<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code (415) 395-7800
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
None None
</TABLE>
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. [ ]
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.
================================================================================
<PAGE> 2
PART I
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 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
2
<PAGE> 3
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.
3
<PAGE> 4
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.
4
<PAGE> 5
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
of $3,151,406 issuance .... --
costs ..................... -- -- 5,200,000 520 37,776,074 -- 37,776,594
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.
5
<PAGE> 6
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 --
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
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.
7
<PAGE> 8
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)
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
8
<PAGE> 9
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)
excess cash in low risk, liquid instruments. No losses have been experienced on
such investments.
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
9
<PAGE> 10
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)
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.
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>
10
<PAGE> 11
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)
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.
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.
11
<PAGE> 12
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)
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 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.
12
<PAGE> 13
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)
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>
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.
13
<PAGE> 14
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)
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:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------
<S> <C>
1999 994,177
2000 535,728
2001 33,517
----------
$1,563,422
==========
</TABLE>
14
<PAGE> 15
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)
(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 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.
15
<PAGE> 16
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) 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.
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
16
<PAGE> 17
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)
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.
17
<PAGE> 18
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)
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>
18
<PAGE> 19
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)
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>
19
<PAGE> 20
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)
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.
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.
20
<PAGE> 21
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)
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.
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
21
<PAGE> 22
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)
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.
(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.
22
<PAGE> 23
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)
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.
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
23
<PAGE> 24
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)
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>
24
<PAGE> 25
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)
(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.
25
<PAGE> 26
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>
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.
26
<PAGE> 27
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
27
<PAGE> 28
FINANCIAL STATEMENTS OF SNAP! LLC
The audited financial statements of Snap! LLC for the years ended
December 31, 1998 and December 31, 1997 are incorporated by reference to pages
F-34 to F-50 of the Registration Statement on Form S-4 of NBC Internet, Inc.
(Registration No. 333-82639) filed November 1, 1999.
28
<PAGE> 29
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
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 and 1998
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 Qualifying Accounts for SNAP! LLC
Independent auditors report on schedule for SNAP! LLC
29
<PAGE> 30
(3) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
<S> <C> <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
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
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C>
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>
31
<PAGE> 32
<TABLE>
<S> <C> <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
99.1* -- Snap! LLC Financial Statements
</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.
32
<PAGE> 33
(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.
(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.
33
<PAGE> 34
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: November 10, 1999
------------------------------------
By /s/ DOUGLAS N. WOODRUM
-------------------------------------
Douglas N. Woodrum
Executive Vice President and
Chief Financial Officer
Date: November 10, 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: November 10, 1999
------------------------------------
By /s/ SHELBY W. BONNIE
-------------------------------------
Shelby W. Bonnie
Vice Chairman of the Board
Date: November 10, 1999
------------------------------------
<PAGE> 35
By /s/ DOUGLAS N. WOODRUM
-------------------------------------
Douglas N. Woodrum
Director, Executive Vice President
and Chief Financial Officer
Date: November 10, 1999
------------------------------------
By
-------------------------------------
John C. "Bud" Colligan
Director
Date:
------------------------------------
By
-------------------------------------
Mitchell Kertzman
Director
Date: November , 1999
------------------------------------
By
-------------------------------------
Eric Robison
Director
Date: November , 1999
------------------------------------
By /s/ DAVID P. OVERMYER
-------------------------------------
David P. Overmyer
Vice President, Finance and
Administration (Principal
Accounting Officer)
Date: November 10, 1999
------------------------------------
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <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
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
</TABLE>
<PAGE> 37
<TABLE>
<S> <C> <C>
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> 38
<TABLE>
<S> <C> <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
99.1* -- Snap! LLC Financial Statements
</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.
<PAGE> 39
(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.
(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 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
November 10, 1999
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
SNAP! LLC
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 our report dated June 18, 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
November 10, 1999
<PAGE> 1
EXHIBIT 99.1
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
<PAGE> 2
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ -- 865 37
Accounts receivable, net of allowance for doubtful accounts of $0 at
December 31 1997, $469 at December 31, 1998, and $807 at June 30, 1999... 367 3,015 4,415
Due from CNET.............................................................. -- 655 --
Prepaid expenses and other current assets.................................. -- 1,778 2,075
---------- ---------- ----------
Total current assets..................................................... 367 6,313 6,527
Property and equipment, net.................................................. 1,127 4,674 8,277
Investments.................................................................. -- 605 18,382
Deposits and other assets.................................................... 36 42 2,194
---------- ---------- ----------
Total assets............................................................. $ 1,530 11,634 35,380
========== ========== ==========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................... $ 312 2,721 3,011
Accrued and other liabilities.............................................. 216 2,846 6,357
Deferred revenue........................................................... 400 553 3,741
Due to CNET................................................................ -- -- 2,611
Due to NBC................................................................. -- -- 1,373
---------- ---------- ----------
Total current liabilities................................................ 928 6,120 17,093
Line of credit............................................................... -- 13,500 30,100
---------- ---------- ----------
Total liabilities........................................................ 928 19,620 47,193
---------- ---------- ----------
Commitments
Members' equity:
Members' equity............................................................ 16,170 48,972 86,808
Deferred compensation...................................................... -- (2,102) (9,146)
Other accumulated comprehensive income..................................... -- -- 11,635
Accumulated deficit........................................................ (15,568) (54,856) (101,110)
---------- ---------- ----------
Total members' equity (deficit).......................................... 602 (7,986) (11,813)
---------- ---------- ----------
Total liabilities and members' equity (deficit).......................... $ 1,530 11,634 35,380
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------------------
1997 1998 1998 1999
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net revenues..................................................... $ 817 7,317 1,958 13,368
Cost of net revenues............................................. 1,520 7,626 3,934 5,858
---------- --------- ----------- ----------
Gross profit (deficit)....................................... (703) (309) (1,976) 7,510
Operating expenses:
Product development............................................ 9,403 6,263 2,303 5,009
Sales and marketing............................................ 4,090 12,482 3,368 14,613
General and administrative..................................... 1,372 5,939 1,407 5,744
Amortization of deferred compensation.......................... -- 160 -- 1,766
Promotion and advertising provided by NBC...................... -- 14,060 -- 26,037
---------- --------- ----------- ----------
Total operating expenses..................................... 14,865 38,904 7,078 53,169
---------- --------- ----------- ----------
Operating loss............................................... (15,568) (39,213) (9,054) (45,659)
Other expense, net............................................... -- (75) -- (595)
---------- --------- ----------- ----------
Net loss..................................................... $ (15,568) (39,288) (9,054) (46,254)
========== ========= ========== ==========
Other comprehensive income:
Unrealized gains on available-for-sale securities............ $ -- -- -- 11,635
---------- --------- ----------- ----------
Comprehensive net loss........................................... $ (15,568) (39,288) (9,054) (34,619)
========== ========= ========== ==========
Basic and diluted net loss per unit.............................. $ (1.33) (2.95) (0.77) (3.19)
========== ========= ========== ==========
Units used in per unit calculation............................... 11,700 13,301 11,700 14,481
========== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER TOTAL
MEMBER UNITS DEFERRED ACCUMULATED MEMBERS'
-------------------- COMPENSATION COMPREHENSIVE ACCUMULATED EQUITY
UNITS AMOUNT EXPENSE INCOME DEFICIT (DEFICIT)
--------- --------- ------------- --------------- ------------ -----------
<S> <C> <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) (39,288)
--------- --------- ------ ------ ------------ -----------
Balances as of December 31, 1998.......... 14,444 $ 48,972 (2,102) -- (54,856) (7,986)
Promotion and advertising provided by NBC
(unaudited)............................. -- 26,037 -- -- -- 26,037
Grant of compensatory stock options
(unaudited)............................. -- 8,810 (8,810) -- -- --
Issuance of units in connection with
GlobalBrain transaction (unaudited)..... 75 2,989 -- -- -- 2,989
Unrealized gain on available-for-sale
securities (unaudited).................. -- -- -- 11,635 -- 11,635
Amortization of deferred compensation
(unaudited)............................. -- -- 1,766 -- -- 1,766
Net loss (unaudited)...................... -- -- -- -- (46,254) (46,254)
--------- --------- ------ ------ ------------ -----------
Balances as of June 30, 1999
(unaudited)............................. 14,519 $ 86,808 (9,146) 11,635 (101,110) (11,813)
========= ========= ====== ====== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------------------
1997 1998 1998 1999
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss....................................................... $ (15,568) (39,288) (9,054) (46,254)
Adjustments to reconcile net loss to net cash used in operating
activities:
Receipt of stock in exchange for services provided........... -- (605) -- (4,139)
Depreciation and amortization................................ 329 929 182 1,489
Amortization of deferred compensation expense................ -- 160 -- 1,766
Promotion and advertising provided by NBC.................... -- 14,060 -- 26,037
Changes in operating assets and liabilities:
Accounts receivable.......................................... (367) (2,648) (356) (1,400)
Prepaid expenses, deposits and other assets................ (36) (1,784) (8) 632
Accounts payable........................................... 312 2,409 (80) 290
Accrued and other liabilities.............................. 216 2,630 325 3,511
Deferred revenue........................................... 400 153 (400) 3,188
Due to/from CNET........................................... -- (655) -- 3,266
Due to NBC................................................. -- -- -- 1,373
---------- --------- ----------- ----------
Net cash used in operating activities.................... (14,714) (24,639) (9,391) (10,241)
---------- --------- ----------- ----------
Cash flows used in investing activities:
Cash paid in connection with Global Brain transaction.......... -- -- -- (1,100)
Investment in Net2Phone........................................ -- -- -- (1,000)
Purchases of fixed assets...................................... (1,456) (4,476) (1,136) (5,087)
---------- --------- ----------- ----------
Net cash used in investing activities.................... (1,456) (4,476) (1,136) (7,187)
---------- --------- ----------- ----------
Cash flows from financing activities:
Proceeds from line of credit................................... -- 13,500 -- 16,600
Capital contribution........................................... 16,170 10,616 10,527 --
Cash contribution from NBC..................................... -- 5,864 5,864 --
---------- --------- ----------- ----------
Net cash provided by financing activities................ 16,170 29,980 16,391 16,600
---------- --------- ----------- ----------
Net increase (decrease) in cash and cash equivalents............. -- 865 5,864 (828)
Cash and cash equivalents at beginning of the period............. -- -- -- 865
---------- --------- ----------- ----------
Cash and cash equivalents at end of the period................... $ -- 865 5,864 37
========== ========= ========== ==========
Supplemental non-cash transactions:
Cash paid for interest......................................... $ -- 13 -- 324
========== ========= ========== ==========
Supplemental non-cash investing and financing activities:
Promotion and advertising provided by NBC...................... $ -- 14,060 -- 26,037
========== ========= ========== ==========
Issuance of member units in connection with Global Brain
transaction.................................................. $ -- -- -- 2,989
========== ========= ========== ==========
Grant of compensatory stock options............................ $ -- 2,262 -- 8,810
========== ========= ========== ==========
Unrealized gain on available-for-sale securities............... $ -- -- -- 11,635
========== ========= ========== ==========
Services rendered in exchange for equity investments........... $ -- 605 -- 4,139
========== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 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 June 30, 1999, the Company had accumulated losses from inception
of approximately $101 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.
(C) 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,
<PAGE> 7
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) 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.
(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, $986,000 and $28,367,000 for the years
ended December 31, 1997 and 1998, and the six months ended June 30, 1998 and
1999, respectively. These costs include the value of promotion and advertising
provided by NBC (see Note 7).
<PAGE> 8
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) CONCENTRATIONS OF CUSTOMERS AND CREDIT RISK
One customer comprised 8% and 29% of net revenues for the year ended
December 31, 1998 and the six-months ended June 30, 1999, respectively, in
conjunction with non-monetary transactions in which the Company received equity
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 six months ended June 30,
1998 and 1999 no other customer accounted for greater than 10% of revenues.
During the quarter ended June 30, 1999, the Company received stock in a
private company currently valued at approximately $10 million in exchange for
future services of equivalent value to be rendered by the Company. Subsequent to
the fiscal quarter end, the Company and the private company issuer of the stock
completed an escrow arrangement under which the Company would earn the release
of the shares from escrow. The release of the shares from escrow would be based
on the Company's actual monthly performance during a two-year term. As of June
30, 1999, the Company had earned the release of shares valued at approximately
$200,000, which has been recorded as revenue in the quarter then ended.
No other significant 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 June 30, 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. Equity investments in publicly traded
companies are initially recorded at market value when the Company's rights of
ownership vest and are assumed to be available-for-sale securities which are
carried at market value, with changes in market value recorded as unrealized
gains and losses in total member's equity.
(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
<PAGE> 9
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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 adopted the provisions of SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which established standards for reporting and disclosures
of comprehensive results and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. During the second
quarter of 1999 the Company reported unrealized holding gains arising from
investments classified as available-for-sale. The Company has an investment in
Mail.com, Inc. (Mail.com), which completed an initial public offering during the
second quarter of 1999. The Company's investment in Mail.com was
<PAGE> 10
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded at market value based on the closing price of the stock on June 30,
1999, and the increase in value of the stock was recorded as an unrealized
holding gain in comprehensive loss.
(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,
$473,000 and $896,000 for the years ended December 31, 1997 and 1998 and for the
six months ended June 30, 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, 2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position or operations of the Company.
<PAGE> 11
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 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, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
Units issuable under unit option plan............................ 986,662 1,528,267
Units issuable under option to NBC (see Note 7).................. 14,805,556 14,805,556
------------ ------------
15,792,218 16,333,823
=========== ============
</TABLE>
As of December 31, 1998 and June 30, 1999, the weighted average exercise
price of unit options was $2.47 and $14.78, respectively.
(Q) INTERIM FINANCIAL DATA
The accompanying financial statements as of June 30, 1999 and for the six
months ended June 30, 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) GLOBALBRAIN INVESTMENT
In April 1999, the Company entered into a series of agreements with
GlobalBrain.net, Inc. (GlobalBrain). In aggregate, the Company committed to
provide GlobalBrain with $2 million in cash and 75,000 membership units (valued
at $3 million) 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 accounted for this transaction as
the acquisition of certain tangible and intangible assets, and allocations of
the consideration surrendered by the Company were made to the following:
purchased technology of approximately $2 million, prepaid development fees of
approximately $2 million, and an equity investment in a private company of
approximately $1 million.
<PAGE> 12
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Furniture, fixtures, leasehold improvements and equipment......... $ 102 1,763 1,948
Purchased software................................................ 159 242 662
Computer equipment................................................ 1,195 3,927 8,409
--------- --------- -----------
1,456 5,932 11,019
Less accumulated depreciation and amortization.................... 329 1,258 2,742
--------- --------- -----------
$ 1,127 4,674 8,277
========= ========= ==========
</TABLE>
(5) CREDIT FACILITIES AND COMMITMENTS
(A) LINE OF CREDIT
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.
On June 25, 1999, the Company's revolving line of credit, guaranteed by
General Electric, was increased to $45,000,000. At June 30, 1999, $30,100,000
was outstanding and $11,220,000 was available under the line of credit. The
outstanding balance is comprised of multiple individual borrowings, due between
July 6, 1999, and December 7, 1999, and bear interest at various rates ranging
from 5.22% to 8.25%. These 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 twelve months.
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.
(B) COMMITMENTS
The Company is obligated under a noncancelable operating lease for office
space, expiring in 2008. Rent expense was $200,000, $1,923,000, $500,000, and
$1,456,000 for the years ended December 31, 1997 and 1998, and for the six
months ended June 30, 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 $393,000 for the years ended
<PAGE> 13
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(B) COMMITMENTS (CONTINUED)
December 31, 1997 and 1998, and for the six months ended June 30, 1998 and 1999,
respectively. The Company has no capital lease obligations.
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 totalling $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
June 30, 1999 follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
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).................................................... 578,249 26.49
Canceled (unaudited)................................................... (36,644) 11.18
---------- -----
Options outstanding, June 30, 1999 (unaudited)......................... 1,528,267 14.78
========== -----
Options exercisable, December 31, 1998 and June 30, 1999 (unaudited)... 31,107 7.79
========== -----
</TABLE>
<PAGE> 14
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(6) OPTION PLAN (CONTINUED)
The following summarizes information about options outstanding as of June
30, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICES UNITS LIFE (YRS.) EXERCISE PRICE
- ------------------- ---------- ----------------------- -----------------
<C> <C> <C> <C>
$ 7.79 - $ 7.79 1,103,613 9.17 $ 7.79
$ 31.25 - $31.25 370,353 9.78 $ 31.25
$ 42.00 - $48.50 54,301 9.94 $ 44.65
---------- ---- ---------
$ 7.79 - $48.50 1,528,267 9.35 $ 14.78
========== ==== =========
</TABLE>
As of December 31, 1998 and June 30, 1999, options available for grant under
the Company's option plan totaled 618,276 and 1,721,733, respectively.
For the year ended December 31, 1998 and the six months ended June 30, 1999,
the Company recorded $2,262,000 and $8,810,000 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 six months ended June 30, 1999, $160,000 and
$1,766,000 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>
(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
<PAGE> 15
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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 $3.9 million for the year ended December 31, 1998 and for the
six months ended June 30, 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
<PAGE> 16
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
and promotion expenses of approximately $14.1 million and $26.0 million for the
year ended December 31, 1998 and the six months ended June 30, 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 $1.4 million for the year ended December 31, 1998 and for the six
months ended June 30, 1999, respectively, for amounts due to NBC for such
services.
During the years ended December 31, 1997 and 1998 and the six months ended
June 30, 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 Note 5).
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.
(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 information reviewed by the CEO
for purposes of making operating decisions and assessing financial performance
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 was involved in a dispute with SNAP Technologies, Inc. (SNAP
Tech) which claimed to own the SNAP trademark. SNAP Tech 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. On July
15, 1999, the lawsuit with SNAP Tech was settled. Pursuant to the settlement
<PAGE> 17
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(10) LEGAL PROCEEDINGS (CONTINUED)
agreement, the Company shall pay $200,000, grant an advertising credit of
$1,000,000, and provide certain other promotions to SNAP Tech in exchange for
all worldwide rights to all names, trademarks, and service marks previously used
by SNAP Tech. NBC and CNET will indemnify the Company for this legal settlement.
Accordingly, no amounts related to this settlement have been accrued in the
accompanying financial statements.
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.
