================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended January 31, 2000
Commission File Number 0-27830
LYCOS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3277338
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
400-2 Totten Pond Road, Waltham, Massachusetts 02451-2000
(Address of principal executive offices, including Zip Code)
(781) 370-2700
(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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
The number of shares outstanding of the registrant's Common Stock as of March
14, 2000 was 109,911,308.
================================================================================
Lycos, Inc.
Table of Contents
Page
----
PART I. Financial Information
ITEM 1 Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
January 31, 2000 and July 31, 1999.............................................. 3
Condensed Consolidated Statements of Operations
Three and six months ended January 31, 2000 and 1999............................ 4
Condensed Consolidated Statements of Cash Flows
Six months ended January 31, 2000 and 1999...................................... 5
Notes to Condensed Consolidated Financial Statements.............................. 7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 12
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings................................................................. 17
ITEM 2 Changes in Securities............................................................. 17
ITEM 3 Defaults Upon Senior Securities................................................... 18
ITEM 4 Submission of Matters to a Vote of Securities Holders............................. 18
ITEM 5 Other Information................................................................. 18
ITEM 6 Exhibits and Reports on Form 8-K.................................................. 19
Signature......................................................................... 20
2
LYCOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, July 31,
2000 1999
----------- ---------
Assets (Unaudited)
Current assets:
Cash and cash equivalents........................................... $ 626,985 $ 166,506
Accounts receivable, net............................................ 31,975 25,830
Electronic commerce and other receivable............................ 114,115 71,843
Prepaid expenses and other current assets........................... 5,565 8,783
----------- ---------
Total current assets............................................ 778,640 272,962
----------- ---------
Property and equipment, less accumulated depreciation................... 9,260 7,726
Electronic commerce and other receivable................................ 62,245 48,029
Investments............................................................. 232,102 48,001
Deferred tax asset...................................................... 1,500 --
Intangible assets, net.................................................. 523,001 505,682
Other assets............................................................ 8,013 7,399
----------- ---------
Total assets.................................................... $ 1,614,761 $ 889,799
=========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - current............................................. $ 6,987 $ 2,949
Accounts payable.................................................... 6,275 2,055
Accrued expenses.................................................... 44,289 22,637
Deferred revenues................................................... 106,573 64,016
----------- ---------
Total current liabilities....................................... 164,124 91,657
Deferred tax liability.................................................. -- 138
Notes payable........................................................... 2,254 2,600
Deferred revenues....................................................... 67,382 55,934
----------- ---------
69,636 58,672
Commitments and contingencies -- --
Stockholders' equity:
Common stock........................................................ 1,108 1,003
Additional paid-in capital.......................................... 1,447,668 815,706
Deferred compensation............................................... (47) (75)
Accumulated deficit................................................. (154,666) (92,751)
Treasury stock, at cost............................................. (3,413) (3,286)
Accumulated other comprehensive income.............................. 90,351 18,873
----------- ---------
Total stockholders' equity...................................... 1,381,001 739,470
----------- ---------
Total liabilities and stockholders' equity...................... $ 1,614,761 $ 889,799
=========== =========
See accompanying notes to condensed consolidated financial statements.
3
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------- -------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
Revenues:
Advertising.......................... $ 44,327 $ 21,452 $ 83,166 $ 39,082
Electronic commerce and other........ 24,248 9,664 41,267 17,173
-------- -------- -------- --------
Total revenues................... 68,575 31,116 124,433 56,255
Cost of revenues......................... 12,843 6,574 24,842 11,964
-------- -------- -------- --------
Gross profit..................... 55,732 24,542 99,591 44,291
Operating expenses:
Research and development............. 11,655 6,185 21,463 11,579
Sales and marketing.................. 35,439 18,135 67,945 34,339
General and administrative........... 8,703 3,387 15,961 5,990
Amortization of intangible assets.... 31,445 12,277 59,681 23,413
-------- -------- -------- --------
Total operating expenses......... 87,242 39,984 165,050 75,321
-------- -------- -------- --------
Operating loss........................... (31,510) (15,442) (65,459) (31,030)
Interest income, net..................... 2,239 1,574 4,110 3,471
Equity share of income in affiliates..... 1,887 -- 1,887 --
Gain on sale of investments.............. -- -- -- 10,120
-------- -------- -------- --------
Loss before income taxes................. (27,384) (13,868) (59,462) (17,439)
Provision for income taxes............... 3,611 -- 2,453 --
-------- -------- -------- --------
Net loss................................. $(30,995) $(13,868) $(61,915) $(17,439)
======== ======== ======== ========
Basic and diluted net loss per share..... $ (0.31) $ (0.16) $ (0.63) $ (0.20)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share........... 101,427 89,518 100,325 88,471
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
January 31,
----------------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Operating activities
Net loss............................................................ $ (61,915) $ (17,439)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of deferred compensation.......................... 28 21
Depreciation................................................... 2,054 1,773
Amortization of intangible assets.............................. 59,681 23,413
Allowance for doubtful accounts................................ 3,176 340
Gain on sale of investments.................................... -- (10,120)
Equity share of losses in affiliates........................... (1,887) --
Deferred taxes................................................. (1,638) --
Issuance of common stock for services.......................... -- (23)
Changes in operating assets and liabilities:
Accounts receivable............................................ (9,138) (2,010)
License fees receivable........................................ (56,488) (8,414)
Prepaid expenses............................................... 3,234 (9,098)
Other assets................................................... 1,872 (514)
Accounts payable............................................... 2,761 (4,800)
Accrued expenses............................................... 16,328 (5,643)
Deferred revenues.............................................. 54,005 3,190
Other liabilities.............................................. -- (37)
---------- ----------
Net cash provided by (used in) operating activities................. 12,073 (29,361)
---------- ----------
Investing activities
Purchase of property and equipment.................................. (1,594) (595)
Acquisition costs paid.............................................. (3,060) (1,064)
Cash proceeds from sale of available-for-sale investment............ 200 12,158
Cash acquired through acquisitions.................................. 1,590 1,906
Investment in affiliates............................................ (21,596) (3,512)
---------- ----------
Net cash provided by (used in) investing activities................. (24,460) 8,893
---------- ----------
Financing activities
Proceeds from issuance of stock, net of offering costs.............. 443,542 --
Proceeds from exercise of stock options............................. 32,601 4,861
Proceeds from issuance of common stock under ESPP................... 415 114
Proceeds from exercise of warrants.................................. 126 --
Cash used to repurchase treasury stock.............................. (127) --
Payments on notes payable........................................... (3,691) (3,091)
---------- ----------
Net cash provided by financing activities........................... 472,866 1,884
---------- ----------
Net increase (decrease) in cash and cash equivalents................ 460,479 (18,584)
---------- ----------
Cash and cash equivalents at beginning of period.................... 166,506 153,980
---------- ----------
Cash and cash equivalents at end of period.......................... $ 626,985 $ 135,396
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Six Months Ended
January 31,
----------------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Schedule of non-cash financing and investing activities:
Issuance of common stock upon acquisition of WhoWhere?
and Quote.................................................... $66,043 $157,995
Assets and liabilities recorded upon acquisition Of WhoWhere?
and Quote
Accounts receivable.......................................... 183 2,345
Prepaids..................................................... 16 1,302
Property and equipment....................................... 1,994 2,914
Other assets................................................. 2,486 649
Notes payable................................................ 7,383 5,185
Accounts payable............................................. 1,459 1,588
Accrued expenses............................................. 5,324 1,661
Deferred revenues............................................ -- 1,945
See accompanying notes to condensed consolidated financial statements.
6
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
Lycos, Inc., ("Lycos" or the "Company") is a network of globally branded
media properties and aggregated content distributed primarily through the World
Wide Web. Under the "Lycos Network" brand, Lycos provides aggregated third-party
content, Web search and directory services, community and personalization
features, personal Web publishing and online shopping. Lycos seeks to draw a
large number of viewers to its Websites by providing a one-stop destination for
information, communication and shopping services on the Web. The Company was
formed in June 1995 by CMG@Ventures L.P., a wholly-owned subsidiary of CMGI,
Inc. The Company conducts its business in one segment, generating revenue from
selling advertising and electronic commerce services. The Company's fiscal year
end is July 31.
These financial statements should be read in conjunction with the
supplemental audited consolidated financial statements and related notes for the
year ended July 31, 1999, included in the Company's Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on January 4, 2000. The
Company consummated an acquisition of Gamesville.com ("Gamesville") on December
3, 1999 which was accounted for as a pooling of interests. The condensed
consolidated financial statements and the accompanying notes reflect the
Company's financial position and the results of operations as if Gamesville were
a wholly-owned subsidiary of the Company since inception.
The results of operations for the separate companies and the combined amounts
presented in the unaudited condensed consolidated financial statements are as
follows (in thousands):
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------- ----------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
Net Revenues:
Lycos $ 67,318 $ 30,552 $ 123,352 $ 55,336
Gamesville 1,257 564 3,081 919
Eliminations -- -- (2,000) --
---------------------------- ----------------------------
$ 68,575 $ 31,116 $ 124,433 $ 56,255
============================ ============================
Net Loss:
Lycos $ (29,155) $ (13,753) $ (58,677) $ (17,349)
Gamesville (1,840) (115) (3,238) (90)
---------------------------- ----------------------------
$ (30,995) $ (13,868) $ (61,915) $ (17,439)
============================ ============================
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, these financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of these interim
periods. Certain information and related footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes the disclosures in these financial statements are adequate to make the
information presented not misleading. The results of operations for the interim
periods shown are not necessarily indicative of the results for any future
interim period or for the entire fiscal year.
7
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from the
Company's Websites. Electronic commerce revenues are generally recognized upon
delivery provided that no significant Company obligations remain and collection
of the receivable is probable. In cases where there are significant remaining
obligations, the Company defers such revenue until those obligations are
satisfied.
Deferred revenues are comprised of electronic commerce fees to be earned in
the future on noncancelable agreements at the balance sheet date.
3. Investments
Investment in Lycos Japan Joint Venture
During November 1999 the Company invested $14.5 million in Lycos Japan in
exchange for convertible bonds and warrants issued by Lycos Japan. This
investment followed Lycos' initial investment of $1 million in April 1998. Also
during November 1999, the Company's joint venture partner, Sumitomo Corporation,
invested an additional $14.5 million in Lycos Japan in exchange for convertible
bonds. A new partner, Kadokawa Publishing Co., Ltd. also joined the joint
venture via an investment of $7.3 million in exchange for Common Stock and
convertible bonds. As a result of the additional investments and new partner,
the Company's ownership of the joint venture changed to approximately 37% and,
assuming full conversion of the convertible bonds and warrants, the Company's
ownership would be approximately 44.7%.
Investment in Lycos Asia Joint Venture
During November 1999 the Company invested $5 million in Lycos Asia, a joint
venture owned 50% by Lycos and 50% owned by Singapore Telecommunications Limited
("SingTel"), a telecommunications provider in Signapore. Under the joint venture
agreement, the Company and SingTel are each committed to provide aggregate
capital investments of $25 million to Lycos Asia. The Company accounts for this
investment under the equity method of accounting.
Joint Venture with Bell ActiMedia
During February 2000 the Company announced the formation of a new Internet
joint venture in Canada, "Sympatico-Lycos", to provide expanded Internet
resources for the business-to-consumer marketplace in Canada. Under the terms of
the agreement, Bell ActiMedia will contribute $25 million in cash and certain
on-line assets, including Internet portal Sympatico. Lycos' ownership in the
joint venture will be 29%. Lycos will also contribute its technologies and
brands in exchange for a royalty, which is based on certain milestones achieved
by Sympatico-Lycos. Separately, Bell ActiMedia and Lycos signed a $40 million
three-year distribution agreement under which Bell ActiMedia products and
services will be promoted to users who access the Lycos Network from Canada.
8
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments (continued)
Investment in ICOMS
In November 1999, the Company entered into an agreement with iCOMS, Inc.
pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C
Preferred Stock representing approximately 14% ownership in iCOMS. At the same
time, the Company entered into a Services Agreement with iCOMS pursuant to which
iCOMS will provide certain operational, engineering and merchant support
services to the Company in connection with the Company's LYCOShop e-commerce
initiative. The Company issued 166,080 unregistered shares of Common Stock in
exchange for iCOMS' Series C Preferred Stock and for the services to be rendered
by iCOMS under the Services Agreement. The Company accounts for its investment
in iCOMS under the cost method.
Investment in Fast Search and Transfer
In January 2000 the Company acquired an approximate 5% ownership interest in
Fast Search & Transfer ASA ("Fast"), a leading Internet search technology
provider based in Oslo, Norway. The Company exchanged 494,777 shares of its
common stock valued at approximately $32 million in exchange for 1,883,714
shares of Fast common stock. In addition, the Company received warrants to
acquire an additional 3,767,426 shares of Fast common stock at a strike price of
$17.37. Based on Fast's trading market price of $82.28 at January 31, 2000, the
Company's 1,883,714 shares were valued at approximately $155 million, and
accordingly, the Company recognized an unrealized gain, net of tax, of
approximately $74 million as a component of other comprehensive income.
Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows (in
thousands):
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
Net loss $(30,995) $(13,868) $(61,915) $(17,439)
Unrealized gains on available-for-sale securities 74,939 2,409 71,478 2,489
------------------------ ------------------------
Comprehensive income (loss) $ 43,944 $(11,459) $ 9,563 $(14,950)
======================== ========================
Accumulated other comprehensive income consists of the unrealized gains on
available-for-sale securities, net of tax, as presented on the accompanying
condensed consolidated balance sheets.
5. Income Taxes
The Company's effective income tax rate has been established after adjustment
for amortization of intangible assets and certain other items which are not
deductible for tax purposes. This effective income tax rate may change during
the remainder of the year if operating results differ significantly from the
current operating projections.
9
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Acquisitions
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger") with Quote.com, Inc., a California corporation ("Quote")
in a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote became a wholly-owned subsidiary of the Company.
As a result, all outstanding shares of Common Stock and Preferred Stock of Quote
were converted into an aggregate 1,346,630 shares of Common Stock of the
Company. Additionally, the Company converted all outstanding Quote stock options
and warrants into approximately 239,000 Lycos options and warrants.
The acquisition of Quote was accounted for as a purchase. The purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Quote are included with those
of the Company for periods subsequent to the date of acquisition.
The purchase price was allocated as follows (in thousands):
Developed technology, goodwill and other intangible assets $ 77,000
Other assets, principally cash 6,269
Liabilities assumed (14,166)
--------
$ 69,103
========
Unaudited combined pro forma financial information for the three months ended
January 31, 2000 and 1999, assuming the Quote acquisition had occurred on August
1, 1998, would have resulted in net revenues of $70.3 million and $34.0 million,
net loss of $34.7 million and $20.1 million, and basic and diluted net loss per
share of $0.34 and $0.22, respectively. Unaudited combined pro forma financial
information for the six months ended January 31, 2000 and 1999, assuming the
Quote acquisition had occurred on August 1, 1998, would have resulted in net
revenues of $131.0 million and $62.0 million, net loss of $74.6 million and
$29.5 million, and basic and diluted net loss per share of $0.74 and $0.33,
respectively. The pro forma net loss includes amortization of developed
technology, goodwill and other intangible assets of $4.8 million for the three
months ended January 31, 2000 and 1999 and $9.6 million for the six months ended
January 31, 2000 and 1999. The unaudited pro forma information is for
illustrative purposes only and is not necessarily indicative of the actual
results of operations had the acquisition occurred on August 1, 1998 nor the
results of any future period.
7. Secondary Offering
On January 25, 2000, the Company completed a secondary offering of its common
stock in which 6,000,000 shares of the Company's Common Stock were sold under a
registration statement filed with the Securities Exchange Commission. Proceeds
to the Company were $443.5 million, net of offering costs. In February 2000, the
Underwriters exercised an option to purchase 163,000 additional shares of Common
Stock, resulting in additional proceeds to the Company of $12 million.
10
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Subsequent Events
Acquisition of Valent Software Corporation
In December 1998, the Company entered into an agreement with Valent Software
Corporation ("Valent") pursuant to which the Company invested $2 million of cash
in Valent. In exchange for the $2 million, the Company received 191,667 shares
of Valent Series C Preferred Stock representing approximately a 16.7% ownership
of Valent and an option to acquire all of the remaining outstanding capital
shares of Valent. Valent provides the infrastructure and tools to link online
clubs.
In January 2000, the Company exercised its option to acquire all of the
remaining outstanding capital shares of Valent. On February 2, 2000 the Company
completed the closing of the Merger and Valent became a wholly-owned subsidiary
of the Company. As a result, all outstanding shares of Common Stock and
Preferred Stock of Valent were converted into an aggregate 564,045 shares of
Common Stock of the Company. Additionally, the Company converted all outstanding
Valent stock options and warrants into 40,129 Lycos options and warrants.
The acquisition of Valent will be accounted for as a purchase. The purchase
price will be allocated to the assets acquired and liabilities assumed based on
their estimated fair values. Results of operations for Valent will be included
with those of the Company for periods subsequent to the date of acquisition.
The purchase price is expected to be allocated as follows (in thousands):
Goodwill and other intangible assets $44,900
Other assets, principally cash 200
Liabilities assumed (100)
-------
$45,000
=======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this report contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
section and elsewhere in this Report, and the risks discussed in the "Factors
Affecting the Company's Business, Operating Results and Financial Condition"
section included in the Company's Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on January 4, 2000. The Company consummated
an acquisition of Gamesville.com ("Gamesville") on December 3, 1999 which was
accounted for as a pooling of interests. The following discussion reflects the
Company's financial position and the results of operations as if Gamesville were
a wholly-owned subsidiary of the Company since inception.
Results of Operations
Total Revenues Total revenues for the three and six months ended January 31,
2000 were $68.6 million and $124.4 million versus $31.1 million and $56.3
million for the three and six months ended January 31, 1999, as a result of
growth in the number of advertisers. As of January 31, 2000, deferred revenues
increased to $174 million, compared to $120 million at July 31, 1999,
attributable to advertising contracts and guaranteed commitments under license
and electronic commerce agreements for which there are significant obligations
of the Company remaining.
Advertising Revenues Advertising revenues were $44.3 million and $83.2
million for the three and six months ending January 31, 2000, representing 65%
and 67% of total revenues, as compared to advertising revenues of $21.5 million
and $39.1 million for the three and six months ended January 31, 1999, which
represented 69% and 69% of total revenues. The increase in advertising revenue
was attributable primarily to an increase in the number of advertisers.
The Company currently derives a substantial portion of its revenues from the
sale of advertisements on its Websites, primarily through banner advertisements
and sponsorships. Advertising contracts are primarily sold as: (1) a "run of
site" contract under which a customer is guaranteed a number of impressions; (2)
a "key word" contract in which a customer purchases the right to advertise in
connection with specified word searches; or (3) a "targeted" contract where the
customer purchases a specified number of impressions in one of the targeted
categories or on a specified page or service.
Electronic Commerce and Other Revenues Electronic commerce and other
revenues were $24.2 million and $41.3 million for the three and six months
ending January 31, 2000, representing 35% and 33% of total revenues, as compared
to electronic commerce and other revenues of $9.7 million and $17.2 million for
the three and six months ended January 31, 1999, which represented 31% and 31%
of total revenues. The increase in electronic commerce and other revenue is
attributable primarily to the addition of several new partners including, among
others, WebMD, FirstUSA, Lifeminders, Fidelity, American Greetings,
RealEstate.com, Mambo.com and International Thinklink Corporation.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from the
Company's Websites. Electronic commerce revenues are generally recognized upon
delivery provided that no significant Company obligations remain and collection
of the receivable is probable. In cases where there are significant remaining
obligations, the Company defers such revenue until those obligations are
satisfied.
12
Cost of Revenues Cost of revenues were $12.8 million and $24.8 million for
the three and six months ending January 31, 2000, representing 19% and 20% of
total revenues, as compared to cost of revenues of $6.6 million and $12.0
million for the three and six months ended January 31, 1999, which represented
21% and 21% of total revenues. Cost of revenues consist primarily of expenses
associated with the ongoing maintenance and support of the Company's products
and services, including compensation, consulting fees, equipment costs,
networking and other related indirect costs. The percentage decrease in cost of
revenues is attributable to operational synergies achieved through the
integration of the Company's various acquisitions.
Operating expenses
Research and Development Research and development expenses were $11.7
million and $21.5 million for the three and six months ending January 31, 2000,
representing 17% and 17% of total revenues, as compared to research and
development expenses of $6.2 million and $11.6 million for the three and six
months ended January 31, 1999, which represented 20% and 21% of total revenues.
Research and development expenses consist primarily of equipment and salary
costs. The overall increase in research and development expenses was primarily
due to increased engineering staffing to continue to develop and enhance the
Company's expanded product offerings.
With the exception of acquired technology, all research and development
costs have been expensed as incurred. The Company believes that significant
investments in research and development are required to remain competitive. As a
consequence, the Company expects to continue to commit substantial resources to
research and development in the future.
Sales and Marketing Sales and marketing expenses were $35.4 million and
$67.9 million for the three and six months ending January 31, 2000, representing
52% and 55% of total revenues, as compared to sales and marketing expenses of
$18.1 million and $34.3 million for the three and six months ended January 31,
1999, which represented 58% and 61% of total revenues. Sales and marketing
expenses consist primarily of compensation, advertising, public relations, trade
shows, travel and costs of marketing literature. The spending increases were due
to the addition of sales and marketing personnel, increased commissions
associated with higher sales, and expenses pertaining to the Company's
advertising, marketing and public relations campaign. The percentage decrease is
attributable to economies of scale achieved through the integration of the
Company's various acquisitions. The Company expects continued increases in sales
and marketing expenses in future periods.
General and Administrative General and administrative expenses were $8.7
million and $16.0 million for the three and six months ending January 31, 2000,
representing 13% and 13% of total revenues, as compared to general and
administrative expenses of $3.4 million and $6.0 million for the three and six
months ended January 31, 1999, which represented 11% and 11% of total revenues.
General and administrative expenses consist primarily of compensation, rent
expenses and fees for professional services. The increases in spending were
primarily due to the expansion of the Company's corporate infrastructure,
including the addition of finance and administrative personnel and increased
costs for professional services. General and administrative expenses include
non-recurring charges of $2.3 million for the three and six months ending
January 31, 2000. The non-recurring charges consist primarily of legal,
investment banker and accounting fees associated with the acquisition of Quote
and Gamesville in December 1999.
Amortization of Intangible Assets Amortization of intangible assets was
$31.4 million and $59.7 million for the three and six months ended January 31,
2000 versus $12.3 million and $23.4 million for the three and six months ended
January 31, 1999. The increase is attributable to increased amortization related
to developed technology and goodwill and other intangible assets recorded upon
the acquisitions of Wired Ventures, Internet Music Distribution, Inc. and Quote.
Interest Income, net Interest income was $2.2 million and $4.1 million for
the three and six months ending January 31, 2000, as compared to interest income
of $1.6 million and $3.5 million for the three and six months ended January 31,
1999. Interest income is generated from investment of the Company's cash
equivalents. Interest expense was not significant in either period. The increase
in interest income reflects the investment of higher cash and cash equivalent
balances. Interest income is expected to increase in future periods due to the
investment of the net proceeds of the Company's secondary stock offering in
January 2000.
13
Gain on Sale of Investments In August 1998, pursuant to an Agreement and
Plan of Merger, Amazon.com acquired all of the outstanding capital stock of
PlanetAll. The Company received 322,128 shares of Amazon.com valued at
approximately $12.8 million at the time of acquisition in exchange for its
shares of PlanetAll. The Company sold 289,917 shares of Amazon.com resulting in
a gain of $10.1 million in the quarter ended October 31, 1998.
Income Taxes The Company's effective income tax rate has been established
after adjustment for amortization of intangible assets and certain other items
which are not deductible for tax purposes. This effective income tax rate may
change during the remainder of the year if operating results differ
significantly from the current operating projections.
Equity Share of Income in Affiliates The Company's equity share of losses
from Lycos Japan were approximately $1.9 million for the three and six months
ended January 31, 2000. The Company's equity share of losses from Lycos Asia
were approximately $714,000 for the three and six months ended January 31, 2000.
There were no recognized losses associated with Lycos Japan in the three or six
months ended January 31, 1999. Increased loss recognized is the result of
increased investment in Lycos Japan, which is accounted for under the equity
method of accounting. The Lycos Asia joint venture began operations in November,
1999 and, therefore, there were no losses recorded for any period prior to the
three months ended January 31, 2000.
The Company recognized equity income in Lycos Ventures of approximately $4.5
million for the three and six months ended January 31, 2000. The equity income
in Lycos Ventures reflects unrealized gains recorded by Lycos Ventures as a
result of public offerings by certain investees of the Lycos Ventures venture
capital fund.
Factors which may affect future operations
There are a number of business factors which singularly or combined may
affect the Company's future operating results. These factors include, without
limitation, the level of usage of the Internet and traffic to the Company's
Internet site, continued acceptance of the Company's products, demand for
Internet advertising, seasonal trends in advertising sales, the advertising
budgeting cycles of individual advertisers, capital expenditures and other costs
relating to the expansion of operations, the introduction of new products or
services by the Company or its competitors, the mix of the services sold and the
channels through which those services are sold, pricing changes, general
economic conditions and specific economic conditions in the Internet industry
and other risks detailed in the Company's filings with the Securities and
Exchange Commission.
Liquidity and Capital Resources
At January 31, 2000, the Company had cash and cash equivalents of $627
million. The Company regularly invests excess funds in short-term money market
funds, government securities and commercial paper.
The Company generated cash from operations of $12.1 million during the six
months ended January 31, 2000, due primarily to increases in accrued expenses
related to the timing of payments.
The Company used cash in investing activities of $24.5 million during the
six months ended January 31, 2000, due primarily to a $14.5 million investment
in Lycos Japan, a $5 million investment in Lycos Asia and $3 million of costs
paid in connection with the Company's acquisition of Quote.
The Company generated cash from financing activities of approximately $472.9
million during the six months ended January 31, 2000, due primarily to proceeds
of $443.5 million received by the Company from the issuance of 6,000,000 shares
of common stock in connection with a secondary offering completed in January
2000 and $32.6 million received by the Company from the exercise of employee
stock options.
14
As of January 31, 2000, the Company had deferred revenues of $174 million
representing fees to be earned in the future on noncancelable electronic
commerce agreements. The increase is due to guaranteed minimums on electronic
commerce agreements such as RealEstate.com, Mambo.com and International
Thinklink Corporation.
The Company currently believes that available funds and cash flows expected
to be generated by operations, if any, will be sufficient to fund its working
capital and capital expenditures requirements for at least the next twelve
months. Thereafter, the Company may need to raise additional funds. The Company
may need to raise additional funds sooner in order to fund more rapid expansion,
to develop new or enhanced products and services, to respond to competitive
pressures or to acquire complementary businesses or technologies. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the stockholders of the Company will be reduced, stockholders may
experience additional dilution, and such equity securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance products or services, take advantage of future opportunities or respond
to competitive pressures, which could have a material adverse effect on the
Company's business, results of operations or financial condition.
Business Combinations
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger") with Quote.com, Inc., a California corporation ("Quote")
in a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote became a wholly-owned subsidiary of the Company.
As a result, all outstanding shares of Common Stock and Preferred Stock of Quote
were converted into an aggregate 1,346,630 shares of Common Stock of the
Company. Additionally, the Company converted all outstanding Quote stock options
and warrants into approximately 239,000 Lycos options and warrants.
The acquisition of Quote was accounted for as a purchase. The purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Quote are included with those
of the Company for periods subsequent to the date of acquisition.
Acquisition of Valent Software Corporation
In December 1998, the Company entered into an agreement with Valent Software
Corporation ("Valent") pursuant to which the Company invested $2 million of cash
in Valent. In exchange for the $2 million, the Company received 191,667 shares
of Valent Series C Preferred Stock representing approximately a 16.7% ownership
of Valent and an option to acquire all of the remaining outstanding capital
shares of Valent. Valent provides the infrastructure and tools to link online
clubs.
In January 2000, the Company exercised its option to acquire all of the
remaining outstanding capital shares of Valent. On February 2, 2000 the Company
completed the closing of the Merger and Valent became a wholly-owned subsidiary
of the Company. As a result, all outstanding shares of Common Stock and
Preferred Stock of Valent were converted into an aggregate 564,045 shares of
Common Stock of the Company. Additionally, the Company converted all outstanding
Valent stock options and warrants into 40,129 Lycos options and warrants.
The acquisition of Valent will be accounted for as a purchase. The purchase
price will be allocated to the assets acquired and liabilities assumed based on
their estimated fair values. Results of operations for Valent will be included
with those of the Company for periods subsequent to the date of acquisition.
15
Investments
Investment in Lycos Japan Joint Venture
During November 1999 the Company invested $14.5 million in Lycos Japan in
exchange for convertible bonds and warrants issued by Lycos Japan. This
investment followed Lycos' initial investment of $1 million in April 1998. Also
during November 1999, the Company's joint venture partner, Sumitomo Corporation,
invested an additional $14.5 million in Lycos Japan in exchange for convertible
bonds. A new partner, Kadokawa Publishing Co., Ltd. also joined the joint
venture via an investment of approximately $7.3 million in exchange for Common
Stock and convertible bonds. As a result of the additional investments and new
partner, the Company's ownership of the joint venture changed to approximately
37% and, assuming full conversion of the convertible bonds and warrants, the
Company's ownership would be approximately 44.7%.
Investment in Lycos Asia Joint Venture
During November 1999 the Company invested $5 million in Lycos Asia, a joint
venture owned 50% by Lycos and 50% owned by Singapore Telecommunications Limited
("SingTel"), a telecommunications provider in Signapore. Under the joint venture
agreement, the Company and SingTel are each committed to provide aggregate
capital investments of $25 million to Lycos Asia. The Company accounts for this
investment under the equity method of accounting.
Joint Venture with Bell ActiMedia
During February 2000 the Company announced the formation of a new Internet
joint venture in Canada, "Sympatico-Lycos", to provide expanded Internet
resources for the business-to-consumer marketplace in Canada. Under the terms of
the agreement, Bell ActiMedia will contribute $25 million in cash and certain
on-line assets, including Internet portal Sympatico. Lycos' ownership in the
joint venture will be 29%. Lycos will also contribute its technologies and
brands in exchange for a royalty, which is based on certain milestones achieved
by Sympatico-Lycos. Separately, Bell ActiMedia and Lycos signed a $40 million
three-year distribution agreement under which Bell ActiMedia products and
services will be promoted to users who access the Lycos Network from Canada.
Investment in ICOMS
In November 1999, the Company entered into an agreement with iCOMS, Inc.
pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C
Preferred Stock representing approximately 14% ownership in iCOMS. At the same
time, the Company entered into a Services Agreement with iCOMS pursuant to which
iCOMS will provide certain operational, engineering and merchant support
services to the Company in connection with the Company's LYCOShop e-commerce
initiative. The Company issued 166,080 unregistered shares of Common Stock in
exchange for iCOMS' Series C Preferred Stock and for the services to be rendered
by iCOMS under the Services Agreement.
Investment in Fast Search and Transfer
In January 2000 the Company acquired an approximate 5% ownership interest in
Fast Search & Transfer ASA ("Fast"), a leading Internet search technology
provider based in Oslo, Norway. The Company exchanged 494,777 shares of its
common stock valued at approximately $32 million in exchange for 1,883,714
shares of Fast common stock. In addition, the Company received warrants to
acquire an additional 3,767,426 shares of Fast common stock at a strike price of
$17.37. Based on Fast's trading market price of $84.46 at January 31, 2000, the
Company's 1,883,714 shares were valued at approximately $155 million, and
accordingly, the Company recognized an unrealized gain, net of tax, of
approximately $74 million as a component of other comprehensive income.
16
PART II
ITEM 1. Legal Proceedings
In November 1999, AIWF Trust, a former shareholder of WiseWire Corporation,
filed a lawsuit in the Court of Common Pleas of Allegheny County, Pennsylvania
against WiseWire, representatives of former shareholders of WiseWire, and Lycos,
as WiseWire's alleged successor in interest. In this lawsuit, AIWF Trust alleged
that pursuant to a 1996 subscription agreement between AIWF Trust and WiseWire,
AIWF Trust was entitled to 2,500,000 shares of WiseWire common stock instead of
the 25,000 shares it received. AIWF Trust seeks the equivalent of 2,500,000
shares of WiseWire common stock in Lycos common stock, which amounts to
approximately 748,000 shares of Lycos common stock. Lycos believes that the
allegations in the complaint are without merit and intends to contest them
vigorously. In addition, Lycos has asserted a claim against the escrow deposit
created in connection with Lycos' acquisition of WiseWire, which currently
contains approximately 329,000 shares of Lycos common stock.
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant to
which, among other things, Lycos would have been merged into a subsidiary of USA
Networks. In May 1999, the parties to the proposed transaction terminated the
merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle County,
by shareholders of the Company allegedly on behalf of all common stockholders of
the Company. The complaints request, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and fees, including
attorneys' fees. Although the proposed merger has since been terminated, the
suits have not been dismissed. The Company believes that the allegations in the
complaints are without merit and intends to contest them vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities law through alleged misrepresentations and omissions relating to the
announced transaction with USA Networks. The consolidated complaint seeks an
unspecified award of damages. The Company believes that the allegations in the
consolidated complaint are without merit and intends to contest them vigorously.
ITEM 2. Changes in Securities
On November 23, 1999, Lycos issued 166,080 shares of Lycos Common Stock as
partial consideration of Lycos' acquisition of 3,032,698 shares of Series C
Preferred Stock of iCOMS, Inc. and as partial consideration for the performance
by iCOMS, Inc. of its obligations under a Service Agreement with Lycos. The
Lycos shares were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, including the exemption
pursuant to section 4(2) thereunder. On November 23, 1999, the closing price of
Lycos Common Stock was $58.25 per share.
On December 3, 1999, Lycos issued 3,605,044 shares of Lycos Common Stock as
consideration of Lycos' acquisition of all of the outstanding common stock and
Series A preferred stock of Gamesville.com, Inc. The Lycos shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended, including the exemption pursuant to section 4(2)
thereunder. On December 3, 1999, the closing price of Lycos Common Stock was $63
per share.
On January 6, 2000, Lycos issued 494,777 shares of Lycos Common Stock as
consideration of Lycos' acquisition of 1,883,714 shares of common stock of Fast
Search & Transfer ASA, a Norwegian corporation. The Lycos shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended, including the exemption pursuant to section 4(2)
thereunder. On January 6, 2000, the closing price of Lycos Common Stock was
$64.688 per share, and the closing price of Fast Search & Transfer common stock
on the Norwegian stock exchange was 400 kroner per share, or approximately
$50.40.
17
On January 13, 2000, Lycos issued 6,910 shares of Lycos Common Stock to
Silicon Valley Bancshares pursuant to the exercise by Silicon Valley Bancshares
of an outstanding warrant exercisable into shares of capital stock of
Gamesville.com, Inc. The Lycos shares were issued pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended,
including the exemption pursuant to section 4(2) thereunder. On January 13,
2000, the closing price of Lycos Common Stock was $74.875 per share.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders was held on December 21, 1999. At the
annual meeting, the following proposals were presented and voted upon by the
stockholders.
A proposal to elect one incumbent director, Robert J. Davis, to serve a term
of three years was presented to the stockholders. 70,159,601 shares were cast in
favor of the proposal, while 126,372 shares withheld authority.
A proposal to ratify, confirm and approve an amendment to Lycos' 1996 Non-
Employee Director Stock Option Plan to permit the Lycos Board of Directors to
grant periodic option grants from time to time to non-employee directors,
instead of on the date of the director's election to the Board of Directors.
60,157,629 shares were cast in favor of the proposal, while 9,993,197 shares
were cast against the proposal. There were 135,147 abstentions.
A proposal to approve adoption of the Lycos 2000 Stock Option Plan ("the
2000 Plan") pursuant to which the Lycos Board of Directors would be permitted to
grant stock options to consultants, employees, and officers of Lycos. The
aggregate number of shares authorized under the plan is 10,000,000; provided,
however, that effective August 1, 2001 and each subsequent August 1 during the
term of the 2000 Plan, the number of shares of Common Stock available for grants
of stock options shall be increased automatically by an amount equal to 5% of
the total number of issued and outstanding shares of Lycos Common Stock
(including shares held in treasury) as of the close of business on July 31 of
the preceding month, provided that the maximum cumulative number of shares of
Common Stock available for grants of incentive stock options under the 2000 Plan
may not exceed 500,000 shares. 27,564,576 shares voted in favor of the proposal,
while 18,938,136 shares voted against the proposal. There were 130,755
abstentions.
A proposal to ratify, confirm, and approve the selection of KPMG LLP as the
independent certified public accountants for the fiscal year 2000 of Lycos was
presented to the stockholders. 70,087,201 shares voted in favor of the proposal,
while 68,098 shares voted against the proposal. There were 130,674 abstentions.
ITEM 5. Other Information
None.
18
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1: Statement of Computation of Basic and Diluted Net Loss
Per Share herein included on page 21.
Exhibit 27.1: Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter
ended January 31, 2000:
(i) On December 21, 1999, Lycos filed a Form 8-K in connection
with the Gamesville.com, Inc. transaction disclosed in Item 2
above.
(ii) On December 22, 1999, Lycos filed a Form 8-K/A in connection
with the December 6, 1999 issuance of 1,346,630 shares of
Lycos Common Stock as consideration of Lycos' acquisition of
all of the outstanding common stock, Series A preferred stock,
Series B preferred stock, Series C preferred stock, and Series
D preferred stock of Quote.com, Inc. The Lycos shares were
issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended,
including the exemption pursuant to section 4(2) thereunder.
On December 6, 1999, the closing price of Lycos Common Stock
was $65.50 per share.
(iii) On January 4, 2000, Lycos filed a Form 8-K/A restating Lycos'
financials in connection with the Gamesville.com, Inc.
transaction disclosed in Item 2 above.
19
SIGNATURE
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.
LYCOS, INC.
Date: March 16, 2000 By: /s/ Edward M. Philip
----------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
20