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, 2002
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 Incorporation or Organization) | (I.R.S. Employer Identification Number) |
235 Second Street
San Francisco, CA 94105
(Address of Principal Executive Offices including Zip Code)
Telephone Number (415) 344-2000
(Registrant's telephone number, including Area Code)
(Former name, former address and former fiscal year if changed since last report)
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, 2002 there were 138,771,952 shares of the registrant's common stock outstanding.
CNET Networks, Inc.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| | |
| Item 1. Financial Statements (unaudited): | |
| | |
| Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 | 1 |
| | |
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001. | 2 |
| | |
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001. | 3 |
| | |
| Notes to the Condensed Consolidated Financial Statements | 5 |
| | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 17 |
| | |
| PART II. Other Information | |
| | |
| Item 1. Legal Proceedings | 18 |
| | |
| Item 2: Changes in Securities and Use of Proceeds | 18 |
| | |
| Item 4: Submission of Matters to a Vote of Security Holders | 18 |
| | |
| Item 6. Exhibits and Reports on Form 8-K | 18 |
| | |
| Signatures | 19 |
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's, except share and per share data)
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 57,630 $ 93,439
Investments in marketable debt securities . . 56,933 46,760
Accounts receivable, net. . . . . . . . . . . 53,637 56,495
Other current assets. . . . . . . . . . . . . 41,503 11,237
Deferred income taxes . . . . . . . . . . . . - 18,235
------------ ------------
Total current assets . . . . . . . . . . . 209,703 226,166
Restricted cash . . . . . . . . . . . . . . . . . 15,762 16,270
Investments in marketable debt securities. . . . 78,430 76,777
Property and equipment, net. . . . . . . . . . . . 77,770 79,043
Other assets . . . . . . . . . . . . . . . . . . . 31,653 41,036
Intangible assets, net . . . . . . . . . . . . . . 77,100 96,135
Goodwill, net . . . . . . . . . . . . . . . . . . 286,962 279,353
------------ ------------
Total assets . . . . . . . . . . . . . . . $ 777,380 $ 814,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 11,085 $ 7,324
Accrued liabilities . . . . . . . . . . . . . 69,427 80,224
Current portion of long-term debt . . . . . . 77 77
------------ ------------
Total current liabilities. . . . . . . . . 80,589 87,625
Noncurrent liabilities:
Long-term debt . . . . . . . . . . . . . . . 176,427 176,457
Other liabilities . . . . . . . . . . . . . 6,611 7,199
------------ ------------
Total liabilities . . . . . . . . . . . . 263,627 271,281
Stockholders' equity:
Common stock; $0.0001 par value; 400,000,000
shares authorized; 138,770,239 outstanding at
March 31, 2002 and 138,300,625 outstanding
at December 31, 2001. . . . . . . . . . . . . 14 14
Notes receivable from stockholders. . . . . . . (397) (563)
Deferred stock compensation . . . . . . . . . . (402) (481)
Additional paid in capital. . . . . . . . . . 2,698,847 2,695,443
Other comprehensive income. . . . . . . . . . (15,117) (12,789)
Treasury stock, at cost . . . . . . . . . . . (30,426) (30,409)
Accumulated deficit . . . . . . . . . . . . . (2,138,766) (2,107,716)
------------ ------------
Total stockholders' equity . . . . . . . . 513,753 543,499
------------ ------------
Total liabilities and stockholders' equity $ 777,380 $ 814,780
============ ============
See accompanying notes to the condensed consolidated financial statements
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's, except share and per share data)
Three Months Ended
March 31,
--------------------------
2002 2001
------------- ------------
Revenues:
Internet. . . . . . . . . . . . . . $ 43,380 $ 66,653
Publishing . . . . . . . . . . . . 12,272 8,499
------------- ------------
Total revenues. . . . . . . . . . 55,652 75,152
Operating expenses:
Cost of revenues . . . . . . . . . 37,135 42,762
Sales and marketing . . . . . . . . 20,754 39,191
General and administrative. . . . . 12,759 9,609
Depreciation. . . . . . . . . . . . 6,241 5,596
Amortization of goodwill and
intangible assets . . . . . . . . 12,059 205,460
------------- ------------
Total operating expenses . . . . . 88,948 302,618
------------- ------------
Operating loss . . . . . . . . . . (33,296) (227,466)
Non-operating income (expense):
Realized gains on sale of investments . 2,336 8,191
Realized losses on sale of investments . (26) (6,687)
Realized losses on impairment
of public investments . . . . . . - (25,455)
Realized losses on impairment
of private investments . . . . . (7,639) (89,271)
Interest income.. . . . . . . . . 1,372 4,193
Interest expense. . . . . . . . . (2,778) (4,538)
Other. . . . . . . . . . . . . . . (3) (599)
------------- ------------
Total non-operating income (expense) (6,738) (114,166)
------------- ------------
Net loss before income taxes. . . . (40,034) (341,632)
Income tax benefit. . . . . . . (8,984) (25,057)
------------- ------------
Net loss. . . . . . . . . . . . . . $ (31,050)$ (316,575)
============= ============
Basic and diluted net loss per share. $ (0.22)$ (2.33)
============= ============
Shares used in calculating
basic and diluted per share data . . 138,668,755 135,909,822
============= ============
See accompanying notes to the condensed consolidated financial
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's, except share and per share data)
Three Months Ended
March 31,
-------------------------
2002 2001
------------ -----------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (31,050) $ (316,575)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . 18,379 212,217
Noncash interest. . . . . . . . . . . . . . . . . . . 254 -
Deferred taxes. . . . . . . . . . . . . . . . . . . . . (14,065) (15,153)
Allowance for doubtful accounts. . . . . . . . . . . . 2,574 5,911
Services exchanged for cost method investments. . . . - (3,554)
(Gain) loss on sale and impairment of marketable
securities and privately held investments . . . . . 5,355 113,222
(Gain) loss on sale and impairment of marketable
debt securities . . . . . . . . . . . . . . . . . . (26) 3,480
Foreign currency translation gain (loss). . . . . . . (1,954) 6,398
Loss on disposal of fixed assets. . . . . . . . . . . (126) -
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . 284 30,285
Other assets. . . . . . . . . . . . . . . . . . . . 1,836 (8,411)
Accounts payable. . . . . . . . . . . . . . . . . . 3,761 (7,641)
Accrued liabilities . . . . . . . . . . . . . . . . (10,788) (36,374)
Other long term liabilities . . . . . . . . . . . . (547) 1,199
------------ -----------
Net cash used in operating activities . . . . . . (26,113) (14,996)
------------ -----------
Cash flows from investing activities:
Purchase of marketable debt securities. . . . . . . . . . (47,664) (12,961)
Proceeds from sale of marketable debt securities. . . . . 36,223 72,244
Proceeds from sale of marketable equity securities. . . . 114 16,440
Investments in privately held companies . . . . . . . . . 3,000 (7,050)
Capital expenditures . . . . . . . . . . . . . . . . . . (4,842) (8,470)
------------ -----------
Net cash provided by (used in) investing activities (13,169) 60,203
------------ -----------
Cash flows from financing activities:
Principal payments on capital leases. . . . . . . . . . . (50) -
Payments received on stockholders' notes. . . . . . . . . 149 -
Net proceeds from employee stock purchase plan. . . . . . 274 904
Net proceeds from exercise of options and warrants. . . . 3,130 6,317
Principal payments on bank debt. . . . . . . . . . . . . (8) (981)
------------ -----------
Net cash provided by financing activities. . . . . 3,495 6,240
------------ -----------
Net increase in cash and cash equivalents. . . . . . . . . (35,787) 51,447
Effect of exchange rate changes on cash and
cash equivalents . . . . . . . . . . . . . . . . . . . . . (22) -
Cash and cash equivalents at beginning of period . . . . . 93,439 167,301
------------ -----------
Cash and cash equivalents at end of period . . . . . . . . $ 57,630 $ 218,748
============ ===========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . $ 4,323 $ 4,334
Taxes paid. . . . . . . . . . . . . . . . . . . . . . . . $ - $ 5,398
See accompanying notes to condensed consolidated financial statements
CNET NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(1) BASIS OF FINANCIAL STATEMENTS
BUSINESS AND BASIS OF PRESENTATION
CNET Networks, Inc. (CNET) is a global media company producing a branded Internet network, a technology product database, print publications, and radio programming for both businesses and individuals. CNET operates in one business segment focused on providing technology related information to both businesses and individuals.
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 CNET'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 CNET. Additionally, there have been no significant changes in any of CNET's commitments since CNET's most recent Annual Report on Form 10-K.
The condensed consolidated results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the current year or any other future period.
INCOME TAXES
Income tax expense has been recorded based on an estimated effective tax rate for the year ended December 31, 2002. The estimated effective tax rate has taken into account any change in the valuation allowance for deferred tax assets where the realization of various deferred tax assets is subject to uncertainty. Management believes that sufficient uncertainty exists regarding the future realization of deferred tax assets and, accordingly, a valuation allowance has been provided against the gross deferred tax assets to properly reflect only recoverable taxes.
In March 2002, Congress enacted the Job Creation and Worker Assistant Act. Through the enactment of this act, losses generated in 2001 and 2002 are permitted a five-year carryback. The losses generated by CNET in these periods will be carried back to offset taxes paid in 1999 and 2000. The amount of recoverable taxes is reflected in the caption other current assets as prepaid taxes. Previously this amount had been presented on the balance sheet as deferred tax assets.
IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment of Long-Lived Assets" which establishes an accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 does not apply to goodwill and other intangible assets that are not amortized. SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events". SFAS 144 eliminates goodwill from its scope, therefore it does not require, as SFAS 121 does, goodwill to be allocated to the long-lived assets. The statement is effective for fiscal years beginning after December 15, 2001. Adoption of SFAS 144 has not had a material effect on CNET's financial position or results of operations.
CNET reviews its long-lived assets if 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 the estimated undiscounted (and without interest charges) future 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 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.
GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations subsequent to March 31, 2002 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives. CNET adopted SFAS Nos. 141 and 142 effective January 1, 2002. CNET does not expect the implementation of SFAS No. 141 to have a material impact on its consolidated financial position, liquidity or results of operations. Under SFAS 142, goodwill is no longer amortized, beginning January 1, 2002. If the non-amortization provisions of SFAS 142 had been effective in 2001, net loss and basic and diluted net income per share for the three months ended March 31, 2001, would have been $(123.1) million, $(0.91) and $(0.91), respectively.
Goodwill and intangible assets of a reporting unit are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of its goodwill or intangible assets may not be recoverable. Impairment of reporting unit goodwill is evaluated based on a comparison of the reporting unit's book value to the estimated undiscounted (and without interest charges) future cash flows for that reporting unit. Conditions that indicate that impairment of goodwill should be evaluated include a significant decrease in CNET's market value or a current period cash flow loss combined with a history of cash flow losses.
RECLASSIFICATIONS
Certain amounts in the financial statements and notes thereto have been reclassified to conform to the current year classification.
(2) LEASE ABANDONMENT
In 2001, CNET performed an evaluation of its domestic and international real estate requirements. This evaluation resulted in the consolidation or abandonment of several leased facilities. In connection with these abandoned leases, CNET recorded an expense of $21.3 million for the year ended December 31, 2001, as well as an adjustment to the ZDNet purchase price allocation of $1.6 million and to the TechRepublic purchase price allocation of $1.9 million. The charge of $21.3 million consisted of $19.6 million for U.S. facilities and $1.7 million for non-U.S. facilities. These charges were based on the difference between the expected cash outflows and the expected cash inflows related to these vacated properties. The net cash expense was present valued using a discount rate of 6.0%. In addition, approximately $7.2 million of leasehold improvements and furniture were to be written-off. During the three-month period ended March 31, 2002, cash charges of $2.3 million were taken against this accrual, and an additional $917,000 for international locations was added to the accrual. At March 31, 2002, a balance of $13.3 million remained in this accrual.
(3) GOODWILL AND INTANGIBLE ASSETS
Acquired Intangible Assets
The following table sets forth the amount of intangible assets that are subject to amortization, including the related accumulated amortization, as well as those intangible assets not subject to amortization:
March 31, 2002
------------------------
Gross Carrying Accumulated
Amount Amortization
----------- -----------
Amortized intangible assets:
Content. . . . . . . . . . . . . . . . . $ 44,201 $ (21,394)
Registered Users. . . . . . . . . . . . . 42,719 (20,113)
Tradename/trademarks. . . . . . . . . . . 28,566 (13,327)
Subscriptions. . . . . . . . . . . . . . 15,138 (7,266)
Developed technology. . . . . . . . . . . . 9,222 (4,613)
Other. . . . . . . . . . . . . . . . . . . 7,648 (3,676)
----------- -----------
Total. . . . . . . . . . . . . . . . $ 147,494 $ (70,389)
=========== ===========
Intangibles that are subject to amortization are amortized on a straight-line basis over three years.
Goodwill
The carrying amount of goodwill has not changed in the three months ended March 31, 2002, except for the addition of approximately $531,000 for TechRepublic acquisition costs.
(4) NET LOSS PER SHARE
The following table sets forth the computation of net loss per share:
Three Months Ended
March 31,
--------------------------
2002 2001
------------- ------------
Net loss . . . . . . . . . . . . . . . $ (31,050)$ (316,575)$
============= ============
Weighted average common shares
outstanding used in computing basic and
diluted loss per share . . . . . . 138,668,755 135,909,822
============= ============
Basic and diluted net loss per share . $ (0.22)$ (2.33)$
============= ============
Basic net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Basic and diluted net loss per share for the three months ended March 31, 2002 does not include the effect of 11,945 shares of unvested restricted stock with an average exercise price of $1.27 per share because their effect is anti-dilutive. In addition, diluted net loss per share for the three months ended March 31, 2002 does not include the effect of 3,153,529 common shares related to options with an average exercise price of $4.98 per share and 4,622,624 common shares related to the Convertible Subordinated Debt offering with an average conversion price of $37.40 per share because their effect is anti-dilutive. Net loss per share for the three months ended March 31, 2001 does not include the effect of 3,316,209 common shares related to options at an average exercise price of $8.00 or 386,871 shares of unvested restricted stock with an average exercise price of $1.90 per share or 4,622,624 common shares related to the Convertible Subordinated Debt offering with an average conversion price of $37.40 per share because their effect is anti-dilutive.
(5) COMPREHENSIVE LOSS
CNET 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.
The changes in the components of other comprehensive income (loss) for the three months ended March 31, 2002 and 2001 are as follows:
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Unrealized holding gains (losses) from:
Marketable debt and equity securities . $ (623) $ (102,720)
Debt obligations. . . . . . . . . . - 99,922
Deferred tax asset (liability)
related to unrealized holding
gains(losses). . . . . . . . . . . 249 (38,048)
---------- ----------
(374) (40,846)
Foreign currency translation
gain (loss). . . . . . . . . . . . (1,954) 6,398
---------- ----------
$ (2,328) $ (34,448)
========== ==========
The components of other comprehensive income are:
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Net loss. . . . . . . . . . . . . . . $ (31,050) $ (316,575)
========== ==========
Other comprehensive income (loss),
net of tax:
Unrealized holding gains arising
during the period. . . . . . . . . $ 38 $ 20,786
Unrealized holding losses arising
during the period. . . . . . . . . . (412) (61,632)
Foreign currency translation
gain (loss). . . . . . . . . . . . (1,954) 6,398
---------- ----------
Comprehensive loss. . . . . . . . . . $ (33,378) $ (351,023)
========== ==========
(6) MARKETABLE EQUITY SECURITIES AND OTHER INVESTMENTS
Marketable Equity Securities
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," CNET 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 in stockholders' equity. Realized gains and losses on sales of investments and declines in value determined to be other-than-temporary are included in non-operating expense in the statement of operations.Declines in value of marketable equity securities are determined to be other-than-temporary when the securities have consistently traded below original cost for a nine-month period, and general market conditions or specific circumstances relating to a security indicate that the security will not recover its original cost. Once an other-than-temporary decline has been identified, the average market price over the preceding 90-calendar day period is compared to the current carrying value. The amount of loss, which is considered to be an other-than-temporary decline, is measured by comparing the cost basis to the higher of the 90-calendar day average and the current carrying value. A realized loss is recognized for the amount of the loss that is considered to be an other-than-temporary decline. This review and evaluation process is performed on an ongoing basis for all marketable equity securities owned by CNET.
For the three months ended March 31, 2002 and 2001, CNET recorded losses of $26,000 and $6.7 million, respectively, on the sale of marketable equity securities. For the three months ended March 31, 2002 and 2001, CNET recorded realized gains of $26,000 and $8.2 million, respectively, on the sale of marketable equity securities. For the three months ended March 31, 2001, CNET recognized impairment losses of $25.5 million for marketable equity securities.
Privately Held Investments
Impairment is assessed routinely on privately held investments based, where possible, on the pricing of new rounds of financing for the individual company, cash resources, liquidity, and other subjective factors such as, our estimate of the strength of the underlying business and assets including technology and intangibles. If an other-than-temporary decline is believed to have occurred based on our assessment of these factors, the investment is further evaluated. If it appears that there are no funding options for a company, and CNET's evaluation of their available cash resources results in a determination that they will not be able to sustain liquidity for a reasonable period of time, then the investment is written-off. If our assessment determines that a privately held investment has sufficient liquidity, but that current rounds of financing for comparable companies are at amounts significantly less than in the past, the investment will be written-down to reflect current market conditions. However, the extent of any impairment is evaluated in conjunction with CNET's view of the subjective factors discussed above.
CNET recognized impairment losses of $7.6 million and $89.3 million on privately held investments in the three months ended March 31, 2002 and 2001, respectively. Additionally, in the three months ended March 31, 2002, CNET recognized a gain of $2.3 million on the sale of its share in a joint venture.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
CNET Networks, Inc., the global source of technology and commerce-related services, primarily for the technology industry, produces a branded, global Internet network, print publications, a technology product database and radio programming for both businesses and individuals. Using unbiased content as our platform, we have built marketplaces for technology and consumer products, and, through our CNET Channel division, we are the primary provider of information powering the computer and electronics sales and distribution channels.
We earn revenues from:
- sales of interactive messaging, banner and sponsorship advertisements on our online network
- fees based on the number of our internet network users who click on an advertisement or text link to visit the websites of our merchant partners, which we refer to as "leads"
- advertising sales and licensing fees from our print publications and radio programming
- revenues from licensing our CNET Channel product database
- subscriptions to our ChannelOnline product procurement service
Cost of revenues includes costs associated with the production and delivery of our Internet channels, print publications, creation of our product database and related technology, and our radio programming. The principal elements of cost of revenues for our operations are payroll and related expenses for the editorial, production and technology staff, and costs for facilities and equipment.
Sales and marketing expenses consist primarily of payroll and related expenses, consulting fees and advertising expenses. General and administrative expenses consist of payroll and related expenses for executive, finance and administrative personnel, professional fees and other general corporate expenses.
The acquisition of TechRepublic, Inc. (TechRepublic) in July 2001 served to expand our network and contributed to revenues, cost of revenues and operating expenses beginning with the third quarter of 2001. This acquisition was accounted for using the purchase method of accounting, and the financial results of their operations are included in CNET's financial statements beginning on the date of acquisition.
Subsequent to the acquisition of ZDNet which occurred in late 2000, we incurred costs related to integrating the operations of ZDNet with our operations through the integration of duplicative businesses. As part of the integration process, we evaluated our staffing requirements related to a more challenging business environment and focused on increasing efficiencies in our operations. We initiated reductions in our global workforce and have incurred additional expenses as we continued to lower our cost structure through the discontinuance of several non-profitable or non-growth areas of our Internet and broadcasting operations and the abandonment of certain leases. We have referred to these costs as "integration costs". These integration costs amounted to $2.9 million and $4.7 million in the quarters ended March 31, 2002 and 2001, respectively, and are included in cost of revenues, sales and marketing, and general and administrative expense, as more fully described below. We do not anticipate that we will incur additional integration costs in the future.
Additionally, we have invested in the creation of a standardized, global technology platform to deliver content and advertising, enable commerce and create universal data collection and registration systems aimed at long term cost reduction. This investment is expected to simplify our operations, build a scalable infrastructure, and create long term cost savings. We believe our integration efforts and creation of a standardized, global technology platform will result in costs savings that will better position us for a quicker return to profitability.
RESULTS OF OPERATIONS
Revenues
Total Revenues
Total revenues were $55.7 million and $75.2 million for the three months ended March 31, 2002 and 2001, respectively. The decrease in revenues of $19.5 million for the three months ended March 31, 2002 compared to the same period in 2001 was primarily attributable to the downturn in the economy which began in 2001. Although the economy had begun to experience a retraction in early 2001, the full impact was not felt until later in the year and continues into the current year. Revenues for the first quarter of 2002 include revenue for TechRepublic, which was acquired in July 2001.
Internet Revenues
Internet revenues were $43.4 million and $66.7 million and represented 78% and 89% of total revenues for the three months ended March 31, 2002 and 2001, respectively. The decrease in revenues of $23.3 million for the three months ended March 31, 2002 compared to the same period in 2001 was primarily due to the downturn in the economy, and particularly related to technology advertising.
Average daily pages delivered for the three months ended March 31, 2002 and 2001 were approximately 39.7 million for each period. During the three months ended March 31, 2002 and 2001, we averaged approximately 280,000 and 350,000 leads per day from our shopping services, respectively. Internet revenues, page views and leads to merchants for the three months ended March 31, 2002 included TechRepublic for the full period, whereas the same period of 2001 does not include any activity for TechRepublic.
Publishing Revenues
Publishing revenues were $12.3 million and $8.5 million and represented 22% and 11% of total revenues for the three months ended March 31, 2002 and 2001, respectively. The increase in revenues over prior year is primarily due to the inclusion of publishing revenues for our China operations in the first quarter of 2002, whereas in prior year quarter, these operations had not yet begun.
A portion of our revenue was received in the form of securities of our customers amounting to approximately $3.6 million for the three months ended March 31, 2001. There were no such revenues received during the first quarter of 2002. In addition, for the three months ended March 31, 2002, approximately $2.7 million of our revenues were derived from barter transactions compared to $5.3 million for the three months ended March 31, 2001, whereby we delivered advertisements on our Internet channels in exchange for advertisements on the Internet sites of other companies. These revenues and marketing expenses were recognized at the fair value of the advertisements received and delivered, and the corresponding revenues and marketing expenses were recognized when the advertisements were delivered.
Cost of Revenues
Total cost of revenues was $37.1 million and $42.8 million for the three months ended March 31, 2002 and 2001, representing approximately 67% and 57% of total revenues, respectively. The decrease in cost of revenues is primarily related to the headcount reductions offset by an increase due to the TechRepublic acquisition in July 2001 and the commencement of China operations in the second quarter of 2001. Approximately $100,000 and $3.0 million of integration costs were included in cost of revenues for the three months ended March 31, 2002 and 2001, respectively.
Sales and Marketing
Sales and marketing expenses were $20.8 million and $39.2 million for the three months ended March 31, 2002 and 2001, respectively, representing 37% and 52% of total revenues for each of the periods. The decrease was primarily due to the headcount reductions in 2001. The costs reduction associated with the workforce contraction did not impact sales and marketing expenses until the third quarter of 2001. Approximately $0.3 million of integration costs were included in sales and marketing for the three months ended March 31, 2001.
General and Administrative
General and administrative expenses were $12.8 million and $9.6 million for the three months ended March 31, 2002 and 2001, respectively, representing 23% and 13% of total revenues for each of the periods, respectively. Approximately $2.8 million and $1.4 million of integration costs were included in general and administrative for the three months ended March 31, 2002 and 2001, respectively. The majority of the integration expense incurred in the first quarter of 2002 was due to additional lease abandonment charges for our international offices.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets amortization expenses were $205.5 million for the three months ended March 31, 2001. Intangible assets amortization expense was $12.1 million for the three months ended March 31, 2002. Effective January 1, 2002, we adopted the provisions of FAS 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill is no longer amortized. If the non-amortization provisions of SFAS 142 had been effective in 2001, net loss and basic and diluted net loss per share for the three months ended March 31, 2001, would have been $(123.1) million, $(0.91) and $(0.91), respectively.
Realized Gain and Loss on Sales of Investments
We had a gain on sales of investments of $2.3 million and $8.2 million for the three months ended March 31, 2002 and 2001, respectively. We had a loss on the sales of investments of $26,000 for the three months ended March 31, 2002 as compared to $6.7 million for the three months ended March 31, 2001. The decrease in realized gain and loss on sales of investments in the three months ended March 31, 2002 compared to prior year resulted primarily from a decrease in the amount of securities sold in the present period versus the prior year period.
Realized Loss on Impairment of Investments
We had a realized loss on impairment of public investments of $25.5 million for the three months ended March 31, 2001 and a realized loss on impairment of privately held investments of $7.6 million and $89.3 million for the three months ended March 31, 2002 and 2001, respectively.
Income Taxes
We recorded an income tax benefit of $9.0 million and $25.1 million for the three months ended March 31, 2002 and 2001, respectively. Management believes that sufficient uncertainty exists regarding the future realization of deferred tax assets and, accordingly, a valuation allowance has been provided against the gross deferred tax assets to properly reflect only recoverable taxes.
In March 2002, Congress enacted the Job Creation and Worker Assistant Act. Through the enactment of this act, losses generated in 2001 and 2002 are permitted a five-year carryback. The losses generated by us in these periods will be carried back to offset taxes paid in 1999 and 2000. The amount of recoverable taxes is reflected in the caption other current assets as prepaid taxes. Previously this amount had been presented on the balance sheet as deferred tax assets.
Net Loss
We recorded a net loss of $31.1 million or $0.22 per diluted share for the three months ended March 31, 2002 compared to a net loss of $316.6 million or $2.33 per diluted share for the three months ended March 31, 2001. The decrease in the current quarter net loss as compared to the same period of the prior year resulted primarily from the cessation of amortization of goodwill upon the adoption of SFAS 142 in 2002, the greater realized loss on the impairment of our privately held investments in prior year quarter, and the realized loss on the impairment of our marketable equity investments in prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had cash and cash equivalents of $57.6 million compared to $93.4 million on December 31, 2001. In addition, on March 31, 2002 we had investments in short and long-term marketable debt securities of $135.4 million. Net cash used in operating activities of $26.1 million for the three months ended March 31, 2002 included a net loss of $31.1 million, noncash losses on sales and impairment of investments of $5.3 million and depreciation and amortization totaling $18.4 million. Net cash used by operating activities of $15.0 million for the three months ended March 31, 2001 included a net loss of $316.6 million and noncash losses on sales and impairment of investments of $116.7 million and depreciation and amortization of $212.2 million.
Net cash used by investing activities of $13.2 million for the three months ended March 31, 2002 was primarily attributable to proceeds from the sale of marketable debt securities offset by purchases of marketable debt securities and capital expenditures. Net cash provided by investing activities of $60.2 million for the three months ended March 31, 2001 was primarily attributable to the sale of marketable debt and equity securities offset by purchases of marketable debt and equity securities, investments in privately held companies, and capital expenditures.
Cash provided by financing activities of $3.5 million and of $6.2 million for the three months ended March 31, 2002 and 2001, respectively, was attributable to proceeds from the issuance of common stock through the exercise of options and warrants.
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. We do not anticipate the need for additional funding in the foreseeable future. Although we have not presently identified alternate or additional sources of long-term capital, if our cash needs were to change, we may consider raising additional capital through debt or equity offerings in the public or private markets. As of March 31, 2002 we had obligations outstanding under notes payable totaling $176.5 million. Notes payable included $172.9 million of 5% Convertible Subordinated Notes, due March 2006. Such obligations were incurred to obtain proceeds for general corporate purposes and to finance acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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. On an ongoing basis, we evaluate these estimates, including those related to bad debts, investments, goodwill and intangible assets, lease abandonment, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
We recognize revenues once the following criteria are met:
- Persuasive evidence of an arrangement exists
- Delivery of our obligation to our customer has occurred
- The price to be charged to the buyer is fixed or determinable
- Collectibility of the fees to be charged is reasonably assured
We have several revenue streams. For each revenue stream, evidence of the arrangement, delivery and pricing may be different. For all revenue streams, we determine that collectibility is reasonably assured through a standardized credit review to determine each customer's credit worthiness.
We recognize revenues from the sale of our interactive messaging and banner advertisements on our online network in the period in which the advertisements are delivered. The arrangements are evidenced either by insertion order or contract, which stipulate the types of advertising to be delivered and pricing. Our customers are billed based on a discounted list price with no amounts subject to refund. When recognizing revenues, the discounts granted are applied to each type of advertisement purchased based on the relative fair value of each element without regard to the discount.
We refer to the fees charged to merchants based on the number of users who click on an advertisement or text link to visit websites of our merchant partners as "leads". For leads, the arrangement is evidenced by a contract that stipulates the lead fee. The fee becomes fixed and determinable upon delivery of the lead. These revenues are recognized in the period in which the leads are delivered to the merchant, and are therefore not subject to refund.
Advertising revenues from our print publications are recognized in the month that the related publications are sent to subscribers or become available at newsstands. Revenues for subscriptions to these publications are recognized on a straight-line basis over the subscription period. Newsstand revenue from our print publications is recognized when the publications are delivered to the newsstand at which time a reserve is recorded against the value of the publications delivered based on the number of magazines that we expect to be returned. To ensure these reserves are adequate, we review the sell-through history of the publications on a monthly basis.
Customers of CNET Channel enter into contracts that allow access to the product database and product procurement services for a specified period of time. Upon execution of a contract and billing for the services, we record deferred revenue for the entire fee. This deferred revenue is recognized on a straight-line basis over the period of the arrangement. The amounts under the contract are not refundable after the customer has used the service.
On occasion, we enter into revenue arrangements that involve both customers and other unrelated third parties. We determine whether to recognize such revenues on a gross or net basis depending on whether we are the primary obligor, determine the pricing, bear the financial risk and other factors outlined in the Financial Accounting Standards Board Emerging Issues Task Force Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent".
We trade advertising on our Internet sites in exchange for advertisements on the Internet sites of other companies. These revenues are recognized in the period in which the advertisements are delivered based on the fair market value of the services delivered. We determine the fair market value of the service delivered based upon amounts charged for similar services in non-trade deals within the previous six-month period.
Collectibility of receivables
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our allowances on periodic assessment of our customer's liquidity and financial condition through credit rating agencies reports, financial statement reviews and historical collection trends. If the financial condition of our customers were to deteriorate and thereby result in an inability to make payments, additional allowances would be required.
Carrying value of investments
We identify and record impairment losses on investments when events and circumstances indicate that such decline in fair value is other-than-temporary. This review and evaluation process is performed on an ongoing basis for all marketable equity securities owned by us. Declines in value of marketable equity securities are determined to be other-than-temporary when the securities have consistently traded below carrying value for a nine-month period, and general market conditions or specific circumstances relating to a security indicate that the security will not recover its carrying value. Additionally, impairment is assessed routinely on privately held investments based, where possible, on the pricing of new rounds of financing for the individual company, cash resources, liquidity, and other subjective factors such as, our estimate of the strength of the underlying business and assets including technology and intangibles. If an other-than-temporary decline is believed to have occurred based on our assessment of these factors, the investment is further evaluated, and if found necessary, an impairment charge is recorded. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments, possibly requiring an impairment charge in the future.
Goodwill and intangibles impairment
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations subsequent to March 31, 2002 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives. We adopted SFAS Nos. 141 and 142 effective January 1, 2002. We do not expect the implementation of SFAS No. 141 to have a material impact on our consolidated financial position, liquidity or results of operations. Under SFAS 142, goodwill is no longer amortized, beginning January 1, 2002.
Goodwill and intangible assets of a reporting unit are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of its goodwill or intangible assets may not be recoverable. Impairment of reporting unit goodwill is evaluated based on a comparison of the reporting unit's book value to the estimated undiscounted (and without interest charges) future cash flows for that reporting unit. Conditions that indicate that impairment of goodwill should be evaluated include a significant decrease in our market value or a current period cash flow loss combined with a history of cash flow losses.
Lease abandonment
During the third and fourth quarters of 2001, we completed an evaluation of our real estate requirements taking into account the workforce reductions that had occurred, the completion of our new facility in San Francisco, and redundant facilities elsewhere within the U.S and internationally. This evaluation resulted in the consolidation or abandonment of several leased facilities. Due to the decline in the commercial real estate markets in these locations, it is expected that these leased facilities will be vacant for several quarters, and once they are subleased, it will be at rates below current contractual requirements. We recorded a charge related to the abandonment, based on the difference between the expected cash outflows and the expected cash inflows related to these vacated properties.If there is a further decline in the commercial real estate markets, if it takes longer to sublet the facilities than expected or if these facilities when sublet are subleased at rates lower than our current estimates, the amounts we will ultimately realize could be materially different from the amounts assumed in arriving at our estimate of the costs of the lease abandonment.
Deferred Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized based on our estimate of future taxable income and prudent and feasible tax planning strategies. If events were to occur in the future, which are currently not contemplated in our current estimates, that would allow us to realize more of our deferred tax assets than the presently recorded net amount, an adjustment to the deferred tax asset would increase income when those events occurred. Conversely, if we were to determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would result in a charge to income in the period in which such determination was made.
Contingencies
We evaluate whether a liability must be recorded for contingencies based on whether a liability is probable and estimable. Our most significant contingencies are related to our ongoing mySimon litigation and our lease guarantee for office space in New York City (as described in Item 3 - " Legal Proceedings" and Note 11 of Item 8 - "Financial Statements" in our Annual Report on Form 10-K, respectively). If the financial condition of any of the sublessees or the primary lessee were to deteriorate and thereby result in an inability to make their lease payments, we would be required to make additional lease payments under the guarantee. In regards to the ongoing mySimon litigation, it is not possible to predict the amount of damages attributable to corrective advertising that could be awarded in a re-trial; however such amounts, if settled adversely to us, could be material to our results of operations and financial condition.
Cyclicality
We believe that advertising sales on the Internet, as well as in traditional media fluctuate significantly with economic cycles and during the calendar year with spending being weighted towards the fourth quarter. Advertising expenditures account for a majority of our revenues. Fluctuations 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 fluctuations during the calendar year in connection with our lead-based shopping services, which may reflect trends in the retail industry.
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, and statements concerning proposed new products and services, and any statements 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.
Statements regarding our future financial performance or results of operations, including expected revenue growth, EBITDA growth, growth in leads to merchants, future expenses, future operating margins and other future or expected performance are subject to the following risks: that projected cost-reduction initiatives will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; that the businesses identified for further integration to achieve cost synergies will not be integrated successfully; the acquisition of businesses or the launch of new lines of business, which could increase operating expense and dilute operating margins; the inability to attract new customers for our Channel Services products; increased competition, which could lead to negative pressure on our pricing and the need for increased marketing; the inability to maintain, establish or renew relationships with commerce, advertising, marketing, technology, and content providers, whether due to competition or other factors; a continued or worsening slowdown in advertising spending on the Internet in general or on our properties in particular, which could be prompted by a decrease in consumer spending or the failure of early stage companies who are heavy Internet advertisers to receive financing or other factors; the inability of CNET to increase the proportion of advertising from established companies; costs associated with our initiatives to standardize our technology platforms or our failure to successfully complete those initiatives; the impact of political and economic conditions due to the recent terrorist attacks in the U.S., the threat of future terrorism in the U.S. and abroad, and armed conflict in the U.S. and abroad; and the general risks associated with our businesses.
The following additional factors could also impact our financial results and cause our forward-looking statements to be inaccurate:
Any shortfall in revenue or earnings compared to analysts' or investors' expectations could cause, and has in the past, caused an immediate and significant decline in the trading price of our common stock. In addition, we may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock.
For a more detailed discussion of risks about our business, see CNET Networks, Inc. Annual Report on Form 10-K for the year ended December 31, 2001 and subsequent Forms 8-K, our Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on September 19, 2001, as well as our definitive proxy statement dated May 2, 2002 and other Securities and Exchange Commission filings, including under the captions "Risk Factors" and "Management's Discussion and Analysis of Results of Operations."
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 Securities and Exchange Commission. Also note that we provide 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 that, 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 that 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, as we do not have the ability to exert significant influence over the investee or their operations. 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.
Foreign Currency Risk
Certain forecasted transactions and assets are exposed to foreign currency risk. We monitor our foreign currency exposures regularly to assess our risk and to determine if we should hedge our currency positions.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
There have been no significant developments in our legal proceedings as disclosed in Item 3 - "Legal Proceedings" of our Annual Report on Form 10-K.
ITEM 2. Changes in Securities and Use of Proceeds. None.
ITEM 4. Submission of Matters to a Vote of Security Holders. None.
ITEM 6. Exhibits and Reports on Form 8-K.
- Exhibits
- Reports on Form 8-K.
Current Report on Form 8-K dated February 7, 2002, Item 5 - "Other Items", which reported CNET's financial results for the fourth quarter and fiscal year ended December 31, 2001.
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 Networks, Inc. |
| | (Registrant) |
| | |
|
/s/ Douglas N. Woodrum
|
| | Douglas N. Woodrum |
| | Executive Vice President,
Chief Financial Officer |
| | |
Dated: May 7, 2002 | |
