===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / 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 NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3696170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CHESTNUT STREET
SAN FRANCISCO, CA 94111
(Address of principal executive officers) (zip code)
TELEPHONE NUMBER (415) 364-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of April 30, 2000 there were 85,809,402 shares of the registrant's common
stock outstanding.
===============================================================================
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's OMITTED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $169,760 $53,063
Investments in marketable debt securities . 51,116 65,985
Investments in marketable equity securities 495,831 785,909
Accounts receivable, net. . . . . . . . . . 31,834 24,628
Other current assets. . . . . . . . . . . . 28,362 18,743
Restricted cash . . . . . . . . . . . . . . 901 740
------------- -------------
Total current assets . . . . . . . . . 777,804 949,068
Investments in marketable debt securities. . . . 111,818 109,802
Investments in marketable equity securities. . . 53,828 -
Property and equipment, net. . . . . . . . . . . 34,086 30,044
Other assets . . . . . . . . . . . . . . . . . . 72,357 50,609
Goodwill . . . . . . . . . . . . . . . . . . . . 749,116 90,788
------------- -------------
$1,799,009 $1,230,311
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $6,921 $11,461
Accrued liabilities . . . . . . . . . . . . 21,872 16,398
Current portion of long-term debt . . . . . 6,083 5,750
Income taxes payable. . . . . . . . . . . . - 5,398
Deferred tax liability. . . . . . . . . . . 229,348 306,352
------------- -------------
Total current liabilities. . . . . . . 264,224 345,359
Long-term debt . . . . . . . . . . . . . . . . . 233,387 179,114
------------- -------------
Total liabilities. . . . . . . . . . . 497,611 524,473
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 8 7
Additional paid in capital. . . . . . . . . 909,581 218,670
Other comprehensive income. . . . . . . . . 53,747 121,409
Retained earnings . . . . . . . . . . . . . 338,062 365,752
------------- -------------
Total stockholders' equity . . . . . . 1,301,398 705,838
------------- -------------
$1,799,009 $1,230,311
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's OMITTED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
------------- ------------
<S> <C> <C>
Revenues:
Internet. . . . . . . . . . . . . $42,043 $18,424
Broadcast . . . . . . . . . . . . 2,323 1,652
------------- ------------
Total revenues . . . . . . . . 44,366 20,076
Cost of revenues:
Internet. . . . . . . . . . . . . 14,072 6,989
Broadcast . . . . . . . . . . . . 2,722 1,607
------------- ------------
Total cost of revenues . . . . 16,794 8,596
------------- ------------
Gross profit . . . . . . . . . . . . 27,572 11,480
Operating expenses:
Sales and marketing . . . . . . . 14,728 5,120
Development . . . . . . . . . . . 2,447 1,508
General and administrative. . . . 5,994 2,787
Amortization of goodwill. . . . . 28,114 306
------------- ------------
Total operating expenses . . . 51,283 9,721
------------- ------------
Operating income(loss) . . . . . . . (23,711) 1,759
Other income (expense):
Gain (loss) on investments. . . . (3,966) 19,875
Other income (expense), net . . . (13) 238
------------- ------------
Total other income (expense). . . (3,979) 20,113
------------- ------------
Net income(loss) before income tax ($27,690) $21,872
Income taxes - -
------------- ------------
Net income (loss) after income tax ($27,690) $21,872
============= ============
Other comprehensive income (loss), net of tax:
Unrealized holding gains (loss)
arising during the period. . . . (67,662) 127,008
------------- ------------
Comprehensive income (loss) ($95,352) $148,880
============= ============
Basic net income (loss) per share. . ($0.36) $0.31
============= ============
Diluted net income (loss) per share. ($0.36) $0.29
============= ============
Shares used in calculating
basic per share data . . . . . . . 77,422 69,459
============= ============
Shares used in calculating
diluted per share data . . . . . . 77,422 76,423
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's OMITTED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . ($27,690) $21,872
Adjustments to reconcile net income (loss) to net
cash provided (used) in operating activities:
Depreciation and amortization. . . . . . . . . . 31,266 1,851
Amortization of program costs. . . . . . . . . . 2,118 1,949
Allowance for doubtful accounts. . . . . . . . . (959) (80)
Investments for services provided. . . . . . . . (2,274) -
Impairment of privately held investments . . . . 5,203 -
Gain on investments. . . . . . . . . . . . . . . (1,237) (19,875)
Foreign currency translation gain. . . . . . . . (48) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . (6,247) 332
Other current assets. . . . . . . . . . . . . (10,025) (9,651)
Other assets. . . . . . . . . . . . . . . . . (3,899) (3,201)
Accounts payable. . . . . . . . . . . . . . . (4,516) (22)
Accrued liabilities . . . . . . . . . . . . . 4,473 3,122
Income tax liabilities. . . . . . . . . . . . (5,421) -
------------ -----------
Net cash used in operating activities. . . (19,256) (3,703)
------------ -----------
Cash flows from investing activities:
Purchase of marketable debt securities. . . . . . . (16,271) -
Purchase of equity investments. . . . . . . . . . . (5,015) -
Proceeds from sale of marketable debt securities. . 29,123 -
Proceeds from sale of marketable equity securities. 53,269 -
Investments in privately held companies . . . . . . (4,314) -
Cash surplus (deficit) for acquisitions . . . . . . 903 (5,778)
Purchases of equipment. . . . . . . . . . . . . . . (6,933) (1,358)
Purchases of programming assets . . . . . . . . . . (1,875) (2,000)
Deferred interest . . . . . . . . . . . . . . . . . - (690)
------------ -----------
Net cash provided by (used in)
investing activities . . . . . . . . . . 48,887 (9,826)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of convertible debt. . . - 166,943
Net proceeds from issuance of derivative instruments 81,630 -
Net proceeds from employee stock purchase plan. . . 482 190
Net proceeds from exercise of options and warrants 4,954 3,263
Principal payments on capital leases. . . . . . . . - (42)
Principal payments on equipment note. . . . . . . . - (124)
------------ -----------
Net cash provided by financing activities. 87,066 170,230
------------ -----------
Net increase in cash and cash equivalents . . . . . . 116,697 156,701
Cash and cash equivalents at beginning of period . . 53,063 51,538
------------ -----------
Cash and cash equivalents at end of period . . . . . $169,760 $208,239
============ ===========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $4,334 $130
Taxes paid. . . . . . . . . . . . . . . . . . . . . 5,398 -
Supplemental disclosure of noncash transactions:
Issuance of debt for acquisitions . . . . . . . . . $ - $5,098
Unrealized gain (loss) on marketable securities and
investments, net of deferred tax liability . . . ($67,662) $127,008
Deferred tax liability. . . . . . . . . . . . . . . $229,348 $50,300
Issuance of common stock for acquisitions . . . . . $685,476 $ -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CNET NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented.
These condensed financial statements should be read in conjunction
with the audited consolidated financial statements included in the
Company's most recent annual report on Form 10-K, as filed with the
Securities and Exchange Commission, which contains additional
financial and operating information and information concerning the
significant accounting policies followed by the Company.
The condensed consolidated results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the current year or any other period.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding during the period and
diluted net income (loss) per share is computed using the weighted average
number of shares of common stock and common stock equivalents outstanding
during the period. Net loss per share for the three months ended March 31,
2000 does not include the effect of approximately 11,694,985 shares of common
stock equivalents because their effect is anti-dilutive. Net income per
share for the period ended March 31, 1999 does not include the effect
of the potential conversion of convertible debt to approximately 4,622,624
common shares related to the Convertible Subordinated Debt offering completed
on March 8, 1999, because their effect is anti-dilutive.
The following table sets forth the computation of net income
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
2000 1999
-------------- --------
(unaudited)
<S> <C> <C>
Net income (loss) ($27,690) $21,872
Basic and diluted: ============== ============
Weighted average common shares
outstanding used in computing basic 77,422 69,459
net income (loss) per share ============== ============
Basic net income (loss) per share ($0.36) $0.31
============== ============
Weighted average common shares
and dilutive common stock equivalents
outstanding used in computing diluted
net income (loss) per share 77,422 76,423
============== ============
Diluted net income (loss) per share ($0.36) $0.29
============== ============
</TABLE>
Marketable Securities
The Company adopted Statement of Financial SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Investments classified
as available for sale are reported at market value, with the
unrealized gains and losses, net of tax, reported as a separate
component of other comprehensive income (loss) in stockholders' equity.
Realized gains and losses on sales of investments and declines in
value determined to be other than temporary are included in operating
results.
Recent Accounting Pronouncements
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
137 in June 1999, 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
will be required to adopt SFAS No. 133 for the year ended December 31, 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.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No. 101. The SAB summarized certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB No. 101 as amended by SAB No. 101A, and any resulting change
in accounting principle that a registrant would have to report, is effective
no later than the company's fiscal quarter ending June 30, 2000. CNET does
not expect the application of SAB No. 101 to have a material effect on its
financial position or results of operations, nor do we expect to report a
change in accounting principle resulting from its application.
In March 2000, FASB issued Financial Interpretation No. 44 ("FIN44").
FIN 44 clarifies (a) the definition of employee for purposes of applying
Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued
to Employees, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
this Interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this Interpretation covers
events occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
CNET does not expect the application of FIN 44 to have a material effect on
its financial position or results of operations.
(2) Debt
In February 2000, the Company issued an indexed debt instrument
in a public offering of Trust Automatic Common Exchange Securities
("Traces") by NBCi through an Automatic Common Exchange Security Trust
(the "Trust"). The Traces offering consisted of 1,250,000 instruments
which were sold for $81.38 per share, with gross proceeds to the
Company of $102 million. The Traces bear interest at an annual rate
of 7.25%, which will be paid on a quarterly basis by the Trust.
The Traces are payable on February 15, 2003, whereby the holder
can exchange each security with the Company for either (i) between
.0833 shares and one share of NBCi common stock that the
Company holds, (ii) cash equal to the value of those shares, or
(iii) a combination of those shares and cash, at the election of the
Company. The Company has recorded its obligation to the Trust as
long-term debt. As a part of the transaction, the Company pledged
1,250,000 shares of NBCi common stock and contributed approximately $20
million as prepaid interest to the Trust. The Company has recorded
the pledged shares (at market value) and the prepaid interest as
long-term investment in marketable equity securities and other assets,
respectively.
The number of shares, or the amount of cash, that a holder will
receive in exchange for a security will vary, depending on the average
market price of the common stock of NBCi over the twenty business
days before the exchange date. If the average market price is between
$81.38 and $97.65, then the holder will receive the value commensurate
with one share of NBCi common stock for each Trace. If the
average market price is equal to or greater than $97.65, then the
holder will receive value commensurate with 0.833 shares of NBCi common
stock for each Trace. If the average market price is less than $81.38,
then the holder will receive value commensurate with one share of NBCi
common stock for each Trace.
On March 31, 2000 the closing price of NBCi common stock was
$43.06 per share. Accordingly the Company recorded our long-term
debt related to the Traces at $53.8 million, with a corresponding $47.9
million amount recorded as other comprehensive income in the
stockholders' equity section of the balance sheet.
(3) Comprehensive Income
The Company has adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which established standards for
reporting and disclosures of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Financial statements for earlier
periods have been reclassified for comparative purposes.
During the three months ended March 31, 2000 the Company
reported unrealized holding losses arising from investments amounting
to $67.6 million, net of tax of $77.0 million. The unrealized holding
losses arising before tax amounted to $144.6 million. There was a
realized gain in the period of $47.9 million related to the Traces debt
(see Note 2) for which no taxes were recorded.
As of March 31, 2000, the Company owns 1,047,422 shares
of Vignette Corporation ("Vignette"), 717,972 shares of beyond.com,
1,889,753 shares of Mail.com, Inc. ("Mail.com"), 6,497,584
shares of NBC Internet Inc., ("NBCi) (1,250,000 of these shares are pledged;
see Note 2), 1,000,000 shares of Niku Corp. ("Niku"), 874,056 shares of
Deltathree.com, Inc. ("deltathree"), 240,000 shares of Ebiz Enterprises,
Inc. ("Ebiz"), and 5,754 shares of Digital River, all public companies.
The Company sold 650,000 shares of common stock of NBCi as part of a public
offering by NBCi. The Company recorded a realized gain from this transaction
of approximately $744,000. This realized gain was offset by a write down
of $5.2 million related to investments in privately held companies.
(4) 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, Internet operations and
broadcast operations. Asset information regarding Internet operations
and broadcast operations is as follows:
<TABLE>
<CAPTION>
(000s)
(unaudited)
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
Broadcast 1,402 2,215
CNET Online 1,799,040 1,228,096
--------- ---------
Consolidated Total 1,800,442 1,230,311
========= =========
</TABLE>
(5) Acquisitions
On February 15, 2000, the Company acquired Digital Media Services,
Inc., ("DMS") a California Corporation, through the merger of DMS into
the Company. Pursuant to the merger, the Company paid $10.7 million
in cash and issued 148,611 shares of common stock valued at $7.3 million.
DMS provides tools that enable manufacturers and merchants to offer
product-specific promotions directly to customers before and at the
point-of-sale, both online and offline. The Company recorded this
transaction using the purchase method of accounting and recognized
approximately $18.0 million in goodwill. The goodwill is being amortized
on a straight-line basis over a three year period.
On February 29, 2000, the Company completed the acquisition of
mySimon Inc., a California corporation ("mySimon"), through a merger of
CNET Sub, Inc., a Delaware corporation and wholly-owned direct subsidiary
of the Company, with and into mySimon pursuant to which the Company
issued approximately 10.7 million shares of its common stock and issued
364,730 options with a combined fair value of $678.2 million. mySimon
owns and operates www.mySimon.com, an online comparison shopping
web site. The Company recorded this transaction using the purchase
method of accounting and recognized approximately $668.4 million in
goodwill. The goodwill is being amortized on a straight-line basis over a
three year period. The mySimon acquisition was originally to be accounted for
using the pooling-of-interests method of accounting but was changed to
the purchase method of accounting due to the announcement on April 19 by the
Company of a stock repurchase plan (see Note 6).
The following unaudited proforma financial information presents
the combined results of operations of CNET as if the acquisitions of
DMS and mySimon had occurred as of the beginning of 1999, after
giving effect to certain adjustments, including amortization of goodwill.
All of these acquisitions were accounted for by the purchase accounting
method. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had these entities
constituted a single entity during such periods:
Three Months Ended March 31,
(000s, except per share data)
(unaudited)
-----------------------
2000 1999
-------------- ---------
Net revenues $45,367 $20,159
Net loss ($84,573) ($36,808)
Basic net loss per share ($0.99) ($0.46)
Diluted net loss per share ($0.99) ($0.46)
(6) Subsequent Events
On April 19, 2000, the Company authorized the repurchase of up to
$100 million of its common stock as market and business conditions warrant.
Purchases may be made on the open market or in private transactions and no
time limit was set for completion of the program. On May 3, 2000, the
Company repurchased 100,000 shares at an average price of $34.37 per share.
In May 2000 the Company entered into a lease for additional office
space in San Francisco. The lease is for aproximately 280,000 square feet
of square feet of office space and will have an average annual rent of
approximately $15.0 million. The lease is expected to commence on June 1,
2001.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Overview
CNET Networks, Inc. is a global media company, producing a
branded Internet network, a computer product database and
television and radio programming for both consumers and
businesses. Using unbiased content as our platform, we have built
marketplaces for technology products, and, through our CNET Data
Services subsidiary, are the primary provider of information
powering the computer and electronics sales and distribution
channels. Our Internet network serves millions of users each day.
CNET Data Services licenses its multi-lingual product database to
U.S. and European online computer retailers, re-sellers and e-
commerce companies. CNET television programming airs on CNBC and
in national syndication, as well as in nearly 100 foreign
countries. CNET Radio airs in the San Francisco Bay Area on KNEW
910 AM.
We seek to use our editorial, technical, and programming
expertise and our product databases to provide news, product
information, product reviews, prices and availability to help
business and consumers make informed technology buying decisions.
Based on the volume of traffic over our branded online network,
we have established a leadership position in our market. In
1999, CNET's millions of online users viewed more than 4 billion
pages making CNET the most used source for computer and
technology information.
Our products and services provide a platform for advertisers
to create brand awareness and sell products to our large, tech-
savvy audience. CNET is also actively providing information and
services to business to enable and enhance online retailing of
computer and technology products. Our products and services are
designed to inform buyers and link them with sellers of products
and services to create a dynamic, efficient marketplace.
We earn revenues from:
- sales of banner and sponsorship advertisements on our
online network
- fees based on the number of CNET users who visit the
websites of our merchant partners, which we refer to
of our merchant partners, which we refer to as leads
- advertising sales and licensing fees from our television
and radio programming
- revenues from licensing our original content
- revenues from licensing our product database
On February 29, 2000 we completed our acquisition of mySimon,
Inc., the Internet's leading comparison shopping service. We
have accounted for this transaction using the purchase method of
accounting, thus have consolidated the results of mySimon in our
financial statements beginning February 29, 2000.
Results of Operations
Revenues
Total Revenues
Total revenues were $44.4 million and $20.1 million for the
three months ended March 31, 2000 and 1999, respectively.
Internet Revenues
Total Internet revenues were $42.0 million and $18.4
million for the three months ended March 31, 2000 and 1999,
respectively. Internet revenues consist primarily of revenues
derived from the sale of advertisements on pages delivered to
users of our Internet network. Revenues also include revenues
from licensing our original content and from licensing our
product database. Advertising programs are generally delivered
on either an "impression" based program or a "performance" based
program. An impression based program earns revenues when an
advertisement is delivered to a user of our Internet network. A
performance based program earns revenues when a user of our
Internet network responds to an advertisement by linking to an
advertiser's Internet network. Performance based programs
include revenues generated from lead-based compensation from our
shopping services. Advertising rates vary depending upon whether
a program is impression or performance based, where
advertisements are placed, and the amount and length of the
advertiser's commitment. Advertising revenues are recognized in
the period in which the advertisements are delivered. Our ability
to sustain or increase revenues for Internet advertising will
depend on numerous factors, which include, but are not limited
to, our ability to increase our inventory of delivered Internet
pages on which advertisements can be displayed and our ability to
maintain or increase advertising rates.
The increase in Internet revenues of $23.6 million for the
three months ended March 31, 2000 compared to the same period in
1999 was primarily attributable to an increase in impression and
performance based advertising programs sold on our network. This
increase in advertising programs sold was due to increased demand
from advertisers and increased availability of advertising
programs. Additional advertising programs were available due to
an increase in the number of pages delivered to users of our
network and increased leads sent to advertisers on our network.
Average daily pages delivered for the three months ended March
31, 2000 were approximately 16.5 million an increase of 74% over
9.5 million for the same period in 1999. During the three months
ended March 31, 2000 we averaged approximately 218,000 leads per
day from our shopping services, an increase of 104% over 107,000
leads per day during the same period in 1999.
Internet revenues for the first quarter of 2000 included
approximately $698,000 in revenues from mySimon, which we began
to consolidate into our financial results effective February 29, 2000.
A portion of our Internet revenues were derived from
barter transactions whereby we delivered advertisements on our
Internet channels in exchange for advertisements on the Internet
sites of other companies. Revenues related to barter transactions
were $1.5 million and $1.2 million for the three months ended
March 31, 2000 and 1999, respectively.
Broadcast Revenues
Broadcast revenues were $2.3 million and $1.7 million for
the three months ended March 31, 2000 and 1999, respectively.
For the three months ended March 31, 1999, a significant
portion of our broadcast revenues were derived from our licensing
agreements with USA Networks. These licensing agreements with
USA Networks generated revenues of approximately $1.5 million for
the first quarter of 1999. Our agreement with USA Networks
expired on December 31, 1999 and was not renewed.
In May 1999 we entered into an agreement with the National
Broadcasting Company ("NBC") whereby NBC granted certain rights
to CNBC, Inc. ("CNBC") to carry the sixty minute television
program we produce called "CNET News.com". The term of the
agreement is from October 1, 1999 through September 30, 2002 and
CNBC will pay us an annual fee based on the cost of production,
not to exceed $2.5 million per year. We also have the right to
sell certain commercial time available on the program. CNET
News.com generated revenues of approximately $1.6 million for the
first quarter of 2000.
We also produce a television program, TV.com, which is
exclusively distributed by Trans World International ("TWI"). We
sell advertisements on TV.com and pay a distribution fee to TWI.
In January 2000 we announced the launch of CNET Radio, an all
technology news station broadcast in the San Francisco Bay Area.
CNET Radio was launched in collaboration with AMFM, Inc. We will
share revenues earned from advertising on CNET Radio with AMFM,
Inc.
Internet operations accounted for 95% and 92% of total
revenues and broadcast operations accounted for 5% and 8% of
total revenues for the three months ended March 31, 2000 and
1999, respectively. We expect to experience fluctuations in
Internet and broadcast revenues in the future as a result of many
factors, including demand for the Company's Internet sites and
broadcast programming and our ability to develop, market and
introduce new and enhanced Internet content and broadcast
programming.
Cost of Revenues
Total Cost of Revenues
Total cost of revenues were $16.8 million and $8.6
million for the three months ended March 31, 2000 and 1999,
respectively. Cost of revenues include costs associated with the
production and delivery of our Internet channels and our
broadcast programming. The principal elements of cost of revenues
for our Internet operations have been payroll and related
expenses for the editorial, production and technology staff, and
costs for facilities and equipment. The principal elements of
cost of revenues for our broadcast operations have been the
production costs of our broadcast programs, which primarily
consist of payroll and related expenses for the editorial and
production staff and costs for facilities and equipment.
Cost of Internet Revenues
Cost of Internet revenues were $14.1 million and $7.0
million for the three months ended March 31, 2000 and 1999,
respectively, representing 33% and 38% of the related revenues,
respectively. The increase of $7.1 million for the three months
ended March 31, 2000 as compared to the same period in 1999 was
primarily attributable to increases in personnel and personnel
related costs. In addition, we had additional costs for server
depreciation and bandwidth costs related to delivering an
increased number of average daily pages.
Cost of Broadcast Revenues
Cost of broadcast revenues were $2.7 million and $1.6
million for the three months ended March 31, 2000 and
1999, respectively, representing approximately 117% and 97% of the
related revenues. The increase of $1.1 million for the three
months ended March 31, 2000 as compared to the same period in
1999 related primarily to increases in personnel and personnel
related costs for CNET Radio and costs associated with CNET
News.com and TV.com.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll
and related expenses, consulting fees and advertising expenses.
Sales and marketing expenses were $14.7 million and $5.1 million
for the three months ended March 31, 2000 and 1999, respectively,
representing 33% and 26% of total revenues for each of the
periods. Sales and marketing expenses increased $9.6 million for
the three months ended March 31, 2000 compared to the same period
in 1999. The increase in sales and marketing expenses primarily
related to the campaign we launched in July 1999 to build our
brand. Expenses related to this campaign totaled approximately
$3.0 million in the three months ended March 31, 2000, and
consisted primarily of radio and print advertising. Prior to
July 1999, we had not marketed our brand. The additional
increase in sales and marketing expense primarily related to
increases in sales and marketing personnel and their related
expenses.
Development
Development expenses include expenses for the development
and production of new Internet channels and research and
development of new or improved technologies, including payroll
and related expenses for editorial, production and technology
staff, as well as costs for facilities and equipment.
Development expenses were $2.4 million and $1.5 million for
the three months ended March 31, 2000 and 1999, respectively,
representing 6% and 8% of total revenues for each of the periods.
The increase in development expenses of $939,000 for the three
months ended March 31, 2000 as compared to the same period in
1999 were primarily attributable to additional personnel costs
related to the enhancement of the functionality of our Internet
network.
General and Administrative
General and administrative expenses consist of payroll
and related expenses for executive, finance and administrative
personnel, professional fees and other general corporate
expenses. General and administrative expenses were $6.0 million
and $2.8 million for the three months ended March 31, 2000 and
1999, respectively, representing 14% of total revenues for each
of the periods, respectively. General and administrative expenses
increased $3.2 million for the three months ended March 31, 2000
compared to the same period in 1999. The increase primarily
related to facilitating our growth, such as increased personnel
and personnel related costs.
Goodwill Amortization
Goodwill amortization expenses relate to the amortization
of the goodwill we record for companies we have acquired where we
use the purchase method of accounting. Goodwill amortization
expenses were $28.1 million and $306,000 for the three months
ended March 31, 2000 and 1999, respectively. During 1999 we
acquired six companies for which we used the purchase method of
accounting. These acquisitions included Winfiles.com, Search
Linux, GDT, Nordby, Savvy Search and Manageable Software
Services, Inc. During the three months ended March 31, 2000 we
acquired mySimon and Digital Media Services ("DMS") for which we
used the purchase method of accounting. We began amortizing the
goodwill associated with the acquisitions of mySimon and DMS on
the effective dates of the acquisitions, which were February 29,
2000 and February 16, 2000, respectively. Goodwill attributed to
the mySimon and DMS acquisitions totaled $686.4 million. We are
amortizing goodwill related to these acquisitions on a straight-
line basis over an estimated useful life of three years.
Gain (loss) on Investments
We had a loss on investments of $4.0 million for the
three months ended March 31, 2000 and a gain on investments of
$19.9 million for the three months ended March 31, 1999. The
loss on investments for the three months ended March 31, 2000 was
primarily related to a write-down in value of two of our
privately held investments to fair value. The gains on
investments for the three months ended March 31, 1999 related to
the merger agreement between beyond.com and BuyDirect.com which
resulted in our owning shares of beyond.com.
Income Taxes
We did not record an income tax expense for either of the
three month periods ended March 31, 2000 and 1999, respectively.
Net Income (Loss)
We recorded a net loss of $27.7 million or ($0.36) per
diluted share for the three months ended March 31, 2000 compared
to a net income of $21.9 million or $0.29 per diluted share for
the three months ended March 31, 1999. Net income decreased
$49.6 million for the three months ended March 31, 2000 as
compared to the comparable period in 1999. The decrease related
primarily to additional goodwill amortization of $27.8 million
and a change in gain (loss) on investments in the periods of $23.8
million.
Liquidity and Capital Resources
As of March 31, 2000, we had cash and cash equivalents of
$169.8 million compared to $53.1 million on December 31, 1999.
In addition, on March 31, 2000 we had investments in short term
and long term marketable debt securities of $162.9 million and
investments in short term and long term marketable equity
securities of $549.7 million. Net cash used in operating
activities of $19.3 million for the three months ended March 31,
2000 was primarily due to changes in operating assets and
liabilities of $25.6 million. Net cash used in operating
activities of $3.7 million for the three months ended March 31,
1999 was primarily due to net income of $21.9 million, offset by
changes in operating assets and liabilities of $9.4 million and
non-cash gains on investments of $19.9 million. Net cash
provided by investing activities of $48.9 million for the three
months ended March 31, 2000 was primarily attributable to
proceeds from the sale of marketable debt and equity securities
offset by the purchase of marketable debt and equity securities,
investments in privately held companies, cash paid for
acquisitions and capital expenditures. Net cash used in
investing activities of $9.8 million for the three months ended
March 31, 1999 was primarily related to cash paid for
acquisitions and capital expenditures. Cash provided by
financing activities of $87.1 million for the three months ended
March 31, 2000 was primarily attributable to the net proceeds
from the issuance of our TRACES security of $81.7 million. Cash
provided by financing activities of $170.2 million for the three
months ended March 31, 1999 was primarily attributable to
proceeds from the issuance of convertible debt of $166.9 million.
We believe that existing funds will be sufficient to meet our
anticipated cash needs for working capital and capital
expenditures for the next 12 months.
As of March 31, 2000 we had obligations outstanding under
notes payable totaling $239.5 million. Notes payable included
$173 million of 5% Convertible Subordinated Notes, due 2006. In
addition, the liability related to our TRACES security was $53.8
million on March 31, 2000. Such obligations were incurred to
obtain proceeds for general corporate purposes, to finance
acquisitions and increases in marketing expenditures.
Seasonality and Cyclicality
We believe that advertising sales in traditional media,
such as television, are generally lower in the first and third
calendar quarters of each year than in the respective preceding
quarters and that advertising expenditures fluctuate
significantly with economic cycles. Depending on the extent to
which the Internet is accepted as an advertising medium,
seasonality and cyclicality in the level of advertising
expenditures generally could become more pronounced for Internet
advertising. Advertising expenditures account for substantially
all of our revenues, and seasonality and cyclicality in
advertising expenditures generally, or with respect to Internet-
based advertising specifically, could therefore have a material
adverse effect on our business, financial condition or operating
results. We may also experience seasonality in connection with
our shopping services, which may reflect seasonal trends in the
retail industry. The level of consumer retail spending generally
decreases in the first and third calendar quarters.
Special Note Regarding Forward-Looking Statements and Risk
Factors
Certain statements in this Quarterly Report on Form 10-Q contain
"forward-looking statements." Forward-looking statements are any
statements other than statements of historical fact. Examples of
forward-looking statements include projections of earnings,
revenues or other financial items, statements of the plans and
objectives of management for future operations, statements
concerning proposed new products or services, statements
regarding future economic conditions or performance and any
statement of assumptions underlying any of the foregoing. In
some cases, you can identify forward-looking statements by the
use of words such as "may," "will," "expects," "should",
"believes", "plans," "anticipates," "estimates," "predicts",
"potential", or "continue", and any other words of similar
meaning.
The risks, uncertainties and other factors to which
forward-statements are subject include, among others, those set
forth under the caption "Risk Factors" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, which is
available from us, from the Securities and Exchange Commission at
prescribed rates and at the web-site www.sec.gov. Such factors
include, without limitation, the following: limited operating
history; fluctuations in quarterly operating results; failure to
compete; risks associated with anticipated growth; risks related
to costs associated with new lines of business or acquisitions;
risks associated with technological change; availability of key
personnel and changes in governmental regulations. All subsequent
written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their
entirety by such factors.
Any or all of our forward-looking statements in this report
and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion in this report will be important in
determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary
materially. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related
subjects in our reports to the SEC. Also note that we provide
the following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our businesses. These
are factors that we think could cause our actual results to
differ materially from expected and historical results. Other
factors besides those listed here could also adversely affect us.
This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to the impact of interest rate changes and
changes in the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for changes
in interest rates relates primarily to our investment portfolio.
We have not used derivative financial instruments in our
investment portfolio. We invest our excess cash in debt
instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers and, by policy, limit the amount of
credit exposure to any one issuer. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in
interest rates.
Investment Risk. We invest in equity instruments of
privately-held, information technology companies for business and
strategic purposes. These investments are included in other
long-term assets and are accounted for under the cost method when
our ownership is less that 20% and the Company doesn't exert
significant influence. For these non-quoted investments, our
policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the
carrying values. We identify and record impairment losses on
investments when events and circumstances indicate that such
assets might be impaired.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In August 1999, the Simon Property Group filed a
complaint against mySimon, Inc., which became our subsidiary on
February 29, 2000. The Simon Property Group is a real estate
investment trust that owns mall properties. The complaint, which
was filed in the Southern District of Indiana at Indianapolis,
alleges that our "mySimon" mark infringes the Simon Property
Group's "SIMON" mark.In October 1999, the Simon Property Group
moved for a temporary restraining order in the matter, which was
denied. The parties are now in discovery, with a projected trial
date in Fall 2000. Although we believe that the Simon Property
Group has not demonstrated the merits of its claim, discovery is
ongoing, and accordingly, we cannot predict the outcome of this
case. Although we believe that an unfavorable outcome in this
case is unlikely, if a court were to determine that the mySimon
mark infringes the Simon Property Group mark and forced us to
discontinue use of the mark and/or pay significant damages to the
Simon Property Group, there could be a material adverse effect on
our business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 15, 2000, CNET completed the acquisition of Digital
Media Services, Inc. In connection with this acquisition, we
issued 148,611 shares of our common stock and paid cash
consideration of approximately $10.7 million to certain
shareholders of Digital Media Services, Inc. No underwriters were
involved in the transaction, and we did not pay any underwriting
discounts or commissions. The issuance of shares in this
transaction was exempt from the registration requirements of the
Securities Act of 1993 pursuant to Section 4(2) thereof.
On February 29, 2000, CNET completed the acquisition of
mySimon, Inc. In connection with this acquisition, we issued
approximately 10,725,927 shares of our common stock to the
shareholders of mySimon, and 364,730. No under writers were
involved in the transaction, and we did not pay any underwriting
discounts or commissions. The issuance of shares in this transaction
was exempt from the registration requirements of the Securities Act
of 1993 pursuant to Section 3(a)(10) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 (1) Agreement and Plan of Merger dated January 19, 2000 among
CNET, Inc., CNET Sub, Inc. and mySimon, Inc. (incorporated by
reference to Exhibit 2.1 to CNET Networks, Inc.'s Current Report
on Form 8-K dated January 19, 2000).
27.1* Financial Data Schedule
____________________
*Filed herewith
(1) Incorporated by reference to Exhibit 2.1 to CNET Networks, Inc.'s
Current Report on Form 8-K dated January 19, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CNET, INC.
(Registrant)
/s/ Douglas N. Woodrum
________________________
Douglas N. Woodrum
Executive Vice President,
Chief Financial Officer
May 15, 2000
Date
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