 1998, we had cash and cash equivalents of $51.5
million compared to $22.6 million in 1997. Cash provided by operating activities
of $9.2 million in 1998 was primarily due to earnings of $2.6 million and
depreciation, amortization and the amortization of program costs of $12.1
million. Net cash used in operating activities of $5.9 million and $8.9 million
for 1997 and 1996 respectively, were primarily attributable to net losses in
such periods. Net cash used in investing activities of $11.0 million, $19.7
million and $18.5 million for 1998, 1997 and 1996, respectively, were primarily
attributable to purchases of equipment and programming assets. Cash flows
provided by financing activities of $30.8 million in 1998 consisted primarily of
the issuance of common stock through a private placement in June of 1998, and
the issuance of common stock through the exercise of warrants, our stock option
plans and our Employee Stock Purchase Plan. Cash flows provided by financing
activities in 1997 consisted primarily of proceeds from the issuance of common
stock in private placements. Cash flows provided by financing activities in 1996
consisted primarily of proceeds from our IPO, the private sale of common stock
to Intel and the issuance of preferred stock. We believe that existing funds
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next 12 months and on a long-term basis.
As of December 31, 1998 we had obligations outstanding under a note
payable and under certain capital leases of $1.7 million. Such obligations were
incurred to finance equipment purchases and are payable through May 2008.
On March 31, 1998, we contributed our ownership in BuyDirect and net
assets related to BuyDirect of approximately $744,000, to a new venture that was
separately owned by BuyDirect's existing management group. Prior to the
transaction, BuyDirect was a wholly owned division of the Company that
distributed electronic software. As part of the transaction, we received a 19%
ownership interest in the new venture, BuyDirect.com. We used the cost method of
accounting for the investment, effective April 1, 1998. Prior to March 31, 1998
the operating results of BuyDirect were included in our consolidated results.
BuyDirect.com recently entered into a merger agreement with beyond.com. This
merger will result in our owning approximately 800,000 shares of beyond.com.
In May 1998 we acquired U.Vision Inc. In the acquisition, we issued
1,089,930 shares of common stock in exchange for all of the outstanding shares
of U.Vision. U.Vision owned and operated ComputerESP, a pricing and availability
engine for buying computer products on the Internet. Subsequent to the merger,
we relaunched ComputerESP as Shopper.com. We recorded this transaction using the
pooling-of-interests accounting method and recorded the financial results of
U.Vision in our consolidated financial statements effective April 1, 1998. The
financial statements prior to April 1, 1998 were not adjusted for the financial
results of U.Vision as the impact was not material.
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In June 1998 we entered into an agreement with NBC Multimedia, Inc.
("NBC Multimedia") to form a limited liability company to operate the snap
Internet portal service. The newly formed company was called Snap! LLC. Prior to
the agreement, snap was a wholly owned division of the Company. Pursuant to the
agreement, we contributed to Snap! LLC substantially all of the assets used
exclusively in the operation of the snap service. Initially, we own 81% of Snap!
LLC and NBC Multimedia owns 19%. However, NBC Multimedia has an option to
increase its ownership to 60%. Effective January 1, 1998, we recorded snap's
financial results using the equity method of accounting, due to certain
contractual control provisions. Prior to January 1, 1998, the operating results
of snap were included in our consolidated results.
In June 1998 we completed the sale of 1,625,600 shares of common stock
to National Broadcasting Company, Inc. ("NBC"). The aggregate purchase price for
the shares sold was $26.2 million.
On February 9, 1999, we announced an agreement with American Online,
Inc. whereby we will become the exclusive provider of computer hardware and
software buying guides on the AOL service and on AOL.com, as well as the primary
provider of computer buying guides on CompuServe, Digital City, AOL Hometown and
certain AOL international properties. Under the terms of the agreement, AOL will
receive guaranteed payments from us of $14.5 million over approximately 27
months. The expected source of funding for these payments will be cash flows
from our operations.
On February 16, 1999, we acquired NetVentures, Inc. in a
stock-for-stock exchange valued at approximately $12.5 million. NetVentures owns
and operates ShopBuilder (www.shopbuilder.com), an online store-creation system.
On February 19, 1999, we acquired AuctionGate Interactive, Inc. in a
stock-for-stock exchange valued at approximately $6.5 million. AuctionGate owns
and operates AuctionGate.com, an auction site specializing in computer products.
On February 26, 1999, we acquired the assets of Winfiles.com, a leading
software downloading service, from Jenesys LLC for a total purchase price of
$11.5 million, payable in cash in two installments of $5.75 million. The first
installment was paid on February 26, 1999 and the second installment will be
paid on August 26, 2000. The expected source of funding for this payment is cash
flows from our operations.
On March 8, 1999, we effected a 2-for-1 split of our common stock that
was distributed in the form of a stock dividend to our common stock holders as
of February 22, 1999.
On March 8, 1999, we also completed a private placement with gross
proceeds of $172.9 million of our 5% convertible subordinated notes. The
Purchase Agreement relating to the notes, executed several days prior to the
completion of the private placement, and the Final Offering Memorandum relating
to the notes, finalized several days prior to the completion of the private
placement, constituted an irrevocable obligation for the registrant to issue
and sell the notes and for the purchasers to buy the notes. The placement was
subject to certain fees and expenses. The notes are due March 1, 2006, and we
pay interest on March 1 and September 1 of each year. The notes are convertible
beginning June 7, 1999, at the option of the noteholder, into shares of our
common stock at a conversion price of $37.40625 per share. The conversion price
equaled 122% of the value of our common stock as of the date we and the
purchasers became irrevocably obligated to complete the transaction. The
conversion price of the notes will be adjusted if certain events that are
described in the terms of the notes occur. We may repurchase or redeem the
notes at our option at any time beginning
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March 6, 2002 at the following prices, plus accrued and unpaid interest and
liquidated damages, if any,
<TABLE>
<CAPTION>
Year Redemption Price Year Redemption Price
<S> <C> <C> <C>
2002 102.857% 2004 101.429%
2003 102.143% 2005 100.714%
</TABLE>
A noteholder may require us to repurchase the notes if we undergo a
change of control, as described in the terms of the notes, or if our common
stock is no longer listed for trading on Nasdaq or another stock exchange. If
one of these events occurs and the noteholder requires us to repurchase the
notes, we will repurchase the notes at a purchase price equal to the face amount
of the notes, plus accrued and unpaid interest and liquidated damages, if any.
In connection with the private placement, we also agreed to file a
registration statement with the Securities and Exchange Commission so that the
noteholders, and the holders of shares of our common stock issued upon the
conversion of the notes, will be able to resell the notes and the common stock.
If we had failed to file the registration statement by May 7, 1999, or if we
fail to cause the registration statement to become effective by August 5, 1999
or suspend the use of the related prospectus in excess of 60 days within any
12-month period, we will be required to pay additional interest on the notes.
This additional interest is referred to as liquidated damages. We will pay an
additional .25% of interest on the notes for the first 90 days of any such
failure, and pay an additional .50% of interest on the notes for the period of
time that our failure exceeds 90 days.
The notes are our general, unsecured obligations, subordinate in right
of payment to all of our existing and future senior debt, as defined in the
terms of the notes. The terms of the notes do not limit our ability to incur
other indebtedness and we are not required to make periodic payments on the
principal of the notes except as described above.
On March 22, 1999, we acquired KillerApp Corporation in a
stock-for-stock exchange valued at approximately $46 million. KillerApp owns and
operates KillerApp.com, an online comparison shopping service for computer and
consumer electronics products.
Seasonality
We believe 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
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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 our business, prospects, financial condition and operating
results.
We may also experience seasonality in our operating results,
particularly in connection with our shopping services which may reflect seasonal
trends in the retail industry. The level of consumer retail spending generally
decreases in the first and third calendar quarters. Advertising expenditures,
which account for substantially all of our revenues, are also subject to
seasonal fluctuations and are influenced by consumer spending patterns.
Year 2000 Compliance
We are aware of the issues associated with the programming code and
embedded technology in existing systems as the year 2000 approaches. The "Year
2000 Issue" arises from the potential for computers to fail or operate
incorrectly because their programs incorrectly interpret the two digit date
fields "00" as 1900 or some other year, rather than the year 2000. The year 2000
issue creates risk for us from unforeseen problems in our own computer systems
and from third parties, including customers, vendors and manufacturers, with
whom we deal. Failures of our and/or third parties' computer systems could
result in an interruption in, or a failure of certain normal business activities
or operations. Such failures could materially and adversely affect our business,
prospects, financial condition and operating results.
To mitigate this risk, we have established a formal year 2000 program
to oversee and coordinate the assessment, remediation, testing and reporting
activities related to this issue. We are currently in the assessment phase of
our year 2000 program. As part of this assessment, we will review the following
systems to determine if they are year 2000 compliant:
o our application systems (financial systems, various
custom-developed business applications)
o technology infrastructure (networks, servers, desktop equipment)
o facilities (security systems, fire alarm systems)
o vendors/partners and products.
This review will include:
o the collection of documentation from software and hardware
manufacturers
o the detailed review of programming code for custom applications
o the physical testing of desktop equipment using software designed
to test for year 2000 compliance
o the examination of key vendors'/partners' year 2000 programs
o the ongoing testing of our products as part of normal quality
assurance activities.
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<PAGE> 32
We anticipate that we will complete the assessment and remediation
phase and begin the testing phase of our year 2000 program by the third quarter
of 1999. We have not made estimates for the costs associated with completing our
year 2000 program, but will do so after completion of the assessment phase of
the project. Costs incurred to date, including costs of personnel, have not been
material. We can offer no assurance that we will not experience serious
unanticipated negative consequences and/or additional material costs caused by
undetected errors or defects in the technology used in our internal systems, or
by failures of our vendors/partners to address their year 2000 issues in a
timely and effective manner.
Should miscalculations or other operational errors occur as a result of
the year 2000 issue, we or the parties on which we depend may be unable to
produce reliable information or to process routine transactions. Furthermore, in
the worst case, we or the parties on which we depend may be incapable of
conducting critical business activities which include, but are not limited to,
the production and delivery of our Internet channels, invoicing customers and
paying vendors, which could have a material adverse effect on our business,
prospects, financial condition and operating results.
CAUTIONARY STATEMENT REGARDING FACTORS THAT MAY AFFECT OUR BUSINESS AND
OUR FUTURE RESULTS
Our disclosure and analysis in this report contains "forward-looking
statements". Forward-looking statements are any statements about our future that
are not statements of historical fact. Examples of forward-looking statements
include projections of earnings, revenues or other financial items, statements
of the plans and objectives of management for future operations, statements
concerning proposed new products or services, statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, you can identify these statements by the
use of words such as "may," "will," "expects," "should," believes," "predicts,"
"plans," "anticipates," "estimates," "potential," "continue" or the negative of
these terms, or any other words of similar meaning.
These statements are only predictions. Any or all of our
forward-looking statements in this report and in any other public statements we
make may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion in this report will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed.
Actual events or results may differ materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q and 8-K reports to the SEC. Also note that we provide the
following cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our businesses. These are factors that we think could
cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here could also adversely affect the
Company. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
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WE HAVE A LIMITED OPERATING HISTORY AND AN ACCUMULATED DEFICIT, WHICH
MAKES YOUR EVALUATION OF US DIFFICULT AND AFFECTS MANY ASPECTS OF OUR BUSINESS.
We have a limited operating history upon which you can evaluate us. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in developing industries, particularly
companies in the relatively new and rapidly evolving market for Internet
products, content and services. These risks for us include, but are not limited
to:
o an evolving and unpredictable business model
o uncertain acceptance of new services including CNET Shopper.com
o competition
o management of growth
We cannot assure you that we will succeed in addressing such risks. If we fail
to do so, our revenues and operating results could be materially reduced.
Additionally, our limited operating history and the emerging nature of
the markets in which we compete makes the prediction of future operating results
difficult or impossible. We cannot assure you that our revenues will increase or
even continue at their current level or that we will maintain profitability or
generate cash from operations in future periods. In addition, interest that we
pay on our 5% convertible subordinated notes and costs of our acquisitions,
including amortization of goodwill and other purchased intangibles and ongoing
operating expenses, may further affect our operating results. From our inception
until the third quarter of 1998, we incurred significant losses. As of December
31, 1998 we had an accumulated deficit of $51.2 million. We may incur additional
losses in the future. We expect to incur losses in 1999 as a result of our
recently announced marketing campaign. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as indicating what our future performance will be.
For each of the five years ended December 31, 1998 we did not have
sufficient earnings to cover fixed charges. If we continue to have insufficient
earnings to cover our fixed charges, our financial results could be adversely
affected. For example, if currently available cash and cash generated by
operations is insufficient to satisfy our fixed charges or our liquidity
requirements, we may be required to sell additional equity or debt securities.
The sale of additional equity or debt securities that are convertible into
equity would result in additional dilution to our stockholders. There can be no
assurance that financing will be available in amounts or on terms that we find
acceptable.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, AND
MAY NOT BE ABLE TO ADJUST OUR SPENDING IN TIME TO COMPENSATE FOR ANY UNEXPECTED
REVENUE SHORTFALL. Our quarterly operating results may fluctuate significantly
in the future as a result of a variety of factors, many of which are outside our
control. We may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to our planned expenditures could materially reduce our
operating results and adversely affect our financial condition.
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Factors that may adversely affect our quarterly operating results
attributable to our Internet operations include, among others:
o demand for Internet advertising
o the addition or loss of advertisers, and the advertising
budgeting cycles of individual advertisers
o the level of traffic on our network of Internet channels
o the amount and timing of capital expenditures and other costs,
including marketing costs, relating to our Internet operations
o competition
o our ability to manage effectively our development of new business
segments and markets
o our ability to successfully manage the integration of operations
and technology of acquisitions and other business combinations
o our ability to upgrade and develop our systems and infrastructure
o technical difficulties, system downtime or Internet brownouts
o governmental regulation and taxation policies
o general economic conditions and economic conditions specific to
the Internet and Internet media
Quarterly operating results attributable to our television operations
are generally dependent on the costs we incur in producing our television
programming. If the costs of producing television programs exceed licensing and
distribution revenues, we could incur losses with respect to our television
operations. As a result of our strategy to cross market our television and
Internet operations, a decrease in the number of viewers of our television
programs may lead to a reduction in use of our Internet channels, which would
materially reduce our revenues and adversely affect our financial condition.
Due to all of the foregoing factors, it is likely that our operating
results may fall below our expectations or the expectations of securities
analysts or investors in some future quarter. If this happens, the trading price
of our common stock would likely be materially and adversely affected.
OUR INTERNET CONTENT AND SERVICES MAY NOT BE ACCEPTED, WHICH COULD
ADVERSELY AFFECT OUR PROFITABILITY. Our future success depends upon our ability
to deliver original and compelling Internet content and services that attract
and retain users. We cannot assure you that our content and services will be
attractive to a sufficient number of Internet users to generate revenues
sufficient for us to sustain operations. If we are unable to develop Internet
content and services that allow us to attract, retain and expand a loyal user
base that is attractive to advertisers and sellers of technology products, we
will be unable to generate revenue.
OUR TELEVISION PROGRAMMING MAY NOT BE SUCCESSFUL, WHICH COULD ADVERSELY
AFFECT OUR PROFITABILITY. We cannot assure you that television broadcasters,
cable networks or their viewers will accept our television programming. The
successful development and production of television programming is subject to
numerous uncertainties, including the ability to:
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o anticipate and successfully respond to rapidly changing consumer
tastes and preferences
o obtain favorable distribution rights
o fund new program development
o attract and retain qualified producers, writers, technical
personnel and television hosts
We may be unable to increase or sustain our revenues if we fail to develop
television programming that allows us to attract, retain and expand a loyal
television audience, or if we fail to retain or develop distribution channels
for our television programming.
OUR FAILURE TO COMPETE SUCCESSFULLY COULD ADVERSELY AFFECT OUR
PROSPECTS AND FINANCIAL RESULTS. The market for Internet content and services is
new, intensely competitive and rapidly evolving. It is not difficult to enter
this market and current and new competitors can launch new Internet sites at
relatively low cost. We cannot assure you that we will compete successfully with
current or future competitors. If we do not compete successfully, our financial
results may be adversely affected.
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD RESULT IN OUR INABILITY
TO SUPPORT AND MAINTAIN OUR OPERATIONS. We have rapidly and significantly
expanded our operations and anticipate that further expansion of our operations
may be required in order to address potential market opportunities. This rapid
growth has placed, and we expect it to continue to place, a significant strain
on our management, operational and financial resources. We cannot assure you
that:
o our current personnel, systems, procedures and controls will be
adequate to support our future operations
o management will be able to identify, hire, train, motivate or
manage required personnel
o management will be able to successfully identify and exploit
existing and potential market opportunities
IF WE EXPERIENCE DIFFICULTIES WITH OUR SYSTEM DEVELOPMENT AND
OPERATIONS, WE COULD EXPERIENCE A DECREASE IN REVENUES. Our Internet revenues
consist primarily of revenues derived from the sale of advertisements and other
fees from sellers of technology products on our Internet channels, in particular
from arrangements with our advertising customers that provide for a guaranteed
number of impressions. If our Internet channels are unavailable as a result of a
system interruption we may be unable to deliver the number of impressions
guaranteed by these agreements. During 1998, we experienced two power
interruptions that resulted in the unavailability of our Internet channels and
services for portions of two days. We cannot assure you that we will be able to
accurately project the rate or timing of increases, if any, in the use of our
Internet channels or will be able to, in a timely manner, effectively upgrade
and expand our systems.
OUR FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED IF WE FAIL TO SUSTAIN
OUR ADVERTISING REVENUES. Our revenues through December 31, 1998 were derived
primarily from the sale of advertising and other fees from sellers of technology
products on our Internet
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channels and from advertising and license fees from producing our television
programs. Most of our advertising contracts can be terminated by the customer at
any time on very short notice. If we lose advertising customers, fail to attract
new customers or are forced to reduce advertising rates in order to retain or
attract customers, our revenues and financial condition will be materially and
adversely affected.
IF THE INTERNET IS NOT ACCEPTED AS AN ADVERTISING MEDIUM WE COULD
EXPERIENCE A DECREASE IN REVENUES. Our Internet advertising customers and
potential customers have only limited experience with the Internet as an
advertising medium and neither they nor their advertising agencies have devoted
a significant portion of their advertising budgets to Internet-based advertising
in the past. In order for us to generate advertising revenues, advertisers and
advertising agencies must direct a significant portion of their budgets to the
Internet and, specifically, to our Internet sites. Acceptance of the Internet
among advertisers and advertising agencies also depends to a large extent on the
growth of use of the Internet by consumers, which is very uncertain, and on the
acceptance of new methods of conducting business and exchanging information. If
Internet-based advertising is not widely accepted by advertisers and advertising
agencies, our revenues and financial condition will be materially and adversely
affected. In addition, users can purchase software that is designed to block
banner advertisements from appearing on their computer screens as the user
navigates on the Internet. This software is intended to increase the navigation
speed for the user. Our revenues could be materially reduced if this software or
other ad-blocking technology becomes widely-used.
IF OUR BRAND IS NOT ACCEPTED OR MAINTAINED, OUR FINANCIAL RESULTS COULD
BE ADVERSELY AFFECTED. Acceptance of our CNET brand will depend largely on our
success in providing high quality Internet and television programming. If
consumers do not perceive our existing Internet and television content to be of
high quality, or if we introduce new Internet channels or television programs or
enter into new business ventures that are not favorably received by consumers,
we will not be successful in promoting and maintaining our brand. If we are
unable to provide high quality content and services or fail to promote and
maintain our CNET brand, our revenues and financial condition will be materially
and adversely affected. In addition, we expect to incur losses in 1999 as a
result of our recently announced marketing campaign.
INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT
OUR ABILITY TO OPERATE. Our success depends to a large extent on the continued
services of Halsey M. Minor, Shelby W. Bonnie and the other members of our
senior management team. In particular, the loss of the services of Mr. Minor or
Mr. Bonnie, our founders, could have an adverse effect on us due to their
crucial role in our strategic development. Our success is also dependent on our
ability to attract, retain and motivate other officers, key employees and
personnel. We do not have "key person" life insurance policies on any of our
officers or other employees. The production of our Internet and television
content and services requires highly skilled writers and editors and personnel
with sophisticated technical expertise. We have encountered difficulties in
attracting qualified software developers for our Internet channels and related
technologies. If we do not attract, retain and motivate the necessary technical,
managerial, editorial and sales personnel, there could be a material adverse
effect on our business and operating results.
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WE HAVE RISKS ASSOCIATED WITH TELEVISION DISTRIBUTION AND WE ARE
DEPENDENT ON THE NETWORKS THAT CARRY OUR TELEVISION PROGRAMMING, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION. Our television programming is
currently carried on the USA Network and the Sci-Fi Channel, both of which are
owned by USA Networks, pursuant to an agreement that has been extended through
September 30, 1999. We cannot assure you that we will be able to obtain
distribution for our television programming after September 30, 1999. We
recently entered into a three year agreement with NBC providing for our
television programming to be carried primarily on CNBC starting in October 1999,
subject to the closing of the transaction forming NBC Internet, to which we are
a party. We cannot assure you that the NBC Internet transaction will close, and
we therefore cannot assure you that our television programming will be carried
on CNBC starting in October 1999. If the NBC Internet transaction does not close
and we are unable to find an alternative carrier for our television programming,
our brand, revenues and financial condition may be materially and adversely
affected.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE COULD ADVERSELY AFFECT OUR
ABILITY TO OPERATE. Characteristics of the market for Internet products and
services include:
o rapid technological developments
o frequent new product introductions
o evolving industry standards
The emerging character of these products and services and their rapid evolution
requires that we continually improve the performance, features and reliability
of our Internet content, particularly in response to competitive offerings. We
cannot assure you that we will be successful in responding quickly, cost
effectively and sufficiently to these developments. In addition, the widespread
adoption of new Internet technologies or standards could require us to make
substantial expenditures to modify or adapt our Internet channels and services
and could fundamentally affect the character, viability and frequency of
Internet-based advertising. Any of these events could have a material adverse
effect on our financial condition and operating results.
OUR FAILURE TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH THIRD PARTIES
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. We rely on the cooperation of
owners and operators of other Internet sites in connection with the operation of
our Internet channels and services. We cannot assure you that this cooperation
will be available on acceptable commercial terms or at all. Our ability to
develop original and compelling Internet content and service is also dependent
on maintaining relationships with and using products provided by third party
vendors of Internet development tools and technologies, including:
o Macromedia's Shockwave
o Microsoft's ActiveX
o Progressive Networks' RealAudio
o Sun Microsystems' Java
Our ability to advertise on other Internet sites and the willingness of the
owners of these sites to direct users to our Internet channels through hypertext
links are also critical to the success of our Internet operations. If we are
unable to develop and maintain satisfactory relationships with such
35
<PAGE> 38
third parties on acceptable commercial terms, or if our competitors are better
able to capitalize on these relationships, our financial condition and operating
results will be materially and adversely affected.
WE MAY HAVE DIFFICULTIES WITH OUR ACQUISITIONS AND INVESTMENTS, WHICH
COULD ADVERSELY AFFECT OUR GROWTH AND FINANCIAL CONDITION. From time to time, we
consider new business opportunities and ventures, including acquisitions, in a
broad range of areas. Any decision by us to pursue a significant business
expansion or new business opportunity could:
o require us to invest a substantial amount of capital, which could
have a material adverse effect on our financial condition and our
ability to implement our existing business strategy
o require us to issue additional equity interests, which would be
dilutive to our current stockholders
o result in operating losses
o place additional, substantial burdens on our management personnel
and our financial and operational systems
We cannot assure you that we will have sufficient capital to pursue any
investment or acquisition, that we will be able to develop any new Internet
channel or service or other new business venture in a cost effective or timely
manner or that these ventures would be profitable.
WE MAY HAVE DIFFICULTIES WITH OUR BUSINESS COMBINATIONS AND STRATEGIC
ALLIANCES, WHICH COULD ADVERSELY AFFECT OUR GROWTH AND FINANCIAL CONDITION. We
may choose to expand our operations or market presence by entering into:
o agreements
o business combinations
o investments
o joint ventures
o other strategic alliances with third parties
Any transaction will be accompanied by risks, which include, among others:
o the difficulty of assimilating the operations, technology and
personnel of the combined companies
o the potential disruption of our ongoing business
o the possible inability to retain key technical and managerial
personnel
o additional expenses associated with amortization of goodwill and
other purchased intangible assets
o additional operating losses and expenses associated with the
activities and expansion of acquired businesses
o the possible impairment of relationships with existing employees
and advertising customers
36
<PAGE> 39
We cannot assure you that we will be successful in overcoming these risks or any
other problems encountered in connection with any transaction or that any
transaction will be profitable.
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS, AND OTHERS MAY INFRINGE UPON
THOSE RIGHTS, OR THESE RIGHTS MAY BECOME OBSOLETE, ADVERSELY AFFECTING OUR
BUSINESS. We rely on trade secret, trademark and copyright laws to protect our
proprietary technologies and content. We cannot assure you that:
o these laws will provide sufficient protection
o others will not develop technologies or content that are similar
or superior to ours
o third parties will not copy or otherwise obtain and use our
technologies or content without authorization
Any of these events could have a material adverse effect on our business.
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN OUR DOMAIN NAMES, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR ONLINE DIVISION. We currently hold
various Web domain names relating to our brand and sites. The acquisition and
maintenance of domain names generally is regulated by government agencies and
their designees. The regulation of domain names in the United States and in
foreign countries is subject to change. For example, the Internet Corporation
for Assigned Names and Numbers recently selected a number of companies to tap
into Network Solutions, Inc.'s domain name registration system. Network
Solutions was previously the exclusive registrar for the ".com," ".net" and
".org" generic top-level domains. We cannot assure you that we will be able to
acquire or maintain relevant domain names in all countries in which we conduct
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear.
We, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, or infringe upon or otherwise decrease the value of
our trademarks and other proprietary rights. Any inability to acquire or
maintain domain names could have a material adverse effect on our business.
CHANGES IN REGULATIONS COULD ADVERSELY AFFECT THE WAY THAT WE OPERATE.
It is possible that new laws and regulations will be adopted covering issues
relating to the Internet, including:
o privacy
o copyrights
o obscene or indecent communications
o pricing, characteristics and quality of Internet products and
services
The adoption of restrictive laws or regulations could:
o decrease the growth of the Internet
o reduce our revenues
o expose us to significant liabilities
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<PAGE> 40
We cannot be sure what effect any future material noncompliance by us with these
laws and regulations or any material changes in these laws and regulations could
have on our business.
IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW, WE MAY NOT HAVE A
SUFFICIENT BASE OF USERS TO SUPPORT OUR BUSINESS. The rapid growth in the use of
and interest in the Internet is a recent phenomenon. We cannot assure you that
acceptance and use of the Internet will continue to develop or that a sufficient
base of users will develop to support our business.
We also cannot assure you that the Internet infrastructure will be able
to support the demands placed upon it by:
o increases in number of users
o an increase in frequency of use
o an increase in bandwidth requirements of users
In addition, the Internet could lose its viability as a commercial medium due to
delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity, or due to increased government
regulation. If use of the Internet does not continue to grow or grows more
slowly than expected, or if the Internet infrastructure does not effectively
support growth that may occur, our revenues and financial condition would be
materially and adversely affected.
WE HAVE CAPACITY CONSTRAINTS AND MAY BE SUBJECT TO SYSTEM DISRUPTIONS,
WHICH COULD ADVERSELY AFFECT OUR REVENUES. Our ability to attract Internet users
and maintain relationships with advertising and service customers depends on the
satisfactory performance, reliability and availability of our Internet channels
and our network infrastructure. Our Internet advertising revenues directly
relate to the number of advertisements delivered by us to users. System
interruptions that result in the unavailability of our Internet channels or
slower response times for users would reduce the number of advertisements and
sales leads delivered and reduce the attractiveness of our Internet channels to
users and advertisers. We have experienced periodic system interruptions in the
past and believe that such interruptions will continue to occur from time to
time in the future. Any increase in system interruptions or slower response
times resulting from these factors could have a material adverse effect on our
revenues and financial condition.
Our Internet and television operations are vulnerable to interruption
by fire, earthquake, power loss, telecommunications failure and other events
beyond our control. All of our servers and television production equipment are
currently located in San Francisco, California, an area that is susceptible to
earthquakes. Since launching our first Internet site in June 1995, we have
experienced system downtime for limited periods due to power loss and
telecommunications failures, and we cannot assure you that interruptions in
service will not materially and adversely affect our operations in the future.
We do not carry sufficient business interruption insurance and do not carry
earthquake insurance to compensate us for losses that may occur. Any losses or
damages that we incur could have a material adverse effect on our financial
condition.
38
<PAGE> 41
OUR BUSINESS INVOLVES RISKS OF LIABILITY CLAIMS FOR OUR INTERNET AND
TELEVISION CONTENT, WHICH COULD RESULT IN SIGNIFICANT COSTS. As a publisher and
a distributor of content over the Internet and television, we face potential
liability for:
o defamation
o negligence
o copyright, patent or trademark infringement
o other claims based on the nature and content of the materials
that we publish or distribute
These types of claims have been brought, sometimes successfully, against online
services. In addition, we could be exposed to liability in connection with
material indexed or offered on our sites. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to reimburse us for all liability that may be imposed. Any
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our financial
condition.
UNAUTHORIZED PERSONS ACCESSING OUR SYSTEMS COULD DISRUPT OUR OPERATIONS
AND RESULT IN THE THEFT OF OUR PROPRIETARY INFORMATION. A party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our Internet operations. We may be required to expend
significant capital and resources to protect against the threat of security
breaches or to alleviate problems caused by breaches in security. For example,
so-called "spiders" have and can be used in efforts to copy our databases,
including our database of technology products and prices.
Concerns over the security of Internet transactions and the privacy of
users may also inhibit the growth of the Internet, particularly as a means of
conducting commercial transactions. To the extent that our activities or the
activities of third party contractors involve the storage and transmission of
proprietary information, such as computer software or credit card numbers,
security breaches could expose us to a risk of loss or litigation and possible
liability. We cannot assure you that contractual provisions attempting to limit
our liability in these areas will be successful or enforceable, or that other
parties will accept such contractual provisions as part of our agreements.
OUR INABILITY TO UTILIZE TECHNOLOGY THAT WE DO NOT OWN COULD DISRUPT
OUR OPERATIONS. We rely on technology licensed from third parties. We cannot
assure you that these third party technology licenses will be available or will
continue to be available to us on acceptable commercial terms or at all.
OUR SUBSTANTIAL DEBT EXPOSES US TO RISKS THAT COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION. As a result of the sale of our 5% convertible
subordinated notes in March 1999, we incurred $172.9 million of additional debt.
Along with the notes, we may incur substantial additional debt in the future.
The level of our indebtedness, among other things, could:
39
<PAGE> 42
o make it difficult for us to make payments on the notes
o make it difficult for us to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes
o limit our flexibility in planning for, or reacting to changes in,
our business
o make us more vulnerable in the event of a downturn in our
business
We cannot assure you that we will be able to meet our debt service obligations,
including our obligations under the notes.
WE MAY BE UNABLE TO PAY OUR DEBT SERVICE AND OTHER OBLIGATIONS, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND CAUSE US TO DEFAULT UNDER THE
NOTES. Our operating income and cash flow generated during 1998 would have been
insufficient to pay the amount of interest payable annually on our indebtedness,
including our notes. We currently expect to spend approximately $100.0 million
within the next six to eighteen months in connection with our recently announced
marketing campaign, and anticipate that we will incur losses in 1999 as a
result. The interest payable on our notes is $8,645,750 each year. We cannot
assure you that we will be able to pay interest and other amounts due on the
notes or our other indebtedness. If we are unable to generate sufficient cash
flow or otherwise obtain funds necessary to make required payments, or if we
fail to comply with the various requirements of our indebtedness, we would be in
default, which would permit the holders of our indebtedness to accelerate the
maturity of the indebtedness and could cause defaults under our other
indebtedness. Any default under our indebtedness could have a material adverse
effect on our financial condition.
YEAR 2000 PROBLEMS FOR US, OUR SUPPLIERS OR OUR CUSTOMERS COULD
INCREASE OUR LIABILITIES OR EXPENSES AND IMPACT OUR PROFITABILITY. We are in the
assessment phase of our year 2000 program. We cannot assure you that we will not
experience serious unanticipated negative consequences and/or additional
material costs caused by undetected errors or defects in the technology used in
our internal systems, or by failures of our vendors/partners to address their
year 2000 issues in a timely and effective manner.
THE PRICE OF OUR COMMON STOCK IS SUBJECT TO WIDE FLUCTUATION. The
trading price of our common stock is subject to wide fluctuations. Trading
prices of our common stock may fluctuate in response to a number of events and
factors, including:
o quarterly variations in operating results
o announcements of innovations
o new products, strategic developments or business combinations by
us or our competitors
o changes in our expected operating expense levels or losses
o changes in financial estimates and recommendations of securities
analysts
o the operating and securities price performance of other companies
that investors may deem comparable to us
o news reports relating to trends in the Internet
o other events or factors
40
<PAGE> 43
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock.
WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK THAT MAY BE
SOLD, WHICH COULD AFFECT THE TRADING PRICE OF OUR COMMON STOCK. We have a
substantial number of shares of common stock subject to stock options and
warrants, and our notes may be converted into shares of common stock. We cannot
predict the effect, if any, that future sales of shares of common stock or
notes, or the availability of shares of common stock or notes for future sale,
will have on the market price of our common stock. Sales of substantial amounts
of common stock, including shares issued upon the exercise of stock options or
warrants or the conversion of notes, or the perception that such sales could
occur, may adversely affect prevailing market prices for our common stock and
notes.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
COULD DETER TAKEOVER ATTEMPTS. Some provisions in our certificate of
incorporation and bylaws could delay, prevent or make more difficult a merger,
tender offer, proxy contest or change of control. Our stockholders might view
any transaction of this type as being in their best interest since the
transaction could result in a higher stock price than the current market price
for our common stock. Among other things, our certificate of incorporation and
bylaws:
o authorize our board of directors to issue preferred stock in
series with the terms of each series to be fixed by our board of
directors
o divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year
o permit directors to be removed only for cause
o specify advance notice requirements for stockholder proposals and
director nominations
In addition, with some exceptions, the Delaware General Corporation Law
restricts or delays mergers and other business combinations between us and any
stockholder that acquires 15% or more of our voting stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and changes in
the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We have not used
derivative financial instruments in our investment portfolio. We invest our
excess cash in debt instruments of the U.S. Government and its agencies, and in
high-quality corporate issuers and, by policy, limits the amount of credit
exposure to any one issuer. We protect and preserve our invested funds by
limiting default, market and reinvestment risk.
41
<PAGE> 44
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if force to sell securities which have declined in market value due
to changes in interest rates.
Investment Risk. We invest in equity instruments of privately-held,
information technology companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted for under
the cost method when ownership is less that 20%. For these non-quoted
investments, our policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the carrying values.
We identify and record impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired. In February 1999, one
of these investments in a privately-held company became a marketable equity
security when the investees completed an initial public offering. Such
investment, which is in the Internet industry, is subject to significant
fluctuations in fair market value due to the volatility of the stock market, and
is recorded as long-term investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors Report
The Board of Directors,
CNET, Inc.
We have audited the accompanying consolidated balance sheets of CNET,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CNET, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of
42
<PAGE> 45
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
San Francisco, California
February 9, 1999, except
as to paragraph 5 of
footnote 5 and footnote 10,
which are as of March 22, 1999
43
<PAGE> 46
CNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 51,533,655 $ 22,553,988
Accounts receivable, net of allowance for
doubtful accounts of $1,721,625 and $461,000
in 1998 and 1997, respectively.................. 15,074,639 9,149,762
Accounts receivable, related party................ 1,710,745 --
Other current assets.............................. 1,704,765 1,134,957
Restricted cash................................... 945,330 1,599,113
--------------- ---------------
Total current assets............................ 70,969,134 34,437,820
Property and equipment, net.......................... 15,325,512 19,553,537
Other assets......................................... 2,059,806 4,270,321
--------------- ---------------
Total assets.................................... $ 88,354,452 $ 58,261,678
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,476,654 $ 3,567,783
Accrued liabilities............................... 6,592,819 10,080,504
Current portion of long-term debt................. 1,112,512 1,358,772
--------------- ---------------
Total current liabilities....................... 11,181,985 15,007,059
Long-term debt....................................... 569,245 2,611,815
--------------- ---------------
Total liabilities............................... 11,751,230 17,618,874
Commitments and contingencies
Stockholders' equity:
Common stock; $0.0001 par value;
50,000,000 shares authorized; 34,119,948
and 29,324,370 shares issued and
outstanding in 1998 and 1997,
respectively.................................... 3,412 2,936
Additional Paid-in capital........................ 127,770,245 94,696,127
Accumulated deficit............................... (51,170,435) (54,056,259)
--------------- ---------------
Total stockholders' equity...................... 76,603,222 40,642,804
--------------- ---------------
Total liabilities and stockholders' equity...... $ 88,354,452 $ 58,261,678
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 47
CNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Internet............................... $ 49,374,195 $ 26,717,280 $ 10,133,684
Television............................. 7,057,885 6,922,309 4,696,664
------------ ------------ ------------
Total revenues........................ 56,432,080 33,639,589 14,830,348
------------ ------------ ------------
Cost of revenues:
Internet............................... 23,291,215 19,812,604 9,120,545
Television............................. 6,741,133 6,904,471 6,212,959
------------ ------------ ------------
Total cost of revenues............... 30,032,348 26,717,075 15,333,504
------------ ------------ ------------
Gross profit (deficit)............... 26,399,732 6,922,514 (503,156)
------------ ------------ ------------
Operating expenses:
Sales and marketing.................... 14,530,355 11,602,746 7,821,454
Development............................ 3,454,387 13,608,846 3,438,333
General and administrative............. 6,806,886 6,848,793 3,772,368
Unusual items.......................... (921,839) 9,000,000 --
------------ ------------ ------------
Total operating expenses............. 23,869,789 41,060,385 15,032,155
------------ ------------ ------------
Operating income (loss).............. 2,529,943 (34,137,871) (15,535,311)
Other income (expense):
Equity losses.......................... (11,795,944) (2,228,430) (1,865,299)
Gain on sale of equity investments..... 10,450,342 11,026,736 --
Interest income (expense), net......... 1,415,616 611,473 451,948
------------ ------------ ------------
Total other income (expense)......... 70,014 9,409,779 (1,413,351)
------------ ------------ ------------
Net income (loss).................... $ 2,599,957 $(24,728,092) $(16,948,662)
============ ============ ============
Basic net income (loss) per share......... $ 0.08 $( 0.91) $( 1.06)
============ ============ ============
Diluted net income (loss) per share....... $ 0.07 $( 0.91) $( 1.06)
============ ============ ============
Shares used in calculating basic
per share data....................... 31,932,530 27,223,642 15,927,794
============ ============ ============
Shares used in calculating diluted
per share data....................... 34,852,938 27,223,642 15,927,794
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 48
CNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Total
------------------------------------------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ------- ---------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995 ......... 3,439,202 34,392 5,400,000 540 15,143,363 (12,379,505) 2,798,790
Issuance of Series B
convertible preferred
stock ..................... 366,144 3,661 -- -- 362,483 -- 366,144
Issuance of Series D
convertible preferred
stock ..................... 2,588 26 -- -- 33,307 -- 33,333
Issuance of Series E
convertible preferred
stock ..................... 453,169 4,532 -- -- 8,364,102 -- 8,368,634
Issuance of warrants ......... -- -- -- -- 164,000 -- 164,000
Public stock offering, net ... 37,776,594
net of $3,151,406
issuance costs ............ -- -- 5,200,000 520 37,776,074 --
Conversion of preferred
stock into common
stock ..................... (4,261,103) (42,611) 15,633,346 1564 41,047 -- --
Exercise of stock options .... -- -- 306,000 30 369,530 -- 369,560
Employee stock purchase
plan ...................... -- -- 23,578 2 169,759 -- 169,761
Net loss ..................... -- -- -- -- -- (16,948,662) (16,948,662)
---------- ------- ---------- ----- ----------- ----------- -----------
Balances as of
December 31, 1996 ......... -- -- 26,562,924 2,656 62,423,665 (29,328,167) 33,098,154
Exercise of stock options .... -- -- 822,914 86 1,175,494 -- 1,175,580
Employee stock purchase
plan ...................... -- -- 70,026 8 705,403 -- 705,411
Issuances of common stock .... -- -- 1,868,506 186 23,391,565 -- 23,391,751
Warrant compensation ......... -- -- -- -- 7,000,000 -- 7,000,000
Net loss ..................... -- -- -- -- -- (24,728,092) (24,728,092)
---------- ------- ---------- ----- ----------- ----------- -----------
Balances as of
December 31, 1997 ......... -- -- 29,324,370 2,936 94,696,127 (54,056,259) 40,642,804
Exercise of stock options
and warrants .............. -- -- 2,027,662 202 6,246,092 -- 6,246,294
Employee stock purchase
plan ...................... -- -- 56,386 4 723,553 -- 723,557
Issuances of common stock .... -- -- 1,625,600 162 26,212,556 -- 26,212,718
Issuance of common stock
in relation to the
UVision acquisition ....... -- -- 1,089,930 108 (108,083) 285,867 177,892
Net income ................... -- -- -- -- -- 2,599,957 2,599,957
---------- ------- ---------- ----- ----------- ----------- -----------
Balances as of
December 31, 1998 ......... -- -- 34,119,948 3,412 127,770,245 (51,170,435) 76,603,222
========== ======= ========== ===== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 49
CNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income(loss)...................................... $ 2,599,957 $(24,728,092) $(16,948,662)
Adjustments to reconcile net loss to net cash
provided (used) in operating activities:
Depreciation and amortization..................... 6,341,217 5,054,980 1,928,496
Amortization of program costs..................... 5,802,074 6,548,937 4,673,201
Interest expense converted into preferred stock... -- -- 222,141
Allowance for doubtful accounts................... 1,260,625 361,214 75,000
Reserve for joint venture......................... -- (1,248,799) 1,865,299
Warrant compensation expense...................... -- 7,000,000 --
Changes in operating assets and liabilities:
Accounts receivable............................. (9,730,143) (4,218,799) (4,165,939)
Other current assets............................ 455,340 (916,690) 29,750
Other assets.................................... 4,933,084 (1,515,407) (1,237,499)
Accounts payable................................ 328,540 228,931 2,807,549
Accrued liabilities............................. (2,833,799) 7,534,213 1,839,558
----------- ----------- -----------
Net cash provided (used) in operating
activities................................. 9,156,895 (5,899,512) (8,911,106)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment, excluding capital leases...... (4,879,353) (12,213,050) (10,739,354)
Purchases of programming assets....................... (6,083,639) (5,826,476) (5,438,092)
Loan to joint venture................................. -- (1,639,139) (1,776,588)
Investment in Vignette Corporation.................... -- -- (511,500)
----------- ----------- -----------
Net cash used in investing activities......... (10,962,992) (19,678,665) (18,465,534)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred
stock............................................... -- -- 4,543,826
Net proceeds from initial public offering............. -- -- 37,776,594
Net proceeds from issuance of common stock............ 26,212,718 23,391,751 --
Net proceeds from the issuance of common stock in
relation to the UVision acquisition................. (107,975)
Allocated proceeds from issuance warrants............. -- -- 164,000
Proceeds from stockholder receivable.................. -- -- 594,654
Proceeds from employee stock purchase plan............ 723,557 705,411 169,761
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Proceeds from debt...................................... -- 3,280,806 3,636,000
Proceeds from exercise of stock and warrants............ 6,246,294 1,175,580 141,050
Principal payments on capital leases.................... (416,377) (238,688) (104,542)
Principal payments on equipment note.................... (1,872,453) (338,630) (91,851)
------------ ------------ ------------
Net cash provided by financing activities....... 30,785,764 27,976,230 46,829,492
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents....... 28,979,667 2,398,053 19,452,852
Cash and cash equivalents at beginning of period........... 22,553,988 20,155,935 703,083
------------ ------------ ------------
Cash and cash equivalents at end of period................. $ 51,533,655 $ 22,553,988 $ 20,155,935
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 324,762 $ 254,790 $ 88,792
Supplemental disclosure of noncash transactions:
Non cash portion of Investment.......................... $ 3,066,449 -- $ 105,000
Capital lease obligations incurred...................... -- $ 408,408 $ 297,436
Note issued in exchange for equipment................... -- -- $ 137,551
Exercise of stock options through issuance of note
receivable from stockholder........................... -- -- $ 594,654
Conversion of preferred stock into common stock......... -- -- $ 42,611
Conversion of debt and interest into 0,0, and 208,548
shares of convertible preferred stock, respectively... -- -- $ 3,858,141
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 51
CNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CNET, Inc. (the "Company") was incorporated in the state of Delaware in
December 1992 and is a media company integrating television programming with a
network of channels on the World Wide Web. The Company produces five television
programs and operates an Internet network focused on computers and technologies.
Revenues for television are derived primarily from licensing fees for the
distribution of the television programming. Internet revenues are primarily
derived from the sale of advertising.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CNET, Inc., and
its majority owned controlled subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets which range from three to seven years.
Property and equipment recorded under capital leases and leasehold improvements
are amortized on a straight-line basis over the shorter of the lease terms or
their estimated useful lives.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially subjecting the Company to
concentrations of credit risk consist primarily of periodic investments of
excess cash and trade accounts receivable. Substantially all of the Company's
accounts receivable are derived from domestic sales. Historically, the Company
has not incurred material credit related losses. The Company invests excess cash
in low risk, liquid instruments. No losses have been experienced on such
investments.
49
<PAGE> 52
DEVELOPMENT
Development expenses include expenses which were incurred in the
development of new Internet channels and in research and development of new or
improved technologies that enhance the performance of the Company's Internet
channels. Costs for development are expensed as incurred. Costs are no longer
recognized as development expenses when a new Internet channel is launched and
is generating revenue.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of changes in tax rates is recognized in
income in the period that includes the enactment date.
REVENUE RECOGNITION
Through June 30, 1996, television revenues were principally derived
from the sale of advertising during the Company's CNET CENTRAL television
program and were recognized upon broadcast based on the number of viewers of the
program. Effective July 1, 1996, and subsequently renewed through June 30, 1999,
the Company licensed a two hour programming block it produces for broadcast on a
cable network for a license fee limited to the costs of production of the
programming block and further limited to certain maximum amounts per the
contract. In September 1996, the Company began producing TV.com which was
exclusively distributed by Golden Gate Productions, L.P., ("GGP"). The revenue
from this program was used first to offset costs of distribution and production
and thereafter was shared equally by the Company and GGP. In August 1997, the
assets of GGP were acquired by a third party who agreed to distribute the
program through Trans World International, ("TWI"), under the same terms.
Beginning March 1, 1998, the Company assumed responsibility for the sale of
advertisements on TV.com and pays a distribution fee to the third party.
Internet revenues consist primarily of revenues derived from the sale
of advertisements on pages delivered to users of our Internet network.
Advertising programs are generally delivered on either an "impression" based
program or a "performance" based program. An impression based program earns
revenues when an advertisement is delivered to a user of our Internet network. A
performance based program earns revenues when a user of our Internet network
responds to an advertisement by linking to an advertisers Internet network.
Advertising revenues are recognized in the period in which the advertisements
are delivered. In the fourth quarter of 1998, the Company began generating
revenue from lead-based compensation from its shopping services.
50
<PAGE> 53
NET INCOME (LOSS) PER SHARE
Basic net income per share is computed using the weighted average
number of outstanding shares of common stock and diluted net income per share is
computed using the weighted average number of outstanding shares of common stock
and common stock equivalents. Basic and diluted net loss per share are computed
using the weighted average number of outstanding shares of common stock. Net
loss per share for the years ended December 31, 1997 and 1996, does not include
the effect of approximately 5,077,844 and 3,128,932 stock options, with weighted
average exercise prices of $12.37 and $3.55, respectively, because their effects
are anti-dilutive.
The following table sets forth the computation of net income (loss) per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) per share:
Basic net income (loss) per share $ 0.08 $ (0.91) $ (1.06)
======== ======== ========
Diluted net income (loss) per share $ 0.07 $ (0.91) $ (1.06)
======== ======== ========
Net income (loss) $ 2,600 $(24,728) $(16,949)
======== ======== ========
Basic and diluted shares:
Weighted average common shares outstanding used in
computing basic net income(loss) per share
31,933 27,224 15,928
======== ======== ========
Common stock equivalents:
Stock options and awards 2,920 -- --
======== ======== ========
Weighted average common shares and
common stock equivalents outstanding
used in computing diluted net income
(loss) per share 34,853 27,224 15,928
======== ======== ========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
using the intrinsic value method. As such, compensation expense is recorded on
the date of grant if the current market price of the underlying stock exceeded
the exercise price.
COMPREHENSIVE INCOME (LOSS)
The Company has no significant comprehensive income (loss) and,
accordingly, the comprehensive income(loss) is the same as net income (loss) for
all periods.
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<PAGE> 54
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are
included in selling and marketing expense and totaled approximately $5,081,308,
$2,267,154 and $3,697,314 during the years ended December 31, 1998, 1997 and
1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and long-term debt approximate their respective
fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
BARTER TRANSACTIONS
The Company trades advertisements on its Internet sites in exchange for
advertisements on the Internet channels of other companies. These revenues and
marketing expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered on
the Company's Internet channels and expense from barter transactions is
recognized when advertisements are delivered on the other companies' Internet
sites. Barter revenues were approximately $3,369,000, $905,000, and $760,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and
52
<PAGE> 55
measure those instruments at fair value. For a derivative not designated as a
hedging instrument, changes in the fair value of the derivative are recognized
in earnings in the period of change. The Company must adopt SFAS No. 133 by July
1, 1999. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position or operations of the Company.
(2) BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial paper $21,452,792 $ 2,004,131
Money market mutual funds 23,447,941 17,034,006
Cash 6,632,922 3,515,851
----------- -----------
$51,533,655 $22,553,988
=========== ===========
</TABLE>
All cash equivalents have been classified as available for sale
securities as of December 31, 1998 and 1997.
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:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computer equipment $12,270,491 $11,769,291
Production equipment 2,552,420 2,241,597
Office equipment, furniture & fixtures 3,131,737 2,230,267
Software 1,845,777 1,745,660
Leasehold improvements 7,644,246 7,193,769
Assets in progress 620,165 1,533,198
----------- -----------
28,064,836 26,713,782
Less accumulated depreciation and amortization 12,739,324 7,160,245
----------- -----------
$15,325,512 $19,553,537
=========== ===========
</TABLE>
53
<PAGE> 56
As of December 31, 1998 and 1997, the Company had equipment under
capital lease agreements of $1,168,134, and accumulated amortization of
$1,084,125 and $694,747, respectively.
As of December 31, 1998, the Company had purchased equipment pursuant
to loan agreements in the amount of $948,982. As of December 31, 1998 and 1997,
the equipment had accumulated amortization of $702,408 and $512,612,
respectively.
ACCRUED LIABILITIES
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Compensation and related benefits $ 4,007,614 $ 2,594,386
Marketing and advertising 577,872 619,101
Deferred Revenue 594,212 3,233,681
Lease Abandonment -- 1,300,000
Other 1,413,121 2,333,336
----------- -----------
$ 6,592,819 $10,080,504
=========== ===========
</TABLE>
DEBT
During 1997, the Company secured a $10.0 million line of credit from a
bank. The line of credit consisted of a $5.0 million operating line of credit at
an interest rate of prime (8.5%) plus 0.5%, secured by all of the Company's
tangible assets and a $5.0 million equipment line at an interest rate of prime
(8.5%) plus 1%, for up to 65% of capital equipment purchases. The Company did
not renew the $10.0 million line of credit upon its expiration in July 1998. As
of December 31, 1997, the Company had not yet drawn any of the operating line of
credit and had drawn $768,000 on the capital equipment line which was paid off
in July, 1998. In addition, the Company had proceeds of $2.5 million from an
asset based loan bearing interest equal to the treasury rate plus 5.56% secured
by certain capital equipment. The $2.5 million asset based loan is subject to
certain financial covenants. At December 31, 1998 the Company was in compliance
with those covenants.
During 1996 and 1995, the Company financed certain production equipment
in the amounts of $189,256 and $759,726, respectively, through notes at an
interest rate of 12.25%. The notes are secured by the equipment financed. The
current and long-term portion of the notes are included in current portion of
long-term debt and long-term debt, respectively, in the accompanying balance
sheet (along with capital lease obligations, Note 4). The aggregate annual
principal payments for notes payable outstanding as of December 31, 1998, are
summarized as follows:
54
<PAGE> 57
<TABLE>
Year Ending December 31,
-------------------------------------
<S> <C>
1999 994,177
2000 535,728
2001 33,517
----------
$1,563,422
==========
</TABLE>
(3) INCOME TAXES
The Company's effective tax rate differs from the statutory federal
income tax rate of 34% as shown in the following schedule:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at statutory rate 34.0% 34.0% 34.0%
Operating losses with no current tax benefit
(34.0%) (34.0%) (34.0%)
-------- -------- --------
Effective tax rate -- -- --
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Capitalized "start-up" expenses $ 457,000 $ 818,000 $ 1,217,000
Net operating losses 22,184,000 16,268,000 9,596,000
Accruals, reserves and other 3,275,000 6,289,000 1,027,000
----------- ----------- -----------
25,916,000 23,375,000 11,840,000
Less valuation allowance 25,916,000 23,375,000 11,840,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ============
</TABLE>
The Company has a valuation allowance as of December 31, 1998, which
fully offsets its gross deferred tax assets due to the Company's historical
losses and the fact that there is no guarantee the Company will generate
sufficient taxable income in the future to be able to realize any or all of the
deferred tax assets. The net change in the total valuation allowance for the
year ended December 31, 1998, was $2,541,000.
As of December 31, 1998, the Company has approximately $61,000,000 of
net operating losses for federal income tax purposes, which expire between 2008
and 2018. The Company also has approximately $24,000,000 of net operating loss
carryforwards for state income tax purposes, which expire between 1999 and 2003.
Included in the deferred tax assets above is
55
<PAGE> 58
approximately $5,500,000 related to stock option compensation for which the
benefit, when realized, will be an adjustment to equity.
The Company may have experienced an "ownership change" as defined by
section 382 of the Internal Revenue Code. If an ownership change has occurred,
the Company's ability to utilize its net operating losses may be limited.
(4) LEASES
The Company has several non-cancelable leases primarily for general
office, facilities, and equipment that expire over the next ten years. Future
minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, Capital Leases Operating Leases
------------------------ -------------- ----------------
<S> <C> <C>
1999 $ 129,140 $ 4,548,163
2000 -- 3,519,185
2001 -- 2,396,254
2002 -- 1,421,819
2003 -- 981,674
Thereafter -- 598,910
-------------- ------------
Total minimum lease payments 129,140 $ 13,466,005
============
Less amount representing interest 10,805
--------------
Capital lease obligation, all current $ 118,335
==============
</TABLE>
Rental expense from operating leases amounted to $3,226,310,
$2,242,186, and $789,678 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(5) STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
On July 2, 1996, the Company effected an initial public offering (IPO)
of 4,000,000 shares of its common stock for $8 per share. Simultaneously with
the IPO, the Company sold 1,200,000 shares of common stock to Intel Corporation
at 93% of the IPO price. The net proceeds from these two offerings (after
deducting underwriting discounts and commissions and offering expenses) were
$37.8 million, and were received on July 8, 1996.
On July 21, 1997, the Company sold 402,506 shares of common stock in a
private placement to Intel for aggregate proceeds of approximately $5.3 million.
On December 18, 1997, the Company sold 1,466,000 shares of common stock in a
private placement to three "accredited investors" (as defined in Rule 501(a)
under the Securities Act of 1933) for aggregate net proceeds of approximately
$18.1 million.
56
<PAGE> 59
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 1,089,930 shares of common stock in exchange for all of
the outstanding shares of U.Vision. U.Vision owned and operated ComputerEsp, a
pricing and availability engine for buying computer products on the Internet.
Subsequent to the merger, the Company relaunched the service as 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 net loss per share data have been adjusted in prior periods to
reflect the U.Vision transaction as outstanding for all periods.
In June of 1998, the Company completed the sale of 1,625,600 shares of
common stock to National Broadcasting Company, Inc., ("NBC"). The aggregate
purchase price for the shares sold was $26.2 million.
STOCK SPLIT
On March 8, 1999, the Company effected a two-for-one split of its
common stock. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
In May 1996, the Company effected a three-for-two split of its common
stock in connection with the IPO. The accompanying consolidated financial
statements have been retroactively adjusted to reflect the stock split.
STOCK OPTION PLANS
In 1994, the Board of Directors adopted a Stock Option Plan (the "1994
Plan") pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1994 Plan authorizes grants of
options to purchase up to 5,500,000 shares of authorized but unissued common
stock. In 1997, the stockholders approved the 1997 Stock Option Plan (the "1997
Plan"). The 1997 Plan authorizes grants of options to purchase up to 5,000,000
shares of authorized but unissued common stock. Stock options for both the 1994
Plan and the 1997 Plan are granted with an exercise price equal to the fair
market value at the date of grant. All stock options have 10-year terms and
generally vest and become fully exercisable between three and four years from
the date of grant.
57
<PAGE> 60
A summary of the status of the 1994 Plan and the 1997 Plan as of
December 31, 1998, 1997 and 1996, and changes during each of the years then
ended:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Prices
---------------- ----------------
<S> <C> <C>
Balance as of December 31, 1995 2,952,500 0.80
Granted 1,728,400 5.72
Exercised (1,393,934) 0.52
Cancelled (158,034) 2.73
---------- ---------
Balance as of December 31, 1996 3,128,932 3.55
Granted 2,647,046 11.87
Exercised (889,392) 1.44
Cancelled (243,504) 7.04
---------- ---------
Balance as of December 31, 1997 4,643,082 8.42
Granted 2,472,900 16.74
Exercised (920,638) 5.12
Cancelled (1,117,460) 11.60
---------- ---------
Balance as of December 31, 1998 5,077,884 $ 12.37
========== =========
</TABLE>
As of December 31, 1998, 1997 and 1996, the number of options
exercisable was 1,050,016, 858,888 and 804,794, respectively, and the weighted
average of the exercise price of those options was $7.01, $3.06, and $1.11,
respectively. As of December 31, 1998, there were 2,218,152 additional shares
available for grant under the Plans.
The Company applies APB Opinion No. 25 in accounting for the Plans and,
accordingly, no compensation cost has been recognized for the Plans in the
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, the Company's
net income (loss) and net income (loss) per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 2,599,957 $ (24,728,092) $ (16,948,662)
Pro forma $ (13,130,574) $ (29,872,164) $ (18,259,031)
Basic net income (loss) per share
As reported $ 0.08 $ (0.91) $ (1.06)
Pro forma $ (0.41) $ (1.10) $ (0.81)
Diluted net income (loss) per share
As reported $ 0.07 $ (0.91) $ (1.06)
Pro forma $ (0.38) $ (1.10) $ (0.81)
</TABLE>
58
<PAGE> 61
The effects of applying SFAS 123 in this pro forma disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
does not apply to awards prior to 1995.
The weighted-average fair value of options granted in 1998, 1997 and
1996, was $16.74, $11.87 and $5.72, respectively.
The fair value of each option grant is estimated on the date of grant
using Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: no dividend
yield, expected volatility of 75%, risk-free interest rate of 6%, and an
expected life of five years, five years and one year.
The following table summarizes information about stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of As of Contractual Exercise As of Exercise
Exercise Prices 12/31/98 Life Price 12/31/98 Price
--------------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.6000 $ 4.2950 543,544 6.86 $ 2.5307 376,086 $ 1.9915
$ 6.0000 $ 7.3150 551,624 7.56 $ 6.5059 253,860 $ 6.4988
$ 7.7500 $10.0650 80,250 8.10 $ 8.9125 18,626 $ 8.4692
$10.3750 $10.3750 638,298 8.92 $ 6.9167 154,700 $10.3750
$10.6900 $12.0650 805,124 8.63 $11.7106 168,184 $11.6537
$12.1250 $13.7500 173,736 8.53 $13.3392 36,138 $13.3415
$13.9400 $13.9400 921,574 9.24 $13.9400 3,876 $13.9400
$14.0000 $14.7500 121,086 8.65 $14.2317 20,320 $14.0931
$16.1250 $16.1250 664,000 9.42 $16.1250 -- --
$16.4400 $34.2500 578,648 9.63 $23.3122 18,226 $22.6535
$ 0.6000 $34.2500 5,077,884 8.68 $12.3702 1,050,016 $ 7.0065
</TABLE>
401(k) PROFIT SHARING PLAN
In 1996, the Company adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") that is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended. The 401(k) Plan covers substantially all of the
Company's employees. Participants may elect to contribute a percentage of their
compensation to this plan, up to the statutory maximum amount. The Company may
make discretionary contributions to the 401(k) Plan, but has not done so to
date.
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<PAGE> 62
EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Company adopted an Employee Stock Purchase Plan that
covers substantially all employees. Participants may elect to purchase the
Company's stock at a 10% discount of the lower of the closing price at the
beginning or end of the quarter by contributing a percentage of their
compensation. The maximum percentage allowed is 10%.
(6) MAJOR CUSTOMERS AND CONTRACTS
CUSTOMERS
For the year ended December 31, 1998, one customer, USA Networks,
accounted for approximately 10% of the Company's revenues. For the years ended
December 31, 1997 and 1996, two customers accounted for over 10% of the
Company's revenues with USA Networks accounting for approximately 16% and 19%,
and Microsoft Corporation accounting for approximately 10% and 12% of total
revenues, respectively.
CONTRACTS
In February 1995, the Company entered into an agreement with USA
Networks to carry its television program, CNET CENTRAL. The contract allowed the
Company to sell the available advertising on the program. In connection with
this agreement, the Company issued 1,033,500 common stock warrants at an
exercise price of $1.21 per share to USA Networks. As of December 31, 1998, all
such warrants were exercised.
Effective July 1, 1996, the agreement with USA Networks was amended to
license to USA Networks the right to carry a two hour programming block produced
by the Company, called "Digital Domain" for broadcast on the USA Network and The
SciFi Channel for an initial term of one year. Under the amended agreement, USA
Networks licensed the rights to Digital Domain for a fee equal to the cost of
production of the programs up to a maximum of $5,250,000 for the first year with
an option to extend the term for an additional year. In January 1997, USA
Networks exercised this option.
In addition, pursuant to the amended agreement, the Company agreed to
pay USA Networks a fee of $1.0 million for the right to cross-market the
Company's Internet channels on the television programs produced by the Company
for USA Networks. During the second year extension the Company paid a fee of
$750,000 for the right to continue such cross-marketing activities. These fees
are reported by the Company as marketing expenses.
In January 1997, USA Networks exercised its option to extend its
agreement with the Company to carry Digital Domain through June 30, 1998. In
connection with this extension to the agreement, the Company agreed that the
warrants held by USA Networks would vest in full on December 31, 2006, to the
extent they had not previously vested. As a result of this change, the Company
incurred a one-time charge to earnings of approximately $7.0 million during the
first quarter of 1997.
60
<PAGE> 63
In July 1998, the Company entered into an agreement with USA Networks
to again license to USA Networks the right to carry Digital Domain for broadcast
on the USA Network and The SciFi Channel for a one year period. The Company
agreed to pay USA Networks a fee of $750,000 for the right to cross-market the
Company's Internet channels on the television programs produced by the Company
for USA Networks.
In January 1996, the Company entered into a joint venture agreement
with E! Entertainment Television, Inc. ("E! Entertainment") that launched an
Internet site in August 1996, called E! ONLINE, focusing on entertainment, news,
gossip, movies and television. The Company agreed to provide $3,000,000 in debt
financing to the joint venture during its first two years of operations, which
amount was advanced pursuant to a seven year note, bearing interest at 9% per
annum. In addition, the Company agreed to provide up to an additional $3,000,000
in equity capital to the joint venture through January 1999. The Company
accounted for its financing and investments under the modified equity method.
Accordingly, the Company recorded all of the losses incurred by the joint
venture through June 30, 1997, in its consolidated statement of operations. The
joint venture, E!
Online LLC, was owned 50% by the Company and 50% by E! Entertainment.
In June 1997, the Company sold its 50% equity position and certain
technology licenses and marketing and consulting services to its joint venture
partner for $10.0 million in cash and a $3.2 million note receivable, which was
included in other assets in the balance sheet and certain additional payments
for up to three years. The note receivable was paid in full in November, 1998.
In August 1996, the Company entered into an agreement with GGP whereby
the Company produced a television program, TV.com, which was exclusively
distributed by GGP. Any revenues from the distribution of TV.com were first used
to offset costs of distribution and production and thereafter were shared
equally by CNET and GGP. In August 1997, the assets of GGP were acquired by a
third party who has agreed to distribute the program through TWI under the same
terms and conditions. Beginning March 1, 1998, the Company assumed
responsibility for the sale of advertisements on TV.com and pays a distribution
fee to TWI.
(7) UNUSUAL ITEMS
In the fourth quarter of 1997, the Company recognized an expense of
$1.3 million related to lease abandonment costs and recognized an expense of
$700,000 relating to a write off of Internet domain names that the Company had
determined that it would no longer use. Through the fourth quarter of 1998, the
Company had incurred expenses of $379,000 related to the abandonment of excess
real estate and during the fourth quarter the Company determined that it had
completed the abandonment of excess real estate. Accordingly, the Company
reversed approximately $922,000 of this expense in the fourth quarter of 1998.
In the first quarter of 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
would vest in full on December 31, 2006, to the extent that they had not
previously vested.
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<PAGE> 64
(8) RELATED PARTY TRANSACTIONS
Included in other assets on the accompanying balance sheets is an
advance to an officer of the Company for $26,250.
An affiliate of an officer and stockholder of the Company loaned the
Company $800,000 in 1996 at an interest rate of 8% and was granted 9,800
warrants to purchase Series D Convertible preferred stock at an exercise price
of $12.88 per share. This loan was subsequently converted to Series E
convertible preferred stock, which were subsequently converted to 29,400
warrants to purchase common stock at an exercise price of $4.29 per share. As of
December 31, 1997, all of these warrants were outstanding and exercisable and
expire in January 2001. Such warrants were valued at estimated fair market value
at the date of issuance.
A stockholder loaned the Company $3,000,000 in 1996 at an interest rate
of 8%. Interest expense related to the loan was $34,000 in 1996. This loan was
subsequently converted to Series E convertible preferred stock. In connection
with this loan agreement, the Company granted the lender 36,750 warrants to
purchase Series D convertible preferred stock at an exercise price of $12.88 per
share, which were subsequently converted to 110,250 warrants to purchase common
stock at an exercise price of $4.29 per share. As of December 31, 1998, all of
these warrants were outstanding and exercisable and expire on dates from May
2000 to February 2001. Such warrants were valued at estimated fair market value
at the date of issuance.
In April 1996, a stockholder exercised options to purchase 366,144
shares of Series B preferred stock and 273,000 shares of common stock for an
aggregate of $694,654. The consideration was paid by $100,000 in cash and the
issuance of a note for $594,654, which was repaid in July 1996. Such shares of
Series B preferred stock were converted into 1,098,432 shares of common stock at
the IPO.
In December 1997, an officer of the Company purchased 16,000 shares of
common stock for $198,000 as a participant in a private placement.
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
$744,000, 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. The Company uses the cost method of
accounting for its BuyDirect investment thus recorded an investment of
approximately $744,000 on its balance sheet. Initially, the Company also entered
into a multi-year arrangement with the new venture to provide marketing and
promotion through April 30, 2000. Effective October 31, 1998, the Company
terminated the initial contract and entered into a new agreement in exchange for
approximately $7.5 million for marketing and promotion through September 30,
2000. In conjunction with the new agreement, the Company received a promissory
note maturing on October 31, 2002 in the amount of $5.6 million.
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<PAGE> 65
For the year ended December 31, 1998, the Company recognized $2,510,422
in revenues related to advertising purchased by BuyDirect and to the licensing
of technology. As of December 31, 1998, the Company had a $1.7 million
receivable balance from BuyDirect related to advertising purchased, licensing of
technology and payments made by CNET on behalf of the venture. The balance is
included on the balance sheet as a related party accounts receivable.
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 Company and NBC Multimedia agreed to
form snap 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 snap, which was completed on June 30, 1998, the
Company contributed to snap substantially all of its assets used exclusively in
the operation of the snap service. Initially, snap will be owned 81% by the
Company and 19% by NBC Multimedia, however, NBC Multimedia has an option to
increase its ownership stake in snap to 60%. Under the agreement, CNET has the
right to appoint two members to snap's Board of Managers (the "Board"), while
NBC has the right to appoint five members. The seven member Board has general
supervision, direction and control of the business and has the general powers
and duties typically vested in the board of directors of a corporation. Through
the June 1998 transaction with NBC, snap's losses were funded by CNET.
Subsequent to the June 1998 transaction, snap's losses were funded through
equity contributions by NBC or affiliates and through debt incurred by snap
which has been guaranteed by affiliates of NBC. There is no requirement for CNET
to provide any direct or indirect funding for snap and the anticipated future
losses are expected to be funded by either additional debt financing or equity
contributions by NBC. Based on the structure of the Board and considering the
current and expected funding of snap, CNET does not control snap and accordingly
has not consolidated its results. The accompanying financial statements present
snap's financial results using the equity method of accounting effective January
1, 1998. Included in equity losses on the accompanying 1998 statement of
operations are losses of $11,796,344 related to snap. As of December 31, 1998
the Company's investment in snap has been reduced to zero.
(9) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operating decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenue and cost of revenue by operating segment for purposes of making
operating decisions and assessing financial performance. The consolidated
information reviewed by the CEO is identical to the information presented in the
accompanying financial statement of operations. The Company operates in two
segments, television and CNET Online, the Company's Internet operation. Asset
information regarding television and CNET Online operations is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Television 3,166,809 3,304,110
CNET Online 85,187,643 54,957,568
----------- -----------
Consolidated Total 88,354,452 58,261,678
=========== ===========
</TABLE>
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<PAGE> 66
(10) SUBSEQUENT EVENTS
On February 9, 1999, the Company announced an agreement with America
Online, Inc., ("AOL"), whereby the Company will become the exclusive provider of
computer hardware and software buying guides on the AOL service and on AOL.com,
as well as the primary provider of computer buying guides on CompuServe, Digital
City, AOL Hometown and certain AOL international properties. Under the terms of
the agreement, AOL will receive guaranteed payments from the Company in the
amount of $14.5 million over approximately 27 months.
On February 16, 1999, the Company acquired NetVentures, Inc., in a
stock ("NetVentures"), in a stock-for-stock exchange valued at approximately
$12.5 million. NetVentures owns and operates ShopBuilder, an online
store-creation system.
On February 19, 1999, the Company acquired AuctionGate Interactive,
Inc., ("AuctionGate"),in a stock-for-stock exchange valued at approximately $6.5
million. AuctionGate owns and operates AuctionGate.com, an auction site
specializing in computer products.
On February 26, 1999, the Company acquired the assets of Winfiles.com,
a leading downloading service, from Jenesys, LLC, for a total purchase price of
$11.5 million, payable in cash in two installments of $5.75 million.
On March 8, 1999, the Company completed a private placement with gross
proceeds of $172,915,0000 of 5% convertible subordinated notes. The placement
will be subject to certain fees and expenses. The notes are convertible, at the
option of the noteholder, into shares of common stock.
On March 22, 1999, the Company acquired KillerApp Corporation in a
stock-for-stock exchange valued at approximately $46 million. KillerApp owns and
operates KillerApp.com, an online comparison shopping service for computer and
consumer related products.
In March 1999, BuyDirect entered into a merger agreement with
beyond.com. This merger will result in our owning approximately 800,000 shares
of beyond.com as a result of our ownership interest in BuyDirect.
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<PAGE> 67
SCHEDULE II
CNET, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Numbers presented in thousands)
Additions
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other Deductions at End
Period Expenses Accounts Describe of Period
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998
Allowance for $ 743(1)
doubtful accounts $461 $ 1,443 $621(3) $ 60(2) $ 1,722
1997
Allowance for
doubtful accounts $100 $ 578 -- $ 217(1) $ 461
1996
Allowance for
doubtful accounts $ 25 $ 75 -- -- $ 100
</TABLE>
(1) Accounts written off.
(2) Part of sale of Buy Direct, Inc.
(3) Amounts charged to revenue to cover underdelivery of guaranteed impressions.
65
<PAGE> 68
S-2 Independent Auditors' Report on Schedule
The Board of Directors
CNET, Inc.
Under date of February 9, 1999, except as to paragraph 5 of footnote 5
and footnote 10, which are as of March 22, 1999, we reported on the consolidated
balance sheets of CNET, Inc., and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, as contained in the annual report on Form 10-K for the year 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statements
schedule in the annual report on Form 10-K for the year 1998. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
San Francisco, California
March 22, 1999
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<PAGE> 69
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Snap! LLC:
We have audited the accompanying balance sheets of Snap! LLC as of
December 31, 1997 and 1998, and the related statements of operations, members'
deficit, and cash flows for each of the years in the two-year period ended
December 31, 1998. These financial statements are the responsibility of Snap!
LLC's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Snap! LLC as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
June 18, 1999, except as to
Note 11(c) which is as of June 25, 1999
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<PAGE> 70
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ -- 865 587
Accounts receivable, net of allowance for doubtful
accounts of $0 at December 31, 1997, $469 at ......... 367 3,015 3,166
December 31, 1998, and $683 at March 31, 1999
Due from CNET .......................................... -- 655 --
Prepaid expenses and other current assets .............. -- 1,778 805
-------- -------- ----------
Total current assets ................................. 367 6,313 4,558
Property and equipment, net ............................ 1,127 4,674 6,313
Investments ............................................ -- 605 2,031
Deposits and other assets .............................. 36 42 40
-------- -------- ----------
Total assets ......................................... $ 1,530 11,634 12,942
======== ======== ==========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ....................................... $ 312 2,721 4,175
Accrued and other liabilities .......................... 216 2,846 3,313
Deferred revenue ....................................... 400 553 915
Due to CNET ............................................ -- -- 833
Due to NBC ............................................. -- -- 1,192
-------- -------- ----------
Total current liabilities ............................ 928 6,120 10,428
Line of credit ............................................ -- 13,500 20,500
-------- -------- ----------
Total liabilities .................................... 928 19,620 30,928
-------- -------- ----------
Commitments
Members' equity:
Members' equity ........................................ 16,170 48,972 65,918
Deferred compensation .................................. -- (2,102) (4,873)
Accumulated deficit .................................... (15,568) (54,856) (79,031)
-------- -------- ----------
Total members' equity (deficit) ...................... 602 (7,986) (17,986)
-------- -------- ----------
Total liabilities and members' equity (deficit) ...... $ 1,530 11,634 12,942
======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 71
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ------------------------
1997 1998 1998 1999
-------- ------- --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues ................................... $ 817 7,317 861 5,361
Cost of net revenues ........................... 1,520 7,626 1,624 2,701
-------- ------- --------- ------------
Gross profits (deficit) ...................... (703) (309) (763) 2,660
Operating expenses:
Product development .......................... 9,403 6,263 1,184 2,195
Sales and marketing .......................... 4,090 12,482 1,332 7,497
General and administrative ................... 1,372 5,939 670 2,705
Amortization of deferred compensation ........ -- 160 -- 519
Promotion and advertising provided by NBC .... -- 14,060 -- 13,656
-------- ------- --------- ------------
Total operating expenses ................... 14,865 38,904 3,186 26,572
-------- ------- --------- ------------
Operating loss ............................. (15,568) (39,213) (3,949) (23,912)
Other expense, net ............................. -- (75) -- (263)
-------- ------- --------- ------------
Net loss ................................... $(15,568) (39,288) (3,949) (24,175)
======== ======== ========= ============
Basic and diluted net loss per unit ............ $ (1.33) (2.95) (0.34) (1.67)
======== ======== ========= ============
Units used in per unit calculation ............. 11,700 13,301 11,700 14,444
======== ======== ========= ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 72
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBER UNITS DEFERRED TOTAL
------------------- COMPENSATION ACCUMULATED MEMBERS'
UNITS AMOUNT EXPENSE DEFICIT EQUITY (DEFICIT)
------- ------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Contributed capital from CNET, Inc. ...... 11,700 $16,170 -- -- 16,170
Net loss ................................. -- -- -- (15,568) (15,568)
------- ------- -------- -------- -----------
Balances as of December 31, 1997 ......... 11,700 $16,170 -- (15,568) 602
Contributed capital from CNET, Inc. ...... -- 10,616 -- -- 10,616
Cash contribution from NBC ............... 2,744 5,864 -- -- 5,864
Promotion and advertising provided
by NBC ............................... -- 14,060 -- -- 14,060
Grant of compensatory stock options ...... -- 2,262 (2,262) -- --
Amortization of deferred compensation .... -- -- 160 -- 160
Net loss ................................. -- -- -- (39,288) (38,288)
------- ------- -------- -------- -----------
Balances as of December 31, 1998 ......... 14,444 $48,972 (2,102) (54,856) (7,986)
Promotion and advertising provided
by NBC (unaudited) ................... -- 13,656 -- -- 13,656
Grant of compensatory stock options
(unaudited) .......................... -- 3,290 (3,290) -- --
Amortization of deferred compensation
(unaudited) .......................... -- -- 519 -- 519
Net loss (unaudited) ..................... -- -- -- (24,175) (24,175)
------- ------- -------- -------- -----------
Balances as of March 31, 1999
(unaudited) .......................... 14,444 $65,918 (4,873) (79,031) (17,986)
======= ======= ======== ======== ===========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 73
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ---------------------
1997 1998 1998 1999
-------- -------- ------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $(15,568) (39,288) (3,949) (24,175)
Adjustments to reconcile net loss to net cash
used in operating activities:
Receipt of stock in exchange for services
provided ....................................... -- (605) -- (1,426)
Depreciation and amortization ..................... 329 929 99 750
Amortization of deferred compensation expense ..... -- 160 -- 519
Promotion and advertising provided by NBC ......... -- 14,060 -- 13,656
Changes in operating assets and liabilities:
Accounts receivable ............................. (367) (2,648) (148) (151)
Receivable from CNET ............................ -- (655) -- 655
Prepaid expenses, deposits and other assets ..... (36) (1,784) (31) 973
Accounts payable ................................ 312 2,409 (151) 1,454
Accrued and other liabilities ................... 216 2,630 152 467
Deferred revenue ................................ 400 153 (200) 362
Due to CNET ..................................... -- -- -- 833
Due to NBC ...................................... -- -- -- 1,192
-------- -------- ------- --------
Net cash used in operating activities ......... (14,714) (24,639) (4,228) (4,891)
-------- -------- ------- --------
Cash flows used in investing activities - purchases
of fixed assets ..................................... (1,456) (4,476) (255) (2,387)
-------- -------- ------- --------
Cash flows from financing activities:
Proceeds from line of credit ........................ -- 13,500 -- 7,000
Capital contribution ................................ 16,170 10,616 4,483 --
Cash contribution from NBC .......................... -- 5,864 -- --
-------- -------- ------- --------
Net cash provided by financing activities ..... 16,170 29,980 4,483 7,000
-------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents ......................................... -- 865 -- (278)
Cash and cash equivalents at beginning of
the period .......................................... -- -- -- 865
-------- -------- ------- --------
Cash and cash equivalents at end of the period ......... $ -- 865 -- 587
======== ======== ======= ========
Supplemental non-cash transactions:
Cash paid for interest .............................. $ -- 13 -- --
======== ======== ======= ========
Supplemental non-cash investing and
financing activities:
Promotion and advertising provided by NBC ........... $ -- 14,060 -- 13,656
======== ======== ======= ========
Grant of compensatory stock options ................. $ -- 2,262 -- 3,290
======== ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
71
<PAGE> 74
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
(a) THE COMPANY
Snap! LLC (Snap or the Company) commenced operations in December 1996
(the Company had no significant operating results during 1996) and was
introduced as a service in September 1997. Snap is an Internet portal service
company that offers a branded network of comprehensive information, media,
ecommerce, communication, and navigation services to millions of users daily.
The Company was incorporated on June 25, 1998 as a Delaware limited
liability company (LLC). Prior to that date, the Company was operated as a
wholly-owned and consolidated operation of CNET, Inc. (CNET). The accompanying
financial statements retroactively reflect the incorporation of the Company as
an LLC to the date of the inception of the Company's operations. On or about
June 30, 1998, as part of a Contribution Agreement entered into between CNET and
NBC, Inc. (NBC) (collectively, the Members), CNET contributed its assets and
liabilities used exclusively in the operation of the Snap service to the LLC for
an approximately 81% ownership interest, while NBC contributed approximately
$5.9 million in cash to the LLC for an approximately 19% ownership interest (see
Note 7). CNET's and NBC's contributions were recorded at their respective
historical carrying amounts.
The accompanying financial statements and related notes also reflect
the historical results of operations and cash flows of Snap while it was
operated by CNET. The statement of operations includes all revenues and costs
directly attributable to Snap, including costs for facilities, functions and
services used by the business and allocations of costs for certain
administrative functions and services performed by centralized departments of
CNET. Costs have been allocated to the Snap operation based on CNET management's
estimate of costs attributable to the Snap operation. Such costs are not
necessarily indicative of the costs that would have been incurred if Snap had
been a separate entity.
(b) LIQUIDITY
The Company has sustained losses and negative cash flows from
operations since inception and expects these conditions to continue into the
foreseeable future. As of March 31, 1999, the Company had accumulated losses
from inception of approximately $79 million. The implementation of the Company's
business plan is dependent upon obtaining additional equity or debt financing
through public or private financing, strategic partnerships or other
arrangements. There can be no assurance that such additional financing will be
available on terms attractive to the Company, or at all. Should additional
external financing not be available, management would curtail the Company's
current growth plans to enable the Company to continue operations through 1999.
72
<PAGE> 75
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements and sponsorships. Advertising revenues are recognized in the
period which the advertisement is displayed, provided that no significant
obligations remain at the end of the period. Company obligations typically
include the guarantee of a minimum number of "impressions" or times that an
advertisement appears in pages viewed by users of the Company's online
properties. To the extent the minimum guaranteed impressions are not delivered,
the Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
The Company also earns revenue on sponsorship contracts from fees
relating to the design, coordination, and integration of customers' content and
links into Snap's online media properties. Such developmental fees are
recognized as revenue once the related activities have been performed and the
customers' Web links are available on Snap's online properties. Snap also
derives revenues from development fees and electronic commerce which to date
have each comprised less than 10% of revenues.
Deferred revenue is primarily comprised of billings in excess of
recognized revenue relating to advertising contracts and payments received
pursuant to sponsorship agreements in advance of revenue recognition.
(b) PRODUCT DEVELOPMENT
Development expenses include expenses which were incurred in the
development of new or improved technologies that enhance the performance of the
Company's Internet service. Costs for development are expensed as incurred.
Costs related to specific products or services are no longer recognized as
development expenses when the specific product or service is launched and
incorporated into the Company's internet service.
(c) ADVERTISING COSTS
All advertising costs are expensed when incurred. Advertising expense,
including the value of advertising provided through barter transactions, totaled
approximately $1,007,000, $18,559,000, $410,000 and $15,463,000 for the years
ended December 31, 1997 and 1998, and the three months ended March 31, 1998 and
1999, respectively. These costs include the value of promotion and advertising
provided by NBC (see Note 7).
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<PAGE> 76
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) CONCENTRATIONS OF CUSTOMERS AND CREDIT RISK
One customer comprised 8% and 27% of net revenues for the year ended
December 31, 1998 and the quarter ended March 31, 1999, respectively, in
conjunction with non-monetary transactions in which the Company received equity
in a private company as consideration for services sold by the Company. One
separate customer accounted for 18% of net revenues for the year ended December
31, 1997. During the years ended December 31, 1997 and 1998, and the three
months ended March 31, 1998 and 1999 no other customer accounted for greater
than 10% of revenues and no other revenues were recorded on non-monetary
transactions in which the Company received equity investments as consideration
for services.
Financial instruments which potentially expose the Company to a
concentration of credit risk consists primarily of trade accounts receivable.
Accounts receivable are typically unsecured and are derived from revenues earned
from customers primarily in the United States. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential credit
losses. At December 31, 1998 and March 31, 1999, no one customer accounted for
more than 10% of the accounts receivable balance.
(e) CASH, CASH EQUIVALENTS, AND INVESTMENTS
The Company considers investments in highly liquid instruments
purchased with remaining maturities of 90 days or less to be cash equivalents.
Cash equivalents are recorded at cost which approximates fair value. The Company
maintains its cash in two depository accounts with high credit quality financial
institutions.
Equity investments in private companies are recorded initially at fair
value when the Company's rights of ownership vest, and subsequently are carried
at the lower of cost or net realizable value.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally three to seven years.
Property and equipment recorded under leasehold improvements are amortized on a
straight-line basis over the shorter of the lease terms or their estimated
useful lives.
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<PAGE> 77
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) INCOME TAXES
Prior to June 25, 1998 the Company's taxable losses were included in
the consolidated tax returns of CNET, Inc. The Company did not receive any
benefit from CNET Inc.'s receipt of such operating losses or research and
development credits.
Upon the incorporation as a Delaware limited liability company on June
26, 1998, the Company's net operating losses inured to the benefit of the
Members. Accordingly, no provision for income taxes is recognized in the
accompanying financial statements as the net loss generated from the Company's
operations was "passed through" to the Members.
(h) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standard (SFAS) No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
governs accounting for software development costs. This statement provides for
capitalization of certain software development costs once technological
feasibility has been established. The costs capitalized are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenues, whichever is greater. No such costs
have been capitalized to date.
(i) STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
using the intrinsic value method. As such, compensation expense is recorded on
the date of grant if the current market price of the underlying membership unit
exceeded the exercise price.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
(k) COMPREHENSIVE LOSS
The Company has no significant comprehensive income or loss items and,
accordingly, the Company's comprehensive loss is the same as net loss for all
periods.
75
<PAGE> 78
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) BARTER TRANSACTIONS
The Company trades advertisements on its online properties in exchange
for advertisements on the online properties of other companies. These revenues
and marketing expenses are recorded at the fair value of services provided or
the fair value of the services received, whichever is more reliably determinable
in the circumstances. Revenue from barter transactions is recognized as income
when advertisements are delivered on the Company's online properties. Expense
from barter transactions is recognized when advertisements are provided to the
Company. Barter revenues and expenses were approximately $342,000, $636,000,
$331,000 and $305,000 for the years ended December 31, 1997 and 1998 and for the
three months ended March 31, 1998 and 1999, respectively.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable, equity investments, accounts payable and long-term debt approximate
their respective fair values.
(n) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured as
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(o) RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. The Company must adopt SFAS
No. 133 by January 1, 2000. Management does not believe the adoption of SFAS No.
133 will have a material effect on the financial position or operations of the
Company.
76
<PAGE> 79
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p) NET LOSS PER UNIT
Basic and diluted loss per unit is computed using the weighted average
number of outstanding units at the end of each period. The following potentially
dilutive units have been excluded from the determination of net loss per unit
for all periods because the effect of such units would have been anti-dilutive:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
<S> <C> <C>
Units issuable under unit option plan .............. 986,662 1,145,413
Units issuable under option to NBC (see Note 7) .... 14,805,556 14,805,556
------------ -----------
15,792,218 15,950,969
============ ===========
</TABLE>
As of December 31, 1998 and March 31, 1999, the weighted average
exercise price of unit options was $2.47 and $2.58, respectively.
(q) INTERIM FINANCIAL DATA
The accompanying financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999, are unaudited. In the opinion of
management, these interim statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The financial data disclosed in these notes to the
financial statements for these periods are also unaudited. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future periods.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ ---------
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Furniture, fixtures, leasehold improvements and equipment .... $ 102 1,763 1,915
Purchased software ........................................... 159 242 345
Computer equipment ........................................... 1,195 3,927 6,059
------- ------- ---------
1,456 5,932 8,319
Less accumulated depreciation and amortization ............... 329 1,258 2,006
------- ------- ---------
$ 1,127 4,674 6,313
======= ======= =========
</TABLE>
77
<PAGE> 80
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(4) CREDIT FACILITIES
As of December 31, 1998, the Company has a revolving line of credit for
$27,000,000 which is secured by substantially all of the Company's assets,
guaranteed by General Electric, parent company of the Company's principal
shareholders, and bears interest at various rates which ranged from 5.40% to
6.86% during the year ended December 31, 1998. Extensions of credit are
available until June 15, 2001. Advances made under the facility shall mature no
later than July 15, 2001. At December 31, 1998, $13,500,000 was outstanding and
$10,170,000 was available under the line of credit. The outstanding balance is
comprised of multiple individual borrowings, which are due between April 6, 1999
and June 28, 1999. The borrowings are classified as long-term on the face of the
balance sheet because the Company has the ability and intent to extend the due
dates beyond December 31, 1999.
At March 31, 1999, $20,500,000 was outstanding and $3,170,000 was
available under the line of credit. The outstanding balance is comprised of
multiple individual borrowings, due between April 6, 1999 and September 22,
1999, and bear interest at various rates ranging from 5.22% to 8.25%.
In both periods, a total of $3,330,000 of the line of credit was
reserved in accordance with the requirements of the Company's facilities lease.
(5) COMMITMENTS
The Company is obligated under a noncancelable operating lease for
office space, expiring in 2008. Rent expense was $200,000, $1,896,000, $250,000,
and $731,000 for the years ended December 31, 1997 and 1998, and for the three
months ended March 31, 1998 and 1999, respectively. The Company subleases
portions of its facilities under noncancelable operating sublease agreements
which expire over the next three years. Rental income from these subleases was
$0, $360,000, $0, and $197,000 for the years ended December 31, 1997 and 1998,
and for the three months ended March 31, 1998 and 1999, respectively. The
Company has no capital lease obligations.
78
<PAGE> 81
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(5) COMMITMENTS (CONTINUED)
As of December 31, 1998, future minimum lease payments for the
Company's operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999..................................................... $ 2,540
2000..................................................... 2,540
2001..................................................... 2,540
2002..................................................... 2,540
2003..................................................... 2,926
Thereafter............................................... 11,503
-----------
$ 24,589
===========
</TABLE>
The minimum operating lease payments have not been reduced by any
future minimum sublease rentals totaling $1,614,000 due under noncancelable
subleases over the next three years.
(6) OPTION PLAN
A summary of the Company's option activity and related information
through March 31, 1999 follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF UNITS PRICES
---------- ---------
<S> <C> <C>
Options outstanding - December 31, 1997 ...................... -- $ --
Granted ...................................................... 1,012,572 7.79
Canceled ..................................................... (25,910) 7.79
----------
Options outstanding, December 31, 1998 ....................... 986,662 7.79
Granted (unaudited) .......................................... 173,574 12.38
----------
Canceled (unaudited) ......................................... (14,823) 7.79
----------
Options outstanding, March 31, 1999 (unaudited) .............. 1,145,413 8.49
========== =========
Options exercisable, December 31, 1998 and March 31, 1999
(unaudited) ................................................ 27,673 7.79
========== =========
</TABLE>
79
<PAGE> 82
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(6) OPTION PLAN (CONTINUED)
The following summarizes information about options outstanding as of
March 31, 1999:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF UNITS WEIGHTED AVERAGE REMAINING
-------------- --------------- --------------------------
CONTRACTUAL LIFE (YRS.)
-----------------------
<S> <C> <C>
$7.79 1,111,461 9.42
$31.25 33,952 9.95
---------------
1,145,413 9.44
===============
</TABLE>
As of December 31, 1998 and March 31, 1999, options available for grant
under the Company's option plan totaled 618,276 and 459,525, respectively.
For the year ended December 31, 1998 and the three months ended March
31, 1999, the Company recorded $2,262,000 and $3,290,000, respectively, of
deferred compensation charges representing the difference between the deemed
fair value of the membership unit on the date of grant and the option exercise
price on the date of grant. Deferred compensation will be amortized over the
four-year vesting period of the options using an accelerated method. During the
year ended December 31, 1998 and the three months ended March 31, 1999, $160,000
and $519,000 of amortization of deferred compensation was recognized as expense.
If compensation cost for the Company's option plan had been determined
based on the fair value at the grant date for awards issued in the year ending
December 31, 1998, consistent with the provisions of SFAS No. 123 Accounting for
Stock-Based Compensation, then the Company's net loss would have been increased
to the pro forma amounts indicated below (in thousands):
<TABLE>
<S> <C>
Net loss - as reported..................................... $39,288
Net loss - pro forma....................................... $39,646
</TABLE>
The weighted average fair value at date of grant for options granted
for the year ending December 31, 1998 was $3.88. The fair value of each option
grant was estimated on the date of grant using the minimum value option pricing
model with the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate................................................ 6%
Weighted-average expected life of the options.......................... 4 years
Dividend rate.......................................................... --
</TABLE>
80
<PAGE> 83
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS
Prior to June 30, 1998, all of the expenditures of the Company were
incurred by CNET and charged to the Company. These expenditures included
allocations for accounting, legal, network operations, facilities, certain
product development efforts, and other general expenses. Such allocations were
generally allocated to the Company based on headcount, estimates on the
percentage usage by the Company, or estimates of the time spent by CNET
employees on the business of the company. The following table summarizes direct
and indirect expenses of the Company prior to June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998
1997 TO JUNE 30, 1998
---- ----------------
<S> <C> <C>
COST OF NET REVENUES
Direct expenses paid by CNET on behalf of the Company ...... $ 1,055 3,066
Expenses allocated by CNET to the Company .................. 465 868
---------- ----------
1,520 3,934
========== ==========
PRODUCT DEVELOPMENT
Direct expenses paid by CNET on behalf of the Company ...... $ 8,471 884
Expenses allocated by CNET to the Company .................. 932 1,418
---------- ----------
9,403 2,302
========== ==========
SALES AND MARKETING
Direct expenses paid by CNET on behalf of the Company ...... $ 1,806 1,862
Expenses allocated by CNET to the Company .................. 2,284 1,507
---------- ----------
4,090 3,369
========== ==========
GENERAL AND ADMINISTRATIVE
Direct expenses paid by CNET on behalf of the Company ...... $ 73 133
Expenses allocated by CNET to the Company .................. 1,299 1,274
---------- ----------
1,372 1,407
========== ==========
</TABLE>
Such allocations are not necessarily indicative of the costs that would
have been incurred if the Company had been a separate entity. However,
management believes the differences between the allocated costs and the cost to
obtain such services from an outside third party would not be significant.
81
<PAGE> 84
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
Following June 30, 1998, the Company began direct procurement and
payment of all of its expenses, with the exception of certain services it
contracted with CNET to provide or maintain. Such services include creative
services, human resources, accounting, facilities, technology support, bandwidth
and hosting support, and sales and marketing, and the Company recorded expenses
totaling $3.7 million and $1.6 million for the year ended December 31, 1998 and
for the three months ended March 31, 1999, respectively, for amounts due to CNET
for such services.
NBC has provided certain promotional and other services to the Company
since its investment date. NBC has provided advertising and promotion services
to the Company which have been recorded as capital contributions at the time the
services were provided based on the average CPM value for commercial air time
during the period the services were provided. The Company has recorded
advertising and promotion expenses of approximately $14.1 million and $13.7
million for the year ended December 31, 1998 and the three months ended March
31, 1999, respectively, at the average CPM value for commercial air time during
the period the services were provided. NBC is not committed to provide such
services to the Company. NBC has provided other services to the Company related
to advertising production and legal support and the Company has recorded
expenses totaling $0.2 million and $1.2 million for the year ended December 31,
1998 and for the three months ended March 31, 1999, respectively, for amounts
due to NBC for such services.
During the years ended December 31, 1997 and 1998 and the three months
ended March 31, 1998 and 1999, the Company has recorded no significant revenues
from CNET, General Electric, NBC or any of their affiliates.
The Company's credit facility is guaranteed by General Electric, parent
company of NBC (see Notes 4 and 11).
As defined in the Contribution Agreement, NBC has an option to purchase
14,805,556 membership units for an aggregate price of $31,365,802. The option
expires in June, 2001.
(8) DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan pursuant to Section 401(k)
of the Internal Revenue Code covering all eligible employees. Under the plan,
participating employees may defer a portion of their pretax earnings up to the
Internal Revenue Service annual contribution limit. For the year ended December
31, 1998, the Company did not contribute to the plan.
82
<PAGE> 85
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(9) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operating decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial information
accompanied by disaggregated information about revenue and cost of revenue by
operating segment for purposes of making operating decisions and assessing
financial performance. The information reviewed by the CEO is identical to the
information presented in the accompanying financial statement of operations. The
Company operates in one segment, Internet operations. The Company has had no
international revenues to date.
(10) LEGAL PROCEEDINGS
The Company is presently litigating a dispute with SNAP Technologies,
Inc., which claims to own the SNAP trademark. SNAP Technologies filed a lawsuit
against CNET on November 19, 1998, alleging trademark infringement and related
statutory violations, to which the Company filed an answer on November 24, 1998.
The Company believes that the claims asserted by SNAP Technologies are without
merit, intends to defend against them vigorously, and believes that the ultimate
resolution of this matter will not have a material adverse effect on its
financial position or results of operations.
In March 1999 the Company filed a complaint against CityAuction, Inc.
in connection with an agreement entered into between the Company and CityAuction
to promote CityAuction's online auction site in exchange for monetary
compensation and warrants to purchase shares of CityAuction. The Company is
claiming that CityAuction breached the agreement by refusing to honor the
Company's exercise in February 1999 of its CityAuction warrants, failing to make
a $125,000 payment due to the Company and failing to provide the Company with
notice of CityAuction's pending acquisition by Ticketmaster Online-CitySearch,
Inc. The Company is also claiming that Ticketmaster induced CityAuction to
breach it contractual obligations to the Company. This matter is in the
discovery stage. An unfavorable outcome in this litigation would deny the
Company the economic benefit of the claimed payments and stock ownership of
CityAuction. No amounts contingent upon a favorable outcome in this litigation
have been recorded in the Company's financial statements.
83
<PAGE> 86
SNAP!LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(11) SUBSEQUENT EVENTS
(a) GLOBAL BRAIN INVESTMENT
In April 1999, the Company entered into a series of agreements with
GlobalBrain.net, Inc. (GlobalBrain). In aggregate, the Company provided
GlobalBrain with $2 million in cash and 75,000 membership units in exchange for
(i) a seven-year (with an option to extend an additional five years) exclusive
right to utilize certain GlobalBrain technology (the Technology) within a portal
service, (ii) non-exclusive rights to utilize the Technology in other Snap
products and to sublicense the Technology, (iii) a commitment from GlobalBrain
to provide a minimum of five dedicated GlobalBrain engineers working full time
under the discretion of Snap on custom research and development work for three
years, (iv) a 10% ownership interest in GlobalBrain, and (v) warrants to
purchase an additional 41% of GlobalBrain in three separate tranches over a five
year period. The Company expects to account for this transaction as the
acquisition of certain tangible and intangible assets, which will include
allocations of the consideration surrendered by the Company to the following:
purchased technology, prepaid development fees, and an equity investment in a
private company.
(b) XOOM/NBC/SNAP MERGER
On May 9, 1999, the Company, Xoom.com, Inc., NBC, Inc. and certain of
its affiliates (collectively, NBC), and CNET, Inc. entered into a series of
definitive agreements, (the Agreements) relating to the formation of a new
company to be named NBC Internet, Inc. (NBCi) upon consummation of all the
transactions contemplated by the Agreements. NBCi is expected to include the
businesses of the Company, Xoom.com, Inc., and certain of NBC's Internet assets
(including NBC.com, Videoseeker.com and NBC Interactive Neighborhood) and a 10%
interest in CNBC.com.)
(c) EXTENSION OF CREDIT FACILITY
On June 25, 1999, the Company's revolving line of credit, guaranteed by
General Electric, was increased to $45,000,000 (see Note 4).
84
<PAGE> 87
SNAP! LLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS-- BALANCE AT
BEGINNING OF CHARGED TO COSTS DEDUCTIONS-- END OF
FISCAL YEAR AND EXPENSES WRITEOFFS FISCAL YEAR
------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts .............. -- -- -- --
Year ended December 31, 1998
Allowance for doubtful accounts .............. -- $ 469 -- $ 469
Year ended March 31, 1999
Allowance for doubtful accounts .............. $ 469 $ 214 -- $ 683
</TABLE>
<PAGE> 88
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Managers
Snap! LLC:
Under date of June 18, 1999, except as to Note 11(c), which is as of
June 25, 1999, we reported on the balance sheets of SNAP! LLC as of December
31, 1997 and 1998, and the related statements of operations, members' deficit,
and cash flows for each of the years in the two-year period ended December 31,
1998, as contained in the annual report of CNET, Inc. on Form 10-K/A for the
year 1998. In connection with our audits of the aforementioned financial
statements, we also audited the related financial statement schedule in the
Form 10-K/A. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
June 18, 1999
<PAGE> 89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Registrant's definitive Proxy
Statement for its 1999 annual meeting, which has been filed pursuant to
Regulation 14A (the "1999 Proxy Statement"), under the caption "Management."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the 1999 Proxy Statement, under the
caption "Executive Compensation and Other Information," but specifically
excluding the information under the captions "-- Performance Graph" and
"--Compensation Committee's Report on Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the 1999 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the 1999 Proxy Statement under the
caption "Certain Relationships and Related Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS:
(1) Financial Statements. The following consolidated financial statements
are filed as a part of this report under Item 8, "Financial Statements
and Supplementary Data":
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
85
<PAGE> 90
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report of KPMG LLP
SNAP! LLC Balance Sheet as of December 31, 1998 and 1997 and as of
March 31, 1999
SNAP! LLC Statements of Operations for the years ended December 31,
1998 and 1997 and for the three months ended March 31, 1999 and 1998
SNAP! LLC Statements of Members' Equity (Deficit) for the years ended
December 31, 1998 and 1997 and for the three months ended March 31,
1999
SNAP! LLC Statements of Cash Flows for the years ended December 31,
1998 and 1997 and for the three months ended March 31, 1999 and 1998
Notes to Financial Statements
Independent Auditors' Report of KPMG LLP
(2) Financial Statement Schedules. The following financial statement
schedules are filed as part of this report:
Schedule II Valuation and Qualifying Accounts for CNET, Inc.
Independent auditors report on schedule for CNET, Inc.
Schedule II Valuation and Quarter Accounts for SNAP! LLC
Independent auditors report on Schedule for SNAP! LLC
(3) Exhibits.
3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into CNET,
Inc.
3.2(2) -- Certificate of Amendment of Certificate of Incorporation of the
Company
3.3(3) -- Certificate of Ownership and Merger of Gamecenter.com, Inc.,
Finder.com, Inc., Buyer.com, Inc. and Virtual Software Library,
Inc. into CNET, Inc.
3.4(1) -- Amended and Restated Bylaws of the Company
4.1(1) -- Specimen of Common Stock Certificate
10.1(1) -- CNET, Inc. Amended and Restated Stock Option Plan
10.2(1) -- Employment Agreement, dated as of October 19, 1994, between the
Company and Halsey M. Minor
10.3(3) -- Employment Agreement, dated as of October 19, 1994, between the
Company and Shelby W. Bonnie
10.4(1) -- Employment Agreement, dated to be effective as of December 1,
1993 and amended as of August 1, 1995 and as of April 1, 1996,
between the Company and Kevin Wendle
10.5(1) -- Employment Agreement, dated to be effective as of February 20,
1995 and amended as of September 19, 1995, between the Company
and Jonathan Rosenberg
10.6(1) -- Option Exercise Agreement, dated as of April 9, 1996, between the
Company and Kevin Wendle
10.7(1) -- Promissory Note of Kevin Wendle, payable to the Company, dated as
of April 9, 1996
10.8(1) -- Lease Agreement, dated as of January 28, 1994, between the
Company and Montgomery/North Associates and amended as of January
31, 1995 and as of October 19, 1995
10.9(1) -- Lease, dated as of October 19, 1995, between the Company and The
Ronald and Barbara Kaufman Revocable Trust, et al.
10.10(1) -- Agreement, dated as of February 1, 1995, between the Company to
USA Networks
86
<PAGE> 91
10.11(1) -- Warrant to Purchase Common Stock, dated February 9 1995, issued
by the Company to USA Networks
10.12(1) -- Series C Convertible Preferred Stock Purchase Warrant, dated as
of May 25, 1995, issued by the Company to Vulcan Ventures
Incorporated
10.13(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as
of January 23, 1996. Issued by the Company to the Bonnie Family
Partnership
10.14(1) -- Operating Agreement of E! Online, LLC, dated as of January 30,
1996, between the Company and E! Entertainment Television, Inc.
10.15(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as
of February 20, 1996 issued by the Company to Vulcan Ventures
Incorporated
10.16(1) -- Amended and Restated Agreement, dated as of July 1, 1996, between
the Company and USA Networks
10.17(1) -- Subscription Agreement, dated as of April 26, 1996, between the
Company and the Series E Purchasers identified therein
10.18(1) -- 1996 Employee Stock Purchase Plan of the Company
10.19(1) -- Stock Purchase Agreement between Intel Corporation and the
Company dated July 1, 1996
10.20(4) -- Stock Purchase Agreement between Vignette Corporation and the
Company
10.21(5) -- Letter Agreement, dated February 20, 1997, between the Company
and Kevin Wendle
10.22(2) -- CNET, Inc. 1997 Stock Option Plan
10.23(6) -- Stock Purchase Agreement, dated as of June 4, 1997, between Intel
Corporation and the Company
10.24(7) -- Master Agreement, dated as of June 30, 1997, among the Company,
E! Entertainment Television, Inc. and E! Online, LLC
10.25(8) -- Security and Loan Agreement between Imperial Bank and the
Company, dated July 24, 1997
10.26(8) -- Note from the Company to Imperial Bank dated July 24, 1997
10.27(8) -- Loan and Security Agreement between The CIT Group and the Company
dated September 5, 1997
10.28(8) -- Office Lease between One Beach Street, LLC and the Company dated
September 24, 1997
10.29(9) -- Stock Purchase Agreement, dated as of December 18, 1997, among
the Company and the Purchasers identified therein
10.30(10) -- Agreement and Plan of Merger, dated as of May 7, 1998 by and
among CNET, Inc., and CNET Acquisition Corp., U. Vision Inc. and
the stockholders of U. Vision Inc.
10.31(11) -- Contribution Agreement, dated as of June 4, 1998, by and among
the Company, NBC and Snap! LLC.
10.32(11) -- Amended and Restated Limited Liability Company Agreement of Snap!
LLC, dated as of June 30, by and among the Company and NBC
Multimedia, Inc.
87
<PAGE> 92
10.33(11) -- Stock Purchase Agreement, dated as of June 4, 1998, by and
between the Company and NBC
10.34(2) -- Agreement, dated as of July 1, 1998, between USA Networks and the
Company
10.35(12) -- Agreement and Plan of Merger, dated as of February 2, 1999, by
and among CNET, Inc., NetVentures, Inc. and the stockholders of
NetVentures, Inc.
10.36(12) -- Purchase Agreement, dated as of December 18, 1998, by and among
Jenesys LLC and Steve Jenkins
10.37(12) -- Amendment No. 1 to Purchase Agreement, dated as of January 22,
1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins
10.38(12) -- Amendment No. 2 to Purchase Agreement, dated as of February 11,
1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins
10.39(12) -- Agreement and Plan of Merger, dated as of February 19, 1999, by
and among CNET, Inc., AuctionGate Interactive, Inc. and the
stockholders of AuctionGate, Inc.
10.40(13) -- Indenture dated March 8, 1999 between the Company and The Bank of
New York, as trustee
10.41(13) -- Form of 5% Convertible Subordinated Note due 2006
10.42(13) -- Registration Agreement dated March 8, 1999 between the Company
and Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc.
and Volpe Brown & Company, LLP, as Representatives of the Initial
Purchasers
21.1(1) -- List of Subsidiary Corporations
23.1* -- Consent of Independent Auditors
23.2* -- Consent of Independent Auditors
- ------------------
* Filed herewith.
(1) Incorporated by reference from a previously filed exhibit to the
Company's Registration Statement on Form SB-2, registration no.
333-4752-LA.
(2) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(3) Incorporated by reference from a previously filed exhibit to the
Company's Registration Statement on Form S-8, registration no.
333-34491.
(4) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996.
(5) Incorporated by reference from an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1997.
88
<PAGE> 93
(7) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K dated July 11, 1997.
(8) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997.
(9) Incorporated by reference from a previously filed exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
(10) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed May 22, 1998.
(11) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed July 15, 1998.
(12) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed March 1, 1999.
(13) Incorporated by reference from a previously filed exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
89
<PAGE> 94
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
By /s/ HALSEY M. MINOR
------------------------------------
Halsey M. Minor
Chairman of the Board
and Chief Executive Officer
Date: August 2, 1999
---------------------------------
By /s/ DOUGLAS N. WOODRUM
------------------------------------
Douglas N. Woodrum
Executive Vice President and
Chief Financial Officer
Date: August 2, 1999
---------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By /s/ HALSEY M. MINOR
------------------------------------
Halsey M. Minor
Chairman of the Board
and Chief Executive Officer
Date: August 2, 1999
---------------------------------
By /s/ SHELBY W. BONNIE
------------------------------------
Shelby W. Bonnie
Vice Chairman of the Board
Date: August 2, 1999
---------------------------------
By /s/ DOUGLAS N. WOODRUM
------------------------------------
Douglas N. Woodrum
Director, Executive Vice President
and Chief Financial Officer
Date: August 2, 1999
---------------------------------
90
<PAGE> 95
By
------------------------------------
John C. "Bud" Colligan
Director
Date:
---------------------------------
By /s/ MITCHELL KERTZMAN
------------------------------------
Mitchell Kertzman
Director
Date: August 2, 1999
---------------------------------
By /S/ ERIC ROBISON
Eric Robison
Director
Date: August 2, 1999
---------------------------------
By /S/ DAVID P. OVERMYER
------------------------------------
David P. Overmyer
Vice President, Finance and Administration
(Principal Accounting Officer)
Date: August 2, 1999
---------------------------------
91
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into CNET,
Inc.
3.2(2) -- Certificate of Amendment of Certificate of Incorporation of the
Company
3.3(3) -- Certificate of Ownership and Merger of Gamecenter.com, Inc.,
Finder.com, Inc., Buyer.com, Inc. and Virtual Software Library,
Inc. into CNET, Inc.
3.4(1) -- Amended and Restated Bylaws of the Company
4.1(1) -- Specimen of Common Stock Certificate
10.1(1) -- CNET, Inc. Amended and Restated Stock Option Plan
10.2(1) -- Employment Agreement, dated as of October 19, 1994, between the
Company and Halsey M. Minor
10.3(3) -- Employment Agreement, dated as of October 19, 1994, between the
Company and Shelby W. Bonnie
10.4(1) -- Employment Agreement, dated to be effective as of December 1,
1993 and amended as of August 1, 1995 and as of April 1, 1996,
between the Company and Kevin Wendle
10.5(1) -- Employment Agreement, dated to be effective as of February 20,
1995 and amended as of September 19, 1995, between the Company
and Jonathan Rosenberg
10.6(1) -- Option Exercise Agreement, dated as of April 9, 1996, between the
Company and Kevin Wendle
10.7(1) -- Promissory Note of Kevin Wendle, payable to the Company, dated as
of April 9, 1996
10.8(1) -- Lease Agreement, dated as of January 28, 1994, between the
Company and Montgomery/North Associates and amended as of January
31, 1995 and as of October 19, 1995
10.9(1) -- Lease, dated as of October 19, 1995, between the Company and The
Ronald and Barbara Kaufman Revocable Trust, et al.
10.10(1) -- Agreement, dated as of February 1, 1995, between the Company to
USA Networks
</TABLE>
<PAGE> 97
<TABLE>
<S> <C>
10.11(1) -- Warrant to Purchase Common Stock, dated February 9 1995, issued
by the Company to USA Networks
10.12(1) -- Series C Convertible Preferred Stock Purchase Warrant, dated as
of May 25, 1995, issued by the Company to Vulcan Ventures
Incorporated
10.13(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as
of January 23, 1996. Issued by the Company to the Bonnie Family
Partnership
10.14(1) -- Operating Agreement of E! Online, LLC, dated as of January 30,
1996, between the Company and E! Entertainment Television, Inc.
10.15(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as
of February 20, 1996 issued by the Company to Vulcan Ventures
Incorporated
10.16(1) -- Amended and Restated Agreement, dated as of July 1, 1996, between
the Company and USA Networks
10.17(1) -- Subscription Agreement, dated as of April 26, 1996, between the
Company and the Series E Purchasers identified therein
10.18(1) -- 1996 Employee Stock Purchase Plan of the Company
10.19(1) -- Stock Purchase Agreement between Intel Corporation and the
Company dated July 1, 1996
10.20(4) -- Stock Purchase Agreement between Vignette Corporation and the
Company
10.21(5) -- Letter Agreement, dated February 20, 1997, between the Company
and Kevin Wendle
10.22(2) -- CNET, Inc. 1997 Stock Option Plan
10.23(6) -- Stock Purchase Agreement, dated as of June 4, 1997, between Intel
Corporation and the Company
10.24(7) -- Master Agreement, dated as of June 30, 1997, among the Company,
E! Entertainment Television, Inc. and E! Online, LLC
10.25(8) -- Security and Loan Agreement between Imperial Bank and the
Company, dated July 24, 1997
10.26(8) -- Note from the Company to Imperial Bank dated July 24, 1997
10.27(8) -- Loan and Security Agreement between The CIT Group and the Company
dated September 5, 1997
10.28(8) -- Office Lease between One Beach Street, LLC and the Company dated
September 24, 1997
10.29(9) -- Stock Purchase Agreement, dated as of December 18, 1997, among
the Company and the Purchasers identified therein
10.30(10) -- Agreement and Plan of Merger, dated as of May 7, 1998 by and
among CNET, Inc., and CNET Acquisition Corp., U. Vision Inc. and
the stockholders of U. Vision Inc.
10.31(11) -- Contribution Agreement, dated as of June 4, 1998, by and among
the Company, NBC and Snap! LLC.
10.32(11) -- Amended and Restated Limited Liability Company Agreement of Snap!
LLC, dated as of June 30, by and among the Company and NBC
Multimedia, Inc.
</TABLE>
<PAGE> 98
<TABLE>
<S> <C>
10.33(11) -- Stock Purchase Agreement, dated as of June 4, 1998, by and
between the Company and NBC
10.34(2) -- Agreement, dated as of July 1, 1998, between USA Networks and the
Company
10.35(12) -- Agreement and Plan of Merger, dated as of February 2, 1999, by
and among CNET, Inc., NetVentures, Inc. and the stockholders of
NetVentures, Inc.
10.36(12) -- Purchase Agreement, dated as of December 18, 1998, by and among
Jenesys LLC and Steve Jenkins
10.37(12) -- Amendment No. 1 to Purchase Agreement, dated as of January 22,
1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins
10.38(12) -- Amendment No. 2 to Purchase Agreement, dated as of February 11,
1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins
10.39(12) -- Agreement and Plan of Merger, dated as of February 19, 1999, by
and among CNET, Inc., AuctionGate Interactive, Inc. and the
stockholders of AuctionGate, Inc.
10.40(13) -- Indenture dated March 8, 1999 between the Company and The Bank of
New York, as trustee
10.41(13) -- Form of 5% Convertible Subordinated Note due 2006
10.42(13) -- Registration Agreement dated March 8, 1999 between the Company
and Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc.
and Volpe Brown & Company, LLP, as Representatives of the Initial
Purchasers
21.1(1) -- List of Subsidiary Corporations
23.1* -- Consent of Independent Auditors
23.2* -- Consent of Independent Auditors
</TABLE>
- ------------------
* Filed herewith.
(1) Incorporated by reference from a previously filed exhibit to the
Company's Registration Statement on Form SB-2, registration no.
333-4752-LA.
(2) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(3) Incorporated by reference from a previously filed exhibit to the
Company's Registration Statement on Form S-8, registration no.
333-34491.
(4) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996.
(5) Incorporated by reference from an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1997.
<PAGE> 99
(7) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K dated July 11, 1997.
(8) Incorporated by reference from a previously filed exhibit to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997.
(9) Incorporated by reference from a previously filed exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
(10) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed May 22, 1998.
(11) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed July 15, 1998.
(12) Incorporated by reference from a previously filed exhibit to the
Company's Current Report on Form 8-K filed March 1, 1999.
(13) Incorporated by reference from a previously filed exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
CNET, Inc.
We consent to incorporation by reference in the registration statement on Forms
S-8 (File Nos. 333-07667, 333-34491 and 333-67325) and Forms S-3 (File Nos.
333-46203, 333-56633 and 333-73023) of CNET, Inc. of our report dated February
9, 1999, except as to paragraph 5 of footnote 5 and footnote 10 which are as of
March 22, 1999, and our report on Schedule dated March 22, 1999, relating to
consolidated balance sheets of CNET, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 annual report on Form 10-K/A of CNET, Inc.
/s/ KPMG LLP
San Francisco, California
August 2, 1999
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
CNET, Inc.
We consent to incorporation by reference in the registration statement on Forms
S-8 (File Nos.333-07667, 333-34491 and 333-67325) and Forms S-3 (File Nos.
333-46203, 333-56633 and 333-73023) of CNET, Inc. of our report dated June 8,
1999, except as to Note 11(c) which is as of June 25, 1999, relating to the
balance sheets of SNAP! LLC as of December 31, 1997 and 1998, and the related
statements of operations, members' deficit, and cash flows for each of the years
in the two-year period ended December 31, 1998, which report appears in the
December 31, 1998 annual report on Form 10-K/A of CNET, Inc.
/s/ KPMG LLP
San Francisco, California
AUGUST 2, 1999
