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, 1997
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)
500 OLD CONNECTICUT PATH, FRAMINGHAM, MASSACHUSETTS 01701-4576
(Address of principal executive offices, including Zip Code)
(508) 424-0400
(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
December 11, 1997 was 14,270,666.
LYCOS, INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements:
Consolidated Balance Sheets
October 31, 1997 and July 31, 1997.............................................. 3
Consolidated Statements of Operations
Three months ended October 31, 1997 and 1996.................................... 4
Consolidated Statements of Cash Flows
Three months ended October 31, 1997 and 1996.................................... 5
Notes to Consolidated Financial Statements........................................ 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 8
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings................................................................. 11
ITEM 2 Change in Securities.............................................................. 11
ITEM 3 Defaults Upon Senior Securities................................................... 11
ITEM 4 Submission of Matters to a Vote of Securities Holders............................. 11
ITEM 5 Other Information................................................................. 11
ITEM 6 Exhibits and Reports on Form 8-K.................................................. 11
Signature......................................................................... 12
2
LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31,
1997 1997
----------------- -----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents................................................ $ 41,017,367 $ 40,766,258
Accounts receivable, less allowance for doubtful accounts of $659,000
and $554,000 at October 31, 1997 and July 31,1997, respectively........ 7,292,693 6,634,262
License fees receivable.................................................. 10,102,146 9,065,806
Prepaid expenses......................................................... 4,808,586 4,259,979
Other current assets..................................................... 713,980 18,439
--------------- --------------
Total current assets.................................................. 63,934,772 60,744,744
--------------- --------------
Property and equipment, less accumulated depreciation...................... 2,239,401 2,397,600
Long-term license fees receivable.......................................... -- 650,000
License agreement, net..................................................... 1,026,190 1,123,645
Goodwill, net.............................................................. 110,073 119,405
Other assets............................................................... 383,615 383,615
--------------- --------------
Total assets.......................................................... $ 67,694,051 $ 65,419,009
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 4,907,645 $ 3,289,513
Accrued expenses......................................................... 6,488,782 7,387,707
Deferred revenues........................................................ 12,794,342 9,541,566
Billings in excess of revenues........................................... 1,626,953 2,387,424
Due to related parties................................................... 14,506 9,105
--------------- --------------
Total current liabilities............................................. 25,832,228 22,615,315
Long term portion of deferred revenues..................................... 3,375,000 5,100,000
Deferred income taxes...................................................... 51,667 56,667
--------------- --------------
3,426,667 5,156,667
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued or outstanding.................................................. -- --
Common stock, $.01 par value; 40,000,000 shares authorized,
14,368,758 shares at October 31, 1997 and 13,796,620 shares
at July 31,1997 issued, and 14,215,080 shares at October 31, 1997
and 13,796,620 shares at July 31, 1997 outstanding................... 143,687 137,966
Additional paid-in capital............................................... 50,149,174 49,506,906
Treasury stock, at cost; 153,678 common shares at October 31, 1997....... (1,536) --
Deferred compensation.................................................... (151,240) (185,436)
Accumulated deficit...................................................... (11,704,929) (11,812,409)
--------------- --------------
Total stockholders' equity............................................ 38,435,156 37,647,027
--------------- --------------
Total liabilities and stockholders' equity............................ $ 67,694,051 $ 65,419,009
=============== ==============
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,
1997 1996
------------------ -------------------
Revenues:
Advertising................................................... $ 6,409,033 $ 3,102,127
License, product and other.................................... 2,894,119 560,859
--------------- -------------------
Total revenues............................................. 9,303,152 3,662,986
Cost of revenues................................................ 1,877,392 838,183
--------------- -------------------
Gross profit............................................... 7,425,760 2,824,803
Operating expenses:
Research and development...................................... 1,435,791 967,188
Sales and marketing........................................... 5,478,635 4,618,209
General and administrative.................................... 944,046 580,723
--------------- -------------------
Total operating expenses................................... 7,858,472 6,166,120
--------------- -------------------
Operating loss.................................................. (432,712) (3,341,317)
Interest income................................................. 540,192 582,325
--------------- -------------------
Net income (loss)............................................... $ 107,480 $(2,758,992)
=============== ===================
Net income (loss) per share..................................... $0.01 $(0.20)
=============== ===================
Shares used in computing net income (loss) per share............ 14,681,976 13,792,896
=============== ===================
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,
1997 1996
----------------- -----------------
OPERATING ACTIVITIES
Net income (loss)................................................... $ 107,480 $(2,758,992)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation............................. 34,196 43,663
Depreciation and amortization..................................... 368,131 273,683
Allowance for doubtful accounts................................... 105,021 60,000
Changes in operating assets and liabilities:
Accounts receivable............................................... (763,452) 126,672
License fees receivable........................................... (386,340) 282,789
Prepaid expenses.................................................. (548,607) (61,750)
Other current assets.............................................. (695,541) --
Other assets...................................................... -- 132,001
Accounts payable.................................................. 1,618,132 (756,514)
Accrued expenses.................................................. (898,925) 1,193,264
Deferred revenues................................................. 1,527,776 (908,466)
Billings in excess of revenues.................................... (760,471) 398,625
Due to related parties............................................ 5,401 (199,810)
Deferred income taxes............................................. (5,000) (6,333)
-------------- -----------------
Net cash used in operating activities............................... (292,199) (2,181,168)
-------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment.................................. (103,145) (619,341)
-------------- -----------------
Net cash used in investing activities............................... (103,145) (619,341)
-------------- -----------------
FINANCING ACTIVITIES
Proceeds from sale of common stock, net............................. 646,453 --
-------------- -----------------
Cash provided by financing activities............................... 646,453 --
-------------- -----------------
Net increase (decrease) in cash and cash equivalents................ 251,109 (2,800,509)
-------------- -----------------
Cash and cash equivalents at beginning of period.................... 40,766,258 44,142,187
-------------- -----------------
Cash and cash equivalents at end of period.......................... $41,017,367 $41,341,678
============== =================
See accompanying notes to consolidated financial statements.
5
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Lycos, Inc., (''Lycos'' or the ''Company'') is a global Internet navigation
and community network dedicated to helping online users locate, retrieve and
manage information personalized to their individual interests by providing easy-
to-use information tools. 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 opinon 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, 1997,
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. 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.
The Company's license, product and other revenues are derived principally from
product licensing fees and fees from maintenance, development and support of its
products and customers. Other revenues include fixed fees and a share of
proceeds from online sales of merchandise by the Company's electronic commerce
partners. License, product and other 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. Fees from maintenance and support of the Company's products including
revenues bundled with the initial licensing fees are deferred and recognized
ratably over the service period.
3. 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, 1997, the Company had no investments with maturities of greater than three
months.
6
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain other equipment under operating
lease agreements expiring through 2002. Future noncancelable minimum payments as
of October 31, 1997 under these leases for each fiscal year end are as follows:
1998 $2,861,484
1999 3,199,272
2000 1,099,460
2001 274,181
2002 242,470
-----------
$7,676,867
===========
In March 1997, the Company renewed its one year ''Premier Provider'' agreement
(the ''1997 Agreement'') with Netscape Communications Corporation ("Netscape")
pursuant to which the Company was designated one of four ''Premier Providers''
of search and navigation services accessible from the ''Net Search'' button on
the Netscape browser. Under the terms of the 1997 Agreement, the Company is
obligated to make installment payments totaling $4.7 million over the term of
the 1997 Agreement, subject to adjustments under certain circumstances. The
Company recognizes the cost of the 1997 Agreement ratably over the term of the
Agreement, with the cost included in sales and marketing expense.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (''SFAS 128'') ''Earnings per Share'', which establishes standards for
computing and presenting earnings per share (''EPS'') and applies to entities
with publicly held common stock or potential common stock. This Statement is
effective for financial statements issued for both interim and annual periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data. Earlier application of this standard is not permitted. The Company
believes that this pronouncement will not have a material adverse effect on its
earnings per share.
6. RECLASSIFICATIONS
Certain amounts in 1997, which were previously included in the consolidated
income statement under the caption ''Cost of revenues'', have been reclassified
as ''Sales and marketing''. This change in classification has no effect on
previously reported net loss or net loss per share.
7
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 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission
RESULTS OF OPERATIONS
Total revenues Total revenues for the three months ended October 31, 1997
increased 154% to $9.3 million from $3.7 million for the three months ended
October 31, 1996, as a result of the growth in the number of advertisers,
average contract duration and value. As of October 31, 1997, deferred revenues
including billings in excess of revenues increased to $17.8 million, compare to
$17.0 million at July 31, 1997 attributable to advertising contracts and license
agreements for which there are significant obligations of the Company remaining.
Advertising revenues Advertising revenues increased 107% to $6.4 million
for the three months ended October 31, 1997, representing 69% of total revenues,
as compared to advertising revenues of $3.1 million for the three months ended
October 31, 1996, which represented 85% of total revenues. The top ten customers
accounted for 31% of advertising revenues in the quarter ended October 31, 1997
as compared to 38% of advertising revenues in the quarter ended October 31,
1996.
The Company's advertising revenues are derived from the sale of advertising on
its Internet Websites. Advertising contracts vary in duration from one week to
five years but are generally short term in nature. Advertising contracts are
principally sold as: (1) a ''general rotation'' 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 specific word
searches; (3) a ''targeted'' contract in which the customer purchases a
specified number of impressions in one of the Web Guides or on a specific page
or service, or (4) a combination of any or all of general rotation, key word and
targeted contracts.
License, product and other revenues License, product and other revenues
increased 416% to $2.9 million for the three months ended October 31, 1997,
representing 31% of total revenues as compared to $561,000 for the three months
ended October 31, 1996, representing 15% of total revenues. The increase in
license, product and other revenue is attributable primarily to the addition of
several new partners including, among others, Bertelsmann, Blockbuster, GTE and
Microsoft.
Cost of revenues Cost of revenues totaled $1.9 million for the quarter
ended October 31, 1997, representing 20% of total revenues, as compared to
$838,000 in the quarter ended October 31, 1996, which represented 23% 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.
OPERATING EXPENSES
Research and Development Research and development expenses totaled $1.4
million for the three months ended October 31, 1997, representing 15% of total
revenues as compared to $967,000 for the three months ended October 31, 1996, or
26% 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.
8
To date, 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 totaled $5.5 million for the
three months ended October 31, 1997, representing 59% of total revenues, as
compared to $4.6 million for the three months ended October 31, 1996,
representing 126% 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 expanded advertising,
marketing and public relations campaign. Sales and marketing expenses also
includes the cost of the Company's ''Premier Provider'' Agreements with
Netscape, as further described below. The Company expects continued increases
in sales and marketing expenses in future periods.
In March 1997, the Company renewed its one year ''Premier Provider'' Agreement
(''the 1997 Agreement'') with Netscape pursuant to which the Company was
designated one of four ''Premier Providers'' of search and navigation services
accessible from the ''Net Search'' button on the Netscape browser. Under the
terms of the 1997 Agreement, the Company is obligated to make installment
payments totaling $4.7 million over the term of the 1997 Agreement, subject to
adjustments under certain circumstances. The Company recognizes the cost of the
1997 Agreement ratably over the term of the 1997 Agreement with the cost
included in sales and marketing expense.
General and Administrative General and administrative expenses totaled
$944,000 for the three months ended October 31, 1997, representing 10% of total
revenues, as compared to $581,000 for the three months ended October 31, 1996,
representing 16% 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, installation of information systems and increased costs for
professional services.
Interest Income Interest income was approximately $540,000 for the three
months ended October 31, 1997 versus $582,000 for the three months ended October
31, 1996. Interest income is generated from investment of the Company's cash
equivalents.
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
third party relationships to create traffic on the Company's websites,
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 1997 Annual Report
on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company had cash and cash equivalents of
approximately $41.0 million. The Company regularly invests excess funds in
short-term money market funds, government securities and commercial paper.
The Company used cash from operations of approximately $292,000 during the
three months ended October 31, 1997, due primarily to net income and increases
in accounts payable and deferred revenues, offset by increases in accounts
receivable, prepaid assets and in accrued expenses. The Company's primary
investing activity during the year has been, and further expenditures are
anticipated to be, for the purchase of computers and office equipment to support
the Company's continued growth. During the three months ended October 31, 1997,
the Company also used approximately $1.3 million for payments under the 1997
Agreement with Netscape.
9
As of October 31, 1997 the Company is committed to noncancelable minimum
payments totaling $7.7 million under operating lease agreements that expire at
various times through 2002. In addition, the Company is obligated to make
remaining installment payments totaling approximately $2.5 million under its
1997 Agreement with Netscape.
At October 31, 1997, the Company had deferred revenues of $16.2 million
representing primarily license fees to be earned in the future on noncancelable
license agreements. In addition, the Company had billings in excess of revenues
from advertising contracts of $1.6 million at October 31, 1997.
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.
10
PART II
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, financial condition, results
of operations or cash flows.
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 11.1: Statement of Computation of Net Income (Loss) Per
Share herein included on page 13.
Exhibit 27.1: Financial Data Schedule
(b) No reports on Form 8-K were filed during the three-month period
ended October 31, 1997.
11
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 11, 1997 By:______________________________
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
12