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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 April 30, 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 (IRS Employer Identification No.)
incorporation or organization)
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
June 13, 2000 was 110,404,798.
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Lycos, Inc.
Table of Contents
Page
--------
PART I. Financial Information
ITEM 1 Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
April 30, 2000 and July 31, 1999................................................. 3
Condensed Consolidated Statements of Operations
Three and nine months ended April 30, 2000 and 1999.............................. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended April 30, 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..................................................... 17
ITEM 4 Submission of Matters to a Vote of Securities Holders............................... 17
ITEM 5 Other Information................................................................... 17
ITEM 6 Exhibits and Reports on Form 8-K.................................................... 18
Signature........................................................................... 19
2
LYCOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, July 31,
2000 1999
--------------- ----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents............................................ $ 652,684 $ 166,506
Accounts receivable, net............................................. 30,783 25,830
Electronic commerce and other receivable............................. 88,823 71,843
Prepaid expenses and other current assets............................ 5,313 8,783
------------ -------------
Total current assets............................................ 777,603 272,962
------------ -------------
Property and equipment, less accumulated depreciation..................... 10,759 7,726
Electronic commerce and other receivable.................................. 42,945 48,029
Investments............................................................... 426,117 48,001
Intangible assets, net.................................................... 535,510 505,682
Other assets.............................................................. 6,374 7,399
Deferred tax asset ....................................................... 1,500 --
------------ -------------
Total assets.................................................... $ 1,800,808 $ 889,799
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - current.............................................. $ 990 $ 2,949
Accounts payable..................................................... 4,511 2,055
Accrued expenses..................................................... 45,548 22,637
Deferred revenues.................................................... 112,929 64,016
------------ -------------
Total current liabilities....................................... 163,978 91,657
Notes payable............................................................. 2,016 2,600
Deferred revenues......................................................... 42,993 55,934
Deferred tax liability.................................................... 104,078 138
------------ -------------
149,087 58,672
Commitments and contingencies -- --
Stockholders' equity:
Common stock......................................................... 1,124 1,003
Additional paid-in capital........................................... 1,485,754 815,706
Deferred compensation................................................ -- (75)
Accumulated deficit.................................................. (32,255) (92,751)
Treasury stock, at cost.............................................. (3,448) (3,286)
Accumulated other comprehensive income............................... 36,568 18,873
------------ -------------
Total stockholders' equity...................................... 1,487,743 739,470
------------ -------------
Total liabilities and stockholders' equity...................... $ 1,800,808 $ 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 Nine Months Ended
April 30, April 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
----------------- ---------------- --------------- ---------------
(Unaudited) (Unaudited)
Revenues:
Advertising.......................... $ 51,568 $ 24,388 $ 134,734 $ 63,470
Electronic commerce and other........ 27,035 11,450 68,302 28,623
-------------- -------------- -------------- --------------
Total revenues................... 78,603 35,838 203,036 92,093
Cost of revenues.......................... 13,764 7,277 38,606 19,241
-------------- -------------- -------------- --------------
Gross profit..................... 64,839 28,561 164,430 72,852
Operating expenses:
Research and development............. 12,570 6,613 34,033 18,193
Sales and marketing.................. 38,921 20,714 106,866 55,053
General and administrative........... 8,483 3,604 24,444 9,593
Amortization of intangible assets.... 37,191 12,274 96,872 35,687
-------------- -------------- -------------- --------------
Total operating expenses......... 97,165 43,205 262,215 118,526
-------------- -------------- -------------- --------------
Operating loss............................ (32,326) (14,644) (97,785) (45,674)
Interest income, net...................... 8,034 1,415 12,144 4,886
Minority interest and other, net.......... (1,090) -- (1,090) --
Equity share of losses in affiliates, net. (13,643) -- (11,756) --
Gain on sale of investment................ 270,237 -- 270,237 10,120
-------------- -------------- -------------- --------------
Net income (loss) before income taxes..... 231,212 (13,229) 171,750 (30,668)
Provision for income taxes................ 108,802 -- 111,255 --
-------------- -------------- -------------- --------------
Net income (loss)......................... $ 122,410 $ (13,229) $ 60,495 $ (30,668)
============== ============== ============== ==============
Basic net income (loss) per share......... $ 1.11 $ (0.15) $ 0.58 $ (0.35)
============== ============== ============== ==============
Diluted net income (loss) per share....... $ 1.05 $ (0.15) $ 0.55 $ (0.35)
============== ============== ============== ==============
Shares used in computing basic net
income (loss) per share.............. 109,949 89,810 103,463 88,665
============== ============== ============== ==============
Shares used in computing diluted net
income (loss) per share.............. 116,244 89,810 109,758 88,665
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
4
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
April 30,
----------------------------------
2000 1999
--------------- ---------------
(Unaudited) (Unaudited)
Operating activities
Net income (loss)..................................................... $ 60,495 $ (30,668)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of intangible assets................................ 96,872 35,687
Equity share of losses in affiliates............................. 11,756 --
Gain on sale of investments...................................... (270,237) (10,120)
Deferred taxes, net.............................................. 102,440 --
Depreciation..................................................... 4,177 2,630
Allowance for doubtful accounts.................................. 4,337 517
Amortization of deferred compensation............................ 75 20
Changes in operating assets and liabilities:
Accounts receivable.............................................. (9,107) (2,960)
Electronic commerce and other receivable......................... (11,896) (96,110)
Prepaid expenses................................................. 3,486 (7,441)
Other assets..................................................... 3,516 (947)
Accounts payable................................................. 987 (3,345)
Accrued expenses................................................. 17,512 (10,014)
Deferred revenues................................................ 35,972 88,897
Other liabilities................................................ -- (37)
------------ -------------
Net cash provided by (used in) operating activities................... 50,385 (33,891)
------------ -------------
Investing activities
Purchase of property and equipment.................................... (5,206) (1,106)
Acquisition costs paid................................................ (3,208) (1,064)
Cash proceeds from sale of available-for-sale investment.............. 200 12,159
Cash acquired through acquisitions.................................... 1,591 1,906
Investments made...................................................... (50,656) (3,552)
------------ -------------
Net cash provided by (used in) investing activities................... (57,279) 8,343
------------ -------------
Financing activities
Proceeds from issuance of stock, net of offering costs................ 455,618 --
Proceeds from exercise of stock options............................... 47,066 7,285
Proceeds from issuance of common stock under ESPP..................... 415 278
Proceeds from exercise of warrants.................................... 126 --
Cash used to repurchase treasury stock................................ (162) --
Payments on notes payable............................................. (9,991) (3,241)
------------ -------------
Net cash provided by financing activities............................. 493,072 4,322
------------ -------------
Net increase (decrease) in cash and cash equivalents.................. 486,178 (21,226)
------------ -------------
Cash and cash equivalents at beginning of period...................... 166,506 153,980
------------ -------------
Cash and cash equivalents at end of period............................ $ 652,684 $ 132,754
============ =============
See accompanying notes to condensed consolidated financial statements.
5
LYCOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Nine Months Ended
April 30,
------------------------------------
2000 1999
----------------- -----------------
(Unaudited) (Unaudited)
Schedule of non-cash financing and investing activities:
Issuance of common stock upon acquisition
of who where?, Quote and Valent................................ $ 113,461 $ 157,995
Assets and liabilities recorded upon acquisition
Of who where?, Quote and Valent
Accounts receivable........................................... 183 2,345
Prepaids...................................................... 16 1,302
Property and equipment........................................ 2,004 2,914
Other assets.................................................. 2,491 649
Notes payable................................................. 7,448 5,185
Accounts payable.............................................. 1,469 1,588
Accrued expenses.............................................. 5,399 1,661
Deferred revenues............................................. -- 1,945
Issuance of common stock in connection with
strategic investments......................................... $ 41,680 $ --
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 the 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 Nine Months Ended
April 30, April 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
------------------------------------- ------------------------------------
Net Revenues:
Lycos $ 78,603 $ 35,082 $201,955 $ 90,418
Gamesville -- 756 3,081 1,675
Eliminations -- -- (2,000) --
--------------------------------- ---------------------------------
$ 78,603 $ 35,838 $203,036 $ 92,093
================================= =================================
Net Income (Loss):
Lycos $ 122,410 $(13,302) $ 63,733 $(30,651)
Gamesville -- 73 (3,238) (17)
--------------------------------- ---------------------------------
$ 122,410 $(13,229) $ 60,495 $(30,668)
================================= =================================
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
Joint Venture with Bell ActiMedia
In 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 AutoWeb
In April 2000, the Company entered into an agreement with AutoWeb, Inc.
pursuant to which the Company purchased 3,035,025 shares of AutoWeb for $21.8
million in cash. The investment represents an approximate 10% ownership in
AutoWeb and was based on quoted trading prices of AutoWeb's common stock. At the
same time, the Company entered into a four year strategic alliance to build and
jointly operate a new on-line automotive channel and deliver marketing and
e-commerce opportunities to the auto industry. Based on AutoWeb's closing traded
market price of $3.94 on April 28, 2000, the Company's investment in AutoWeb was
valued at $11.9 million, and accordingly, the Company recorded a $6.0 million
unrecognized loss, net of tax, as a component of other comprehensive income.
4. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows
(in thousands):
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------------------------- ------------------------------
Net income (loss) $ 122,410 $ (13,229) $ 60,495 $ (30,668)
Unrealized gain (loss) on available-for-sale
securities (53,783) 1,776 17,695 4,265
------------------------------- ------------------------------
Comprehensive income (loss) $ 68,627 $ (11,453) $ 78,190 $ (26,403)
=============================== ==============================
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.
8
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The provision for income taxes relates
primarily to deferred taxes recorded on the gain from the initial public
offering of Lycos Europe, as discussed in note 7.
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
===============
Acquisition of Valent Software Corporation, Inc.
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% interest in Valent and an option to acquire all of the remaining
outstanding capital stock 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 stock 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.
9
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Acquisitions (continued)
The acquisition of Valent 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 Valent 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 $ 49,700
Other assets 16
Liabilities assumed (150)
----------------
$ 49,566
================
The following pro forma financial information presents the combined results
of operations of Lycos, Quote and Valent as if the acquisitions had occurred as
of the beginning of fiscal 2000 and 1999, after giving effect to certain
adjustments, including amortization of goodwill and other intangible assets. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had Lycos, Quote and Valent constituted a
single entity during such period.
Pro Forma Three Months Pro Forma Nine Months
Ended April 30, Ended April 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
------------------------------------- ------------------------------------
Revenues $ 78,603 $ 39,168 $209,717 $101,173
Net income (loss) $122,410 $(24,121) $ 26,739 $(62,413)
Net income (loss) per share:
Basic $ 1.11 $ (0.26) $ 0.26 $ (0.69)
Diluted $ 1.05 $ (0.26) $ 0.24 $ (0.69)
7. Gain on Sale of Investment
During March 2000, Lycos Europe, N.V. ("Lycos Europe") completed an initial
public offering on the German Neuer Markt stock exchange which raised
approximately $625 million, net of offering costs. As a result of the offering,
the Company's percentage ownership in Lycos Europe was reduced to approximately
43.8% from 50% and the Company recognized a one-time gain of $270 million. At
April 30, 2000 the Company's carrying value of Lycos Europe, which is recorded
in investments on the balance sheet, is $260 million. The fair value of the
Company's investment in Lycos Europe, based on the quoted trading price, was
approximately $1.6 billion at April 30, 2000.
10
LYCOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Subsequent Events
On May 16, 2000, Lycos and Terra Networks, S.A. ("Terra Networks"), entered
into an agreement and plan of reorganization to combine and create Terra Lycos
(the "Combination"). As part of the Combination, each issued and outstanding
share of Lycos common stock will be converted into Terra Networks American
Depositary Shares ("Terra Networks ADSs") representing a number of ordinary
shares of Terra Networks (or if the applicable Lycos stockholder elects, into a
number of Terra Networks ordinary shares in account entry form instead of Terra
Networks ADSs) equal to the Exchange Ratio. The Exchange Ratio shall be equal to
(1) $97.55 divided by (2) the U.S. dollar equivalent of the average closing
price of Terra Networks ordinary shares on the Spanish Continuous Market
Exchange for the ten full Spanish Continuous Market Exchange trading days ending
on the tenth Spanish Continuous Market Exchange trading day prior to the
completion of the Combination. However, if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or greater than $68.06,
the exchange ratio shall be 1.433, and if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or less than $45.37,
the exchange ratio shall be 2.150.
In connection with the Combination, Terra Networks, Lycos and Telefonica,
S.A., Terra Networks' majority owner ("Telefonica"), entered into a rights
offering agreement (the "Rights Offering"). Pursuant to the Rights Offering,
Terra Networks will make a rights offering prior to the Combination whereby it
will issue to its shareholders rights to purchase Terra Networks ordinary shares
for an aggregate of $2.0 billion at a price per share of $56.13, which was the
closing price of Terra Networks ordinary shares on May 16, 2000. Under the
Rights Offering, Telefonica has agreed to subscribe for all shares not
subscribed for by other shareholders.
As a result of the Combination and following the Rights Offering, Lycos
stockholders are expected to own between 37% and 46% of the shares of Terra
Lycos. Telefonica is expected to own between 38% and 47% of Terra Lycos after
the Combination. The Combination is expected to be accounted for by Terra
Networks as an acquisition under the purchase method of accounting for business
combinations.
The Combination is expected to be completed during the third quarter of
calendar year 2000 and is subject to completion of the Rights Offering and
customary closing conditions, including approval by stockholders of Lycos and
receipt of all necessary regulatory approvals. There can be no assurance such
approvals will be obtained.
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 nine months ended April
30, 2000 increased to $78.6 million and $203.0 million versus $35.8 million and
$92.1 million for the three and nine months ended April 30, 1999 as a result of
growth in the number of advertisers. As of April 30, 2000, deferred revenues
increased to $156 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 $51.6 million and $134.7
million for the three and nine months ended April 30, 2000, representing 66% and
66% of total revenues, as compared to advertising revenues of $24.4 million and
$63.5 million for the three and nine months ended April 30, 1999, which
represented 68% and 69% of total revenues. The increase in advertising revenue
was attributable to an increase in the number of advertisers as well as an
increase in the average size and length of advertising contracts.
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 $27.0 million and $68.3 million for the three and nine months
ending April 30, 2000, representing 34% and 34% of total revenues, as compared
to electronic commerce and other revenues of $11.5 million and $28.6 million for
the three and nine months ended April 30, 1999, which represented 32% and 31% of
total revenues. The increase in electronic commerce and other revenues is
attributable primarily to the addition of several new partners including, among
others, WebMD, FirstUSA, Lifeminders, Fidelity, American Greetings, Anyday.com,
Driveway Corporation and AutoWeb.
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 of services 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.
Cost of Revenues Cost of revenues were $13.8 million and $38.6 million
for the three and nine months ending April 30, 2000, representing 18% and 19% of
total revenues, as compared to cost of revenues of $7.3 million and $19.2
million for the three and nine months ended April 30, 1999, which represented
20% 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.
12
Operating expenses
Research and Development Research and development expenses were $12.6
million and $34.0 million for the three and nine months ending April 30, 2000,
representing 16% and 17% of total revenues, as compared to research and
development expenses of $6.6 million and $18.2 million for the three and nine
months ended April 30, 1999, which represented 18% and 20% of total revenues.
Research and development expenses consist primarily of equipment and salary
costs. The percentage decrease is attributable to economies of scale achieved
through the integration of the Company's various acquisitions. 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 $38.9 million and
$106.9 million for the three and nine months ending April 30, 2000, representing
50% and 53% of total revenues, as compared to sales and marketing expenses of
$20.7 million and $55.1 million for the three and nine months ended April 30,
1999, which represented 58% and 60% 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 $8.5
million and $24.4 million for the three and nine months ending April 30, 2000,
representing 11% and 12% of total revenues, as compared to general and
administrative expenses of $3.6 million and $9.6 million for the three and nine
months ended April 30, 1999, which represented 10% and 10% 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 $1.4 million and $3.7 million for the three and nine
months ending April 30, 2000, respectively. The non-recurring charges consist
primarily of legal, investment banker and accounting fees associated with the
initial public offering of Lycos Europe in March 2000 and the acquisition of
Gamesville in December 1999.
Amortization of Intangible Assets Amortization of intangible assets was
$37.2 million and $96.9 million for the three and nine months ended April 30,
2000 versus $12.3 million and $35.7 million for the three and nine months ended
April 30, 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., Quote and
Valent.
Interest Income, net Interest income was $8.0 million and $12.1 million
for the three and nine months ending April 30, 2000, as compared to interest
income of $1.4 million and $4.9 million for the three and nine months ended
April 30, 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 as a result of the Company's secondary stock offering in
January 2000.
Gain on Sale of Investments During March 2000, Lycos Europe completed an
initial public offering on the German Neuer Markt stock exchange which raised
approximately $625 million, net of offering costs. As a result of the offering,
the Company's percentage ownership in Lycos Europe was reduced to approximately
43.8% from 50% and the Company recognized a one-time gain of $270 million. At
April 30, 2000 the Company's carrying value of Lycos Europe, which is recorded
in investments on the balance sheet, is $260 million. The fair value of the
Company's investment in Lycos Europe, based on the quoted trading price, was
approximately $1.6 billion at April 30, 2000.
13
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. The provision for income
taxes relates primarily to deferred taxes recorded on the gain from the initial
public offering of Lycos Europe, as discussed above.
Equity Share of Losses in Affiliates The Company's equity share of losses
from Lycos Europe were approximately $10 million for the three and nine months
ended April 30, 2000. The Company's equity share of losses from Lycos Japan were
approximately $3.0 million and $4.9 million for the three and nine months ended
April 30, 2000, respectively. The Company's equity share of losses from Lycos
Asia were approximately $900,000 and $1.6 million for the three and nine months
ended April 30, 2000, respectively. There were no recognized losses associated
with Lycos Europe or Lycos Japan in the three or nine months ended April 30,
1999. The increased loss recognized in the three and nine months ended April 30,
2000 is the result of increased basis of the Company's investment in Lycos
Europe as a result of a gain recorded upon completion of its initial public
offering and an increased basis as a result of a convertible loan made to Lycos
Japan. The Lycos Asia joint venture began operations in November, 1999 and,
therefore, no losses were recorded for any period prior to November 1999. The
Company's joint ventures in Europe, Japan and Asia are all accounted for under
the equity method of accounting.
The Company recognized equity income in Lycos Ventures of approximately
$430,000 and $4.9 million for the three and nine months ended April 30, 2000,
respectively. The equity income in Lycos Ventures reflects unrealized gains
recorded by Lycos Ventures as a result of public offerings and changes in quoted
trading prices 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.
In addition, factors relating to the Company's combination with Terra
Networks, including the following, could affect the Company's future operating
results: the risk that Terra Networks' and the Company's businesses will not be
integrated successfully; costs related to the combination; failure of the
Company's stockholders to approve the combination; inability to obtain antitrust
approvals related to the combination; and other factors generally affecting the
business of the combined company.
Liquidity and Capital Resources
At April 30, 2000, the Company had cash and cash equivalents of $653
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 $50.4 million during the nine
months ended April 30, 2000, due primarily to increases in accrued expenses
related to the timing of payments and increases in deferred revenue relating to
customer payments received in advance.
The Company used cash in investing activities of $57.3 million during the
nine months ended April 30, 2000, due primarily to a $14.5 million loan to Lycos
Japan, a $5 million investment in Lycos Asia, a $21.8 investment in AutoWeb, a
$5 million investment in Driveway Corporation, $3 million of costs paid in
connection with the Company's acquisition of Quote and $5.2 million in capital
expenditures of property and equipment.
14
The Company generated cash from financing activities of approximately $493
million during the nine months ended April 30, 2000, due primarily to proceeds
of $455.6 million received by the Company from the issuance of 6,163,000 shares
of common stock in connection with a secondary offering completed in January
2000 and $47.1 million received by the Company from the exercise of employee
stock options.
As of April 30, 2000, the Company had deferred revenues of $156 million
representing fees to be earned in the future on noncancelable electronic
commerce agreements. The increase is due to additional electronic commerce
agreements with guaranteed minimums.
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
Proposed Merger with Terra Networks, S.A.
On May 16, 2000, Lycos and Terra Networks, S.A. ("Terra Networks"), entered
into an agreement and plan of reorganization to combine and create Terra Lycos
(the "Combination"). As part of the Combination, each issued and outstanding
share of Lycos common stock will be converted into Terra Networks American
Depositary Shares ("Terra Networks ADSs") representing a number of ordinary
shares of Terra Networks (or if the applicable Lycos stockholder elects, into a
number of Terra Networks ordinary shares in account entry form instead of Terra
Networks ADSs) equal to the Exchange Ratio. The Exchange Ratio shall be equal to
(1) $97.55 divided by (2) the U.S. dollar equivalent of the average closing
price of Terra Networks ordinary shares on the Spanish Continuous Market
Exchange for the ten full Spanish Continuous Market Exchange trading days ending
on the tenth Spanish Continuous Market Exchange trading day prior to the
completion of the Combination. However, if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or greater than $68.06,
the exchange ratio shall be 1.433, and if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or less than $45.37,
the exchange ratio shall be 2.150.
In connection with the Combination, Terra Networks, Lycos and Telefonica,
S.A., Terra Networks' majority owner ("Telefonica"), entered into a rights
offering agreement (the "Rights Offering"). Pursuant to the Rights Offering,
Terra Networks will make a rights offering prior to the Combination whereby it
will issue to its shareholders rights to purchase Terra Networks ordinary shares
for an aggregate of $2.0 billion at a price per share of $56.13, which was the
closing price of Terra Networks ordinary shares on May 16, 2000. Under the
Rights Offering, Telefonica has agreed to subscribe for all shares not
subscribed for by other shareholders.
As a result of the Combination and following the Rights Offering, Lycos
stockholders are expected to own between 37% and 46% of the shares of Terra
Lycos. Telefonica is expected to own between 38% and 47% of Terra Lycos after
the Combination. The Combination is expected to be accounted for by Terra
Networks as an acquisition under the purchase method of accounting for business
combinations.
The Combination is expected to be completed during the third quarter of
calendar year 2000 and is subject to completion of the Rights Offering and
customary closing conditions, including approval by stockholders of Lycos and
receipt of all necessary regulatory approvals. There can be no assurance such
approvals will be obtained.
15
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, Inc.
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% interest in 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 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 Valent are included with
those of the Company for periods subsequent to the date of acquisition.
Investments
Joint Venture with Bell ActiMedia
In 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 AutoWeb
In April 2000, the Company entered into an agreement with AutoWeb, Inc.
pursuant to which the Company purchased 3,035,025 shares of AutoWeb for $21.8
million in cash. The investment represents an approximate 10% ownership in
AutoWeb and was based on quoted trading prices of AutoWeb's common stock. At the
same time, the Company entered into a four year strategic alliance to build and
jointly operate a new on-line automotive channel and deliver marketing and
e-commerce opportunities to the auto industry. Based on AutoWeb's closing traded
market price of $3.94 on April 28, 2000, the Company's investment in AutoWeb was
valued at $11.9 million, and accordingly, the Company recorded a $6.0 million
unrecognized loss, net of tax, 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.
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.
ITEM 2. Changes in Securities
On February 2, 2000, Lycos issued 564,045 shares of Lycos Common Stock as
consideration of Lycos' acquisition by way of a merger of all of the outstanding
common stock, Series A preferred stock, and Series B preferred stock of Valent
Software Corporation, 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 February 2,
2000, the closing price of Lycos Common Stock was $72.94 per share.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Securities Holders
None.
ITEM 5. Other Information
None.
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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 20.
Exhibit 27.1: Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter ended April
30, 2000. The Company filed Form 8-K with the Securities and
Exchange Commission on May 18, 2000 with respect to the proposed
combination with Terra Networks, S.A. as previously disclosed in
this Form 10-Q.
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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: June 14, 2000 By: /s/ Edward M. Philip
---------------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
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