================================================================================
- --------------------------------------------------------------------------------
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 October 31, 1996
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 (IRS Employer Indentification No.)
or organization)
293 Boston Post Road West, Marlboro, Massachusetts 01752
(Address of principal executive offices, including Zip Code)
(508)-229-0717
(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. Yes [X] No [_]
The number of shares outstanding of the registrant's Common Stock as of
December 13, 1996 was 13,792,896
- --------------------------------------------------------------------------------
================================================================================
LYCOS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets
October 31, 1996 and July 31, 1996............................3
Consolidated Statements of Operations
Three months ended October 31, 1996 and 1995..................4
Consolidated Statements of Cash Flows
Three months ended October 31, 1996 and 1995..................5
Notes to Consolidated Financial Statements.....................7
Items 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................9
Part II. Other Information
Item 1 Legal Proceedings.............................................12
Item 2 Changes in Securities.........................................12
Item 3 Defaults Upon Senior Securities...............................12
Item 4 Submission of Matters to a Vote of Securities Holders.........12
Item 5 Other Information.............................................12
Item 6 Exhibits and Reports on Form 8-K..............................12
Signature.....................................................13
2
LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, July 31,
1996 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 41,341,678 $ 44,142,187
Accounts receivable, less allowance for doubtful accounts of
$260,000 at October 31, 1996 and $200,000 at July 31, 1996 3,107,253 3,293,925
License fee receivable 1,274,479 1,032,405
Prepaid expenses 1,043,461 981,711
------------- -------------
Total current assets 46,766,871 49,450,228
------------- -------------
Property and equipment, less accumulated depreciation 1,853,547 1,405,768
Long-term license fees receivable 426,953 951,816
License agreement, net 1,416,010 1,513,466
Goodwill, net 167,017 171,682
Other assets 35,614 167,615
------------- -------------
Total assets $ 50,666,012 $ 53,660,575
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,985,365 $ 2,741,879
Accrued expenses 2,939,682 1,746,418
Deferred revenues 2,239,956 3,148,422
Billings in excess of revenues 1,801,057 1,402,432
Due to related parties 237,457 437,267
------------- -------------
Total current liabilities 9,203,517 9,476,418
------------- -------------
Deferred taxes 71,667 78,000
Stockholders' equity:
Common stock, $.01 par value 137,929 137,929
Additional paid-in capital 49,537,608 49,537,608
Deferred compensation (332,498) (376,161)
Accumulated deficit (7,952,211) (5,193,219)
------------- -------------
Total stockholders' equity 41,390,828 44,106,157
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 50,666,012 $ 53,660,575
============= =============
See accompanying notes to consolidated financial statements
3
LYCOS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
October 31, October 31,
1996 1995
------------ -------------
Revenues:
Advertising $ 3,102,127 $ 190,041
License and product 560,859 25,000
------------- -------------
Total revenues 3,662,986 215,041
Cost of revenues 2,088,183 183,946
------------- -------------
Gross profit 1,574,803 31,095
Operating expenses:
Research and development 967,188 30,491
Sales and marketing 3,368,209 131,518
General and administrative 580,723 152,980
------------- -------------
Total operating expenses 4,916,120 314,989
------------- -------------
Operating loss (3,341,317) (283,894)
Interest income, net 582,325 4,381
------------- -------------
Net loss ($ 2,758,992) ($ 279,513)
============= =============
Net loss per share ($ 0.20) ($ 0.03)
============= =============
Shares used in computing net loss per share 13,792,896 11,012,764
============= =============
See accompanying notes to consolidated financial statements
4
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
October 31, October 31,
1996 1995
---------------- ----------------
Operating activities
Net loss ($ 2,758,992) ($ 279,513)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 43,663 -
Depreciation and amortization 273,683 13,624
Allowance for doubtful accounts 60,000 -
Changes in operating assets and liabilities:
Accounts receivable 126,672 (132,247)
License fees receivable 282,789 (30,444)
Prepaid expenses (61,750) (20,592)
Other assets 132,001 (70,035)
Accounts payable (756,514) 84,942
Accrued expenses 1,193,264 299,570
Deferred revenues (908,466) 40,367
Billings in excess of revenues 398,625 -
Due to related parties (199,810) (46,944)
Deferred income taxes (6,333) 50,000
---------------- ----------------
Net cash used in operating activities (2,181,168) (91,272)
Investing activities
Purchase of property and equipment (619,341) (426,684)
Payments under License Agreement - (15,118)
Cash acquired through acquisition of Point Communications - 17,137
---------------- ----------------
Net cash used in investing activities (619,341) (424,665)
Financing activities
Proceeds from capital contribution - 1,000,000
---------------- ----------------
Net cash provided by financing activities - 1,000,000
---------------- ----------------
(Decrease) increase in cash and cash equivalents (2,800,509) 484,063
Cash and cash equivalents at beginning of period 44,142,187 446,447
---------------- ----------------
Cash and cash equivalents at end of period $ 41,341,678 $ 930,510
================ ================
5
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(Unaudited)
Three Months Three Months
Ended Ended
October 31, October 31,
1996 1995
---------------- ----------------
Schedule of non-cash financing and investing activities:
Issuance of common stock for License Agreement $ 300,000
Recognition of deferred tax liability related to License Agreement 50,000
Assets and liabilities recognized upon acquisition of Point
Communications
Accounts receivable 33,975
Property and equipment 47,496
Goodwill 186,633
Accounts payable 97,734
Deferred revenues 23,137
Accrued expenses 4,370
Due to related parties 70,000
See accompanying notes to consolidated financial statements
6
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
Lycos, Inc. ("the Company") provides among the most widely used online
navigational guides to the Internet's World Wide Web. The Company was formed
in June 1995 by CMG@Ventures, L.P., a wholly-owned subsidiary of CMG
Information Services. The Company operates in one industry segment, selling
advertising on its Web sites and licensing its technology and products to
customers in various industries worldwide. The Company's fiscal year end is
July 31.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary 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. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended July 31, 1996, included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. 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.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less as cash equivalents, and
those with maturities of greater than three months as short-term investments.
At October 31, 1996, the Company had no investments with maturities of
greater than three months.
3. Commitments
In April 1996, the Company entered into a one year "Premier Provider"
agreement ("the Agreement") with Netscape Communications Corporation
("Netscape") pursuant to which the Company was designated one of five
"Premier Providers" of search and navigation services accessible from the
"Net Search" button on the Netscape browser. Under the terms of the
Agreement, the Company is obligated to make installment payments totaling $5
million over the term of the Agreement. At October 31, 1996, the Company's
remaining obligation under the terms of the Agreement totaled $1,500,000. The
cost of the Agreement is recognized ratably over its term and therefore,
$1,250,000 relating to the Agreement is included in "Cost of revenues" in the
accompanying Consolidated Statements of Operations for the three months ended
October 31, 1996.
7
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(Unaudited)
3. Commitments (continued)
The Company leases its facilities and certain other equipment under
operating agreements expiring through 2001. Future noncancelable minimum
payments as of October 31, 1996 under these leases for each fiscal year end
are as follows:
1997 $ 1,090,016
1998 1,050,801
1999 820,645
2000 158,132
2001 33,475
Thereafter 579
------------
$ 3,153,648
============
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
liability with respect to these actions will not materially affect the
financial position of the Company.
4. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock and dilutive common stock equivalent shares outstanding
during the period. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, such computations include all common and common
equivalent shares issued within 12 months of the filing date as if they were
outstanding for all periods presented using the treasury stock method.
Common equivalent shares consist of shares issuable upon the exercise of
stock options. Fully diluted net loss per share approximates primary net
loss per share.
8
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 1996 Annual Report on Form 10-K.
Results of Operations
Revenues Total revenues for the three months ended October 31, 1996
were $3.7 million versus $215,000 for the three months ended October 31, 1995,
representing an increase of 1,603%. As of October 31, 1996, the Company had
deferred revenues of $2.2 million attributable to license agreements for which
there are significant obligations of the Company remaining, and billings in
excess of revenues of $1.8 million, attributable to billings in excess of
revenues on advertising contracts.
Advertising revenues Advertising revenues were $3.1 million for the
three months ended October 31, 1996, representing 85% of total revenues as
compared to advertising revenues of $190,000 for the three months ended
October 31, 1995, which represented 88% of total revenues. Ten customers
accounted for 38% of advertising revenues in the quarter ended October 31, 1996
as compared with ten customers which accounted for 96% of advertising revenues
in the quarter ended October 31, 1995.
The Company's advertising revenues are derived principally from the sale
of advertising on its Internet web sites. Advertising contracts vary in
duration from several days to five years. Advertising contracts are principally
sold as either: (1) a "general rotation" contract under which a customer is
guaranteed a minimum number of impressions; (2) a "key word" contract in which a
customer purchases the right to specified words and the customer's advertisement
is shown as those words are "searched"; or (3) a combination of general rotation
and key word contracts.
License and product revenues License and product revenues were
$561,000 for the three months ended October 31, 1996, representing 15% of total
revenues as compared to $25,000 for the three months ended October 31, 1995,
representing 12% of total revenues. This increase is attributable primarily to
the addition of over 20 new licensees, including, among others, AT&T,
Bertelsmann's Telemedia, Compuserve, Simon & Shuster, Swedish Post and Xaxon.
The Company licenses its products and technology generally in exchange
for a license fee, maintenance fees for product updates and, where applicable, a
share of the advertising revenues, subscription fees or product sales received
by licensees. The Company's license agreements generally have terms of one to
three years.
Cost of revenues Cost of revenues were $2.1 million for the quarter
ended October 31, 1996, representing 57% of total revenues, as compared to
$184,000 in the quarter ended October 31, 1995, which represented 86% of total
revenues. Cost of revenues consist primarily of expenses associated with the
ongoing enhancement, maintenance and support of the Company's products and
services, including compensation, consulting fees, equipment, networking and
other related indirect costs. Cost of revenues also includes amortization costs
associated with the Company's License Agreement with Carnegie Mellon University,
as well as costs associated with the Company's "Premier Provider" agreement, as
further described below.
In April 1996, the Company entered into a one year "Premier Provider"
agreement ("the Agreement") with Netscape Communications Corporation
("Netscape") pursuant to which the Company
9
was designated one of five "Premier Providers" of search and navigation services
accessible from the "Net Search" button on the Netscape browser. Under the terms
of the Agreement, the Company is obligated to make installment payments totaling
$5 million over the term of the Agreement. The Company recognizes the cost of
this agreement ratably over the term of the agreement. For the quarter ended
October 31, 1996, Cost of revenues includes $1,250,000 attributable to the
Agreement.
Operating expenses
Research and Development Research and development expenses were
$967,000 for the three months ended October 31, 1996, representing 26% of total
revenues versus $30,000 for the three months ended October 31, 1995, or 14% of
total revenues. Research and development expenses consist primarily of
equipment, depreciation, personnel costs and editorial costs. The overall
increase in research and development spending was primarily due to increased
staffing required to continue to develop and enhance the Company's product
lines, including the Pictures and Sounds Catalog and City Guide which were
released in September 1996. The Company expects to continue to commit
substantial resources to research and development in the future.
Sales and Marketing Sales and marketing expenses were $3.4 million for
the three months ended October 31, 1996, representing 92% of total revenues
versus $132,000 for the three months ended October 31, 1995, representing 61% of
total revenues. The spending increases were due to the addition of sales and
marketing personnel and expenses associated with the Company's expanded
advertising, marketing and public relations campaigns. The Company plans to
continue to build its sales force and promote its brand resulting in continued
increases in sales and marketing expenses in future periods.
General and Administrative General and administrative expenses were
approximately $581,000 for the three months ended October 31, 1996, representing
16% of total revenues versus $153,000 for the three months ended October 31,
1995, representing 71% of total revenues. 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.
Interest Income, net Interest income, net, was approximately $582,000
for the three months ended October 31, 1996 versus $4,000 for the three months
ended October 31, 1995. The increase is due primarily to the investment of
proceeds received upon the closing of the Company's initial public offering in
April 1996.
Other 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, dependence on major customers,
dependence on advertising revenues, dependence on the Internet, rapid
technological change, competition and variability of quarterly results, which
have been outlined in the Company's 1996 Annual Report on Form 10-K.
Liquidity and Capital Resources
At October 31, 1996, the Company had cash and cash equivalents of $41.3
million. The Company regularly invests excess funds in short-term money market
funds, government securities, and commercial paper. At October 31, 1996, the
Company also has available a bank revolving credit facility providing for
borrowings up to $1.0 million which matures on June 1, 1997. As of October 31,
1996, there were no borrowings outstanding under this credit facility.
The Company used cash from operations of $2.2 million in the three
months ended October 31, 1996, due primarily to the net loss, as well as
decreases in accounts payable and deferred revenues. The Company's primary
investing activity in the three month period has been, and further expenditures
are anticipated to be, for the purchase of computer and office equipment to
support the Company's growth.
10
From time to time the Company expects to evaluate the acquisition of
products, businesses and technologies that complement the Company's business.
Currently, however, the Company does not have any understandings, commitments or
agreements with respect to any such material acquisitions.
The Company believes that its existing cash and cash equivalents,
together with borrowings available under the Company's credit facility, will be
sufficient to meet the Company's cash requirements for at least the next twelve
months.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a
material adverse effect on its business or financial condition.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Statement of Computation of Net Loss Per Share herein
included on page 14.
(b) No reports on Form 8-K were filed during the three-month period
ended October 31, 1996.
12
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: December 13, 1996 By:/s/ Edward M. Philip
-------------------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
13