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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 30, 1998
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)
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400-2 Totten Pond Road, Waltham,
Massachusetts 02154-2000
(Address of principal executive offices,
including zip code)
(781) 370-2700
(Registrant's telephone number,
including area code)
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of the Current Report on Form 8-K filed
by the registrant on May 1, 1998 as set forth in the pages attached hereto:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- ------------------------------------------------------------------
(a) Financial Statements of Business Acquired and Lycos, Inc. Pro Forma
Condensed Consolidated Financial Information
TABLE OF CONTENTS
WISEWIRE CORPORATION
(A Development Stage Enterprise)
PAGE
------
Report of Independent Accountants....................................... F-1
Balance Sheets at January 31, 1998 (unaudited), May 31, 1997 and 1996... F-2
Statements of Operations for the eight months ended January 31, 1998 and
1997 (unaudited) and for the year ended May 31, 1997 and for the period
from June 9, 1995 (Inception) through May 31, 1996 and for the period
from June 9, 1995 (Inception) through January 31, 1998 (unaudited)...... F-3
Statements of Stockholders' Equity for the eight months ended January 31,
1998 (unaudited) and for the year ended May 31, 1997 and for the period
from June 9, 1995 (Inception) through May 31, 1996...................... F-4
Statements of Cash Flows for the eight months ended January 31, 1998 and
1997 (unaudited) and for the year ended May 31, 1997 and for the period
from June 9, 1995 (Inception) through May 31, 1996 and for the period
from June 9, 1995 (Inception) through January 31, 1998 (unaudited)...... F-5
Notes to Financial Statements............................................ F-6
Lycos, Inc. Pro Forma Condensed Consolidated Financial Information
Unaudited Pro Forma Condensed Consolidated Balance Sheets at
January 31, 1998......................................................... F-15
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
six months ended January 31, 1998........................................ F-16
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended July 31, 1997................................................. F-16
Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................... F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
WiseWire Corporation:
We have audited the accompanying balance sheets of WiseWire Corporation, a
development stage enterprise, (the Company) as of May 31, 1997 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
the year ended May 31, 1997 and for the period from June 9, 1995 (inception)
through May 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WiseWire Corporation as of
May 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended May 31, 1997 and for the period from June 9, 1995
(inception) through May 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has incurred losses from operations and had
negative cash flows from operations since its inception. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to this matter are also discussed in
Note 11. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
July 31, 1997, except for the first paragraph of Note 5 as to
which the date is October 13, 1997 and Note 12 as to which
the date is September 24, 1997
F-1
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MAY 31,
JANUARY 31, ----------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................ $ 722,864 $ 966,292 $1,217,619
Accounts receivable, net of allowance for
doubtful accounts of $50,000 in 1998.... 120,200 38,364 15,487
Prepaid expenses......................... 25,114 49,978 11,780
---------- ---------- ----------
Total current assets................... 868,178 1,054,634 1,244,886
Property and equipment, net of accumulated
depreciation and amortization............. 808,839 952,722 296,223
Capitalized software costs, net of
accumulated amortization of $117,877 in
1998 and $19,181 in 1997.................. 104,200 202,896 98,585
Other assets............................... 30,733 37,034 13,122
---------- ---------- ----------
Total assets........................... $1,811,950 $2,247,286 $1,652,816
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 36,339 $ 272,324 $ 80,293
Current portion of long-term debt........ 448,476 135,349 --
Accrued expenses......................... 403,623 183,596 16,311
Deferred revenue......................... -- 22,605 --
Loans and accrued interest due to
stockholder/officer..................... -- -- 12,910
---------- ---------- ----------
Total current liabilities.............. 888,438 613,874 109,514
Long-term debt........................... 230,302 417,320 --
---------- ---------- ----------
Total liabilities...................... 1,118,740 1,031,194 109,514
Commitments and contingencies ............. -- -- --
Stockholders' equity:
Series A convertible preferred stock,
$.01 par value; 187,500 shares autho-
rized, 187,500 issued and outstanding in
1998 and 1997 and 125,000 issued and
outstanding in 1996..................... 1,875 1,875 1,250
Series B convertible preferred stock,
$.01 par value; 2,000,000 shares autho-
rized, 750,000 issued and outstanding in
1998 and 1997 and none in 1996.......... 7,500 7,500 --
Series C convertible preferred stock,
$.01 par value; 2,941,403 shares autho-
rized, 2,941,403 issued and outstanding
in 1998 and none in 1997 and 1996....... 29,414 -- --
Common stock, $.01 par value; 10,000,000
shares authorized; 4,165,745, 4,110,745
and 3,835,900 issued and outstanding in
1998, 1997 and 1996, respectively....... 41,657 41,107 38,359
Additional paid-in capital............... 8,004,471 4,136,558 1,719,281
Deferred compensation.................... (773,573) -- --
Accumulated deficit during the develop-
ment stage.............................. (6,618,134) (2,970,948) (215,588)
---------- ---------- ----------
Total stockholders' equity............. 693,210 1,216,092 1,543,302
---------- ---------- ----------
Total liabilities and stockholders' eq-
uity.................................. $1,811,950 $2,247,286 $1,652,816
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
PERIOD FROM
EIGHT MONTHS ENDED YEAR JUNE 9, 1995
JANUARY 31, ENDED (INCEPTION) TO CUMULATIVE
------------------------ MAY 31, MAY 31 THROUGH
1998 1997 1997 1996 JANUARY 31, 1998
----------- ----------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
Revenues:
License............... $ 242,052 -- -- -- $ 242,052
Advertising........... 47,477 $ 10,000 $ 8,645 $ 4,346 60,468
-------- ----------- ----------- --------- -----------
Total revenues...... 289,529 10,000 8,645 4,346 302,520
Cost of revenues........ 565,715 167,737 160,460 11,082 737,257
-------- -------- ----------- --------- -----------
Gross profit (defi-
cit)............... (276,186) (157,737) (151,815) (6,736) (434,737)
Operating expenses:
Research and develop-
ment................. 1,193,628 381,889 727,738 95,096 2,016,462
Sales and marketing... 446,076 111,915 369,659 13,649 829,384
General and adminis-
trative.............. 1,488,256 989,778 1,573,411 166,031 3,227,698
---------- ---------- ----------- --------- -----------
Total operating ex-
penses............. 3,127,960 1,483,582 2,670,808 274,776 6,073,544
---------- ---------- ----------- --------- -----------
Operating loss.......... (3,404,146) (1,641,319) (2,822,623) (281,512) (6,508,281)
Other income (expense)
Grant income (ex-
pense)............... (193,576) 37,893 71,822 60,000 (61,754)
Interest income (ex-
pense)............... (49,464) 22,276 (4,559) 5,924 (48,099)
----------- ----------- ----------- --------- -----------
(243,040) 60,169 67,263 65,924 (109,853)
----------- ----------- ----------- --------- -----------
Net loss................ $(3,647,186) $(1,581,150) $(2,755,360) $(215,588) $(6,618,134)
=========== =========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
F-3
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL DEFICIT DURING TOTAL
------------------ ------------------ PAID-IN DEFERRED THE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
--------- -------- ---------- ------- ---------- ------------ --------------- -------------
Balance, June 9, 1995
(Inception)............ -- -- -- -- -- -- -- --
Initial capitalization
of Company............. 3,250,000 $ 9,750 -- -- -- -- -- $ 9,750
Issuance of common
stock.................. 585,900 5,859 -- -- $ 696,081 -- -- 701,940
Five-for-one stock
split.................. -- 22,750 -- -- (22,750) -- -- --
Issuance of preferred
stock--Series A........ -- -- 125,000 $ 1,250 998,750 -- -- 1,000,000
Stock compensation...... -- -- -- -- 47,200 -- -- 47,200
Net loss................ -- -- -- -- -- -- $ (215,588) (215,588)
--------- -------- ---------- ------- ---------- --------- ----------- ----------
Balance, May 31, 1996... 3,835,900 38,359 125,000 1,250 1,719,281 -- (215,588) 1,543,302
Issuance of preferred
stock
Series A............... -- -- 62,500 625 499,375 -- -- 500,000
Series B............... -- -- 750,000 7,500 1,492,500 -- -- 1,500,000
Issuance of common stock
for cash............... 257,500 2,575 -- -- 397,825 -- -- 400,400
Issuance of common stock
for services........... 17,345 173 -- -- 27,577 -- -- 27,750
Net loss................ -- -- -- -- -- -- (2,755,360) (2,755,360)
--------- -------- ---------- ------- ---------- --------- ----------- ----------
Balance, May 31, 1997... 4,110,745 $ 41,107 $ 937,500 $ 9,375 $4,136,558 -- $(2,970,948) 1,216,092
Issuance of preferred
stock--Series C
(unaudited)............ -- -- 2,941,403 29,414 2,970,586 -- -- 3,000,000
Exercise of stock
options (unaudited).... 55,000 550 -- -- 6,850 -- -- 7,400
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- -- 890,477 (890,477) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- -- 116,904 -- 116,904
Net loss (unaudited).... -- -- -- -- -- -- (3,647,186) (3,647,186)
--------- -------- ---------- ------- ---------- --------- ----------- ----------
Balance, January 31,
1998 (unaudited)....... 4,165,745 $ 41,657 3,878,903 $38,789 $8,004,471 $(773,573) $(6,618,134) $ 693,210
========= ======== ========== ======= ========== ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
PERIOD FROM
EIGHT MONTHS ENDED JUNE 9, 1995 CUMULATIVE
JANUARY 31, YEAR ENDED (INCEPTION) THROUGH
------------------------ MAY 31, TO MAY 31, JANUARY 31,
1998 1997 1997 1996 1998
----------- ----------- ------------ ------------ ----------------
(UNAUDITED) (UNAUDITED)
Cash flows from operat-
ing activities:
Net loss................ $(3,647,186) $(1,581,150) $ (2,755,360) $ (215,588) $ (6,618,134)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and amor-
tization.............. 377,466 177,555 298,824 23,630 699,920
Provision for bad
debts................. 50,000 -- -- -- 50,000
Write-off of capital-
ized software costs... -- -- 98,585 -- 98,585
Settlement of grant
obligation............ 190,000 -- -- -- 190,000
Expense for stock op-
tions issued at less
than fair market val-
ue.................... 116,904 -- -- 47,200 164,104
Issuance of common
stock for services.... -- 27,750 27,750 -- 27,750
Changes in operating
assets and liabili-
ties:
Accounts receivable... (131,836) 15,477 (22,877) (15,487) (170,200)
Prepaid expenses, de-
posits and other as-
sets................. 31,165 (35,187) (64,785) (11,780) (45,400)
Accounts payable...... (235,985) (38,728) 21,244 16,877 (197,864)
Accrued expenses and
deferred revenue..... 197,422 1,564 113,890 16,311 327,623
----------- ----------- ------------ ---------- ------------
Net cash used in oper-
ating activities..... (3,052,050) (1,432,719) (2,282,729) (138,837) (5,473,616)
----------- ----------- ------------ ---------- ------------
Cash flows from invest-
ing activities:
Expenditures for prop-
erty and equipment.... (134,887) (717,700) (785,561) (247,080) (1,167,528)
Capitalization of soft-
ware development
costs................. -- -- (123,196) (98,585) (221,781)
Expenditures for intan-
gibles................ -- -- -- (13,345) (13,345)
----------- ----------- ------------ ---------- ------------
Net cash used in in-
vesting activities... (134,887) (717,700) (908,757) (359,010) (1,402,654)
----------- ----------- ------------ ---------- ------------
Cash flows from financ-
ing activities:
Proceeds from
borrowings............ -- 584,412 598,944 -- 598,944
Repayments of
borrowings............ (63,891) -- (46,275) -- (110,166)
Proceeds from issuance
of common stock....... -- 400,000 400,400 711,690 1,112,090
Proceeds from issuance
of preferred stock.... 3,000,000 500,000 2,000,000 1,000,000 6,000,000
Proceeds from exercise
of stock options...... 7,400 -- -- -- 7,400
Loans from
stockholder/officer,
net................... -- (12,910) (12,910) 3,776 (9,134)
----------- ----------- ------------ ---------- ------------
Net cash provided by
financing activi-
ties................. 2,943,509 1,471,502 2,940,159 1,715,466 7,599,134
----------- ----------- ------------ ---------- ------------
Net (decrease) increase
in cash and cash equiv-
alents................. (243,428) (678,917) (251,327) 1,217,619 722,864
Cash and cash equiva-
lents:
Beginning of period.... 966,292 1,217,619 1,217,619 -- --
----------- ----------- ------------ ---------- ------------
End of period.......... $ 722,864 $ 538,702 $ 966,292 $1,217,619 $ 722,864
=========== =========== ============ ========== ============
Supplemental non-cash
investing and financing
activities:
Purchases of furniture
and computers, and
capitalized software
development costs in-
cluded in liabili-
ties.................. -- $ 4,203 $ 246,788 $ 72,550 $ 319,338
=========== =========== ============ ========== ============
Settlement of grant
obligation............ $ 190,000 -- $ -- $ -- $ 190,000
=========== =========== ============ ========== ============
Issuance of common
stock for services.... -- $ 27,750 $ 27,750 $ -- $ 27,750
=========== =========== ============ ========== ============
Cash paid for interest
expense................ $ 30,000 -- $ 30,026 $ -- $ 60,026
=========== =========== ============ ========== ============
The accompanying notes are an integral part of these financial statements.
F-5
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
WiseWire Corporation (the Company), which operates in one industry segment,
provides software that functions as an intelligent agent service that will
filter information on the Internet and World Wide Web to the specific interest
of the user. The Company was formed on June 9, 1995.
The Company is considered to be in the development stage, as defined in
Financial Accounting Standards Board Statement No. 7, therefore, the
accompanying financial statements represent that of a development stage
enterprise. The Company's product was released in April 1997; however, to date
there have been no significant revenues associated with this intelligent agent
service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company's cash equivalents are maintained in short-term commercial paper. Cash
equivalents are recorded at cost, which approximates fair value.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on the straight-line
method over the estimated useful lives of the assets, which range from 3 to 7
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the estimated useful life of the assets or the lease term.
Capitalized Software
Internally developed computer software costs and costs of product
enhancements are capitalized subsequent to the determination of technological
feasibility. Such capitalization continues until the product becomes available
for general release. Amortization is the greater of the amount computed using:
(1) the straight-line method over 18 months; or (2) the ratio of the current
year's revenue to the total anticipated revenue of the product. Amortization
expense of $19,181 was recorded for the year ended May 31, 1997 and no amounts
were recorded for the period from June 9, 1995 (inception) through the period
ended May 31, 1996. During 1997, the Company reduced capitalized software
costs to its net realizable value by writing off software costs totaling
$98,585.
The Company reviews the carrying value of capitalized software and
impairments are recognized in the results of operations when the expected cash
flows from future services using this software are less than the capitalized
value.
Intangibles
Included in other assets are trademarks and patents which are carried at
cost and amortized on the straight- line method over their estimated useful
lives of up to 5 years. Accumulated amortization was $2,898 and $223 at May
31, 1997 and 1996, respectively.
Revenue Recognition
The Company enters into license agreements for a specified period of time,
which generally consist of initial set-up fees and monthly service fees. Set-
up fees cover developmental costs and are recognized on a
F-6
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
percentage-of-completion basis based on costs incurred to date to total
estimated costs. Ongoing monthly service fees are deferred and recognized
ratably over the term of the agreement.
The Company's internet 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 services are
performed.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and the tax basis of the assets
and the liabilities using the tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce the deferred tax assets to the amount expected to be
realized.
Concentration of Credit Risk
The Company's customers are primarily large commercial enterprises. Sales to
date have been minimal; however, it is anticipated that future revenues will
be diversified by region and industry, and significant credit losses are not
expected. The Company's revenues through May 31, 1997 were generated
principally from two customers in the United States.
From time to time, the Company maintains cash deposits with its principal
bank in excess of the FDIC insured limits, and with a regional brokerage firm
in excess of SIPC coverage. The brokerage firm, however, provides additional
coverage through a major insurance company.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
accounts receivable, accounts payable, accrued expenses and deferred revenues,
approximate their fair market values. The Company has no investments in
derivative financial instruments.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation," ("SFAS 123") requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
or loss in the notes to the financial statements. The Company applies the
disclosure provisions of SFAS 123 and applies APB Opinion 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized under SFAS 123 for the Company's stock
option plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
F-7
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the amounts of revenues and expenses during
the reported periods. Actual results could differ from the estimates.
3. LOAN FROM STOCKHOLDER/OFFICER
At May 31, 1996, the founder and principal stockholder had provided loans to
the Company, which were evidenced by demand notes that accrued interest at 9%.
These notes, including accrued interest, were paid during the year ended May
31, 1997.
4. PROPERTY AND EQUIPMENT
1997 1996
---------- --------
Computers and equipment................................. $1,117,113 $264,628
Furniture............................................... 76,954 27,255
Leasehold improvements.................................. 59,030 27,747
---------- --------
1,253,097 319,630
Less: accumulated depreciation and amortization......... 300,375 23,407
---------- --------
$ 952,722 $296,223
========== ========
5. LONG-TERM DEBT
Long term debt at May 31, 1997 consists of the following:
1997
--------
Senior loan in the original amount of $498,944 under terms of
a senior loan and security agreement in a total amount not to
exceed $750,000, collateralized by the Company's computer equipment
having an original cost of $512,000 and a net book value of
$452,669 at May 31, 1997. The existing promissory note requires
36 monthly principal and interest payments of $16,216 through January
1, 2000, and a 37th payment equal to the then fair market value of the
collateral at that time as determined by the lender, but not less than
10% of the original loan. Or, at the Company's option, 6 additional
monthly payments of $16,216 through July 1, 2000. Prepayments are not
permitted under terms of the loan agreement. The agreement includes
certain covenants which require the Company to furnish the lender with
monthly, quarterly and annual financial statements within specified
time periods. The Company failed to meet these reporting requirements
during 1997, and by letter dated October 13, 1997, the lender waived
these events of default for fiscal year 1997 and through
September 30, 1997................................................... $452,669
In January 1997, the Company obtained a $100,000 loan from the
Pittsburgh Urban Redevelopment Authority. The Company's assets serve
as collateral for this loan. This loan bears 5% interest and requires
the Company to make 53 monthly principal and interest payments of
$1,887 commencing in July 1997 and a final payment of $15,553 in
November 2001. Monthly payments begin in
July 1997............................................................ 100,000
--------
Total long-term debt............................................ 552,669
Less current maturities....................................... 135,349
--------
$417,320
========
F-8
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Scheduled annual maturities of long-term debt for the years ending May 31,
are as follows:
1998................................................................ $135,349
1999................................................................ 160,336
2000................................................................ 190,393
2001................................................................ 52,434
2002................................................................ 14,157
--------
Total............................................................. $552,669
========
6. STOCKHOLDERS' EQUITY
At May 31, 1997 and 1996, the Company's common $.01 par value shares are
stated after giving effect to a 5-for-1 stock split approved by the
shareholders on August 12, 1996.
Each Series A preferred share is convertible to 5 shares of common stock.
Each share of Series B preferred is convertible into one share of common
stock. As of May 31, 1997, outstanding preferred stock is convertible into
1,687,500 shares of common stock and options have been issued that, if
exercised, would require an additional 1,189,450 common shares to be issued.
Series A and B preferred stock provide upon liquidation that before any
distribution may be made on common stock that the greater of $8.00 per share
must be first paid to the Series A and $2.00 per share to the Series B
preferred shareholders, or the value per share paid to the common
shareholders, if the conversion to common stock occurred. The preferred
shareholders may convert their shares to common shares under certain
circumstances and the shares convert to common automatically upon a public
stock offering. Series A and Series B preferred shareholders may each elect
one director. Series A and Series B preferred shares also include anti-
dilution provisions that prohibit the payment of dividends on common stock and
restrict certain corporate action without 80% consent of the preferred shares
voting power.
The Company also has 10,000,000 shares of authorized, undesignated and
unissued convertible preferred stock at May 31, 1997 and 1996.
7. STOCK OPTION PLANS
The Company maintains two stock option plans for the granting of options to
purchase shares of common stock under which 1,603,875 common shares have been
reserved for issuance as of May 31, 1997. Under these plans, the Company may
grant either incentive stock options or non-qualified stock options. These
options are fully vested and are exercisable over a 5 year period from date of
grant. The employee plan was adopted in 1995 and is restricted to Company
employees. These options generally have a term of ten years from the date of
grant with 20% vesting after a brief probationary period and the remainder vest
over a four-year period. The non-employee plan was adopted in 1996 and is
intended primarily for directors or other non-employees. Options granted under
the non-employee plan typically vest immediately.
In March 1997, the exercise price for all outstanding options granted to
existing employees was reduced to $.20 and the term extended to 10 years,
which the Company's Board of Directors deemed to be the current estimated fair
market value of the Company's common stock. During the period from June 9, 1995
(inception) through May 31, 1996, non-qualified options were granted at prices
less than fair market value and compensation expense of $47,200 was recorded in
results of operations.
F-9
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLANS
The summary of option activity is as follows:
PERIODS ENDED MAY 31,
--------------------------------------
1997 1996
------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
Outstanding at beginning of year..... 360,000 $ .76 -- --
--------- -------
Granted.............................. 938,750 3.93 360,000 $.76
Exercised............................ (20,000) .02 -- --
Forfeited or expired................. (89,300) 2.34 -- --
Canceled for reissuance.............. (956,000) 3.24 -- --
Reissued............................. 956,000 .20 -- --
--------- -------
Outstanding at end of year........... 1,189,450 .71 360,000 .76
--------- -------
Number of options exercisable at
year-end............................ 424,080 1.02 109,000 .56
Weighted average fair value of
options granted at
year-end............................ .22 .21
The following summarizes information about fixed stock options outstanding
at May 31, 1997:
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED
NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING NUMBER
EXERCISE PRICES MAY 31, 1997 LIFE (YRS) EXERCISABLE
--------------- ------------ ---------- -----------
$ .02 to $.20......................... 974,050 9.9 267,980
$1.20 to $1.60........................ 118,750 2.6 97,150
$4.00 to $8.00........................ 96,650 4.0 58,950
--------- -------
1,189,450 424,080
========= =======
Had the compensation cost for the Company's two stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
PERIODS ENDED MAY 31,
----------------------
1997 1996
----------- ---------
Net loss as reported................................. $(2,755,360) $(215,588)
=========== =========
Pro forma............................................ $(2,860,877) $(231,979)
=========== =========
The pro forma compensation of $105,517 for the year ended May 31, 1997 and
$16,391 for the period ended May 31, 1996 that would have resulted from
adoption of SFAS No. 123 is calculated using the Black-Scholes pricing model
utilizing a 6% risk free rate of return, a zero dividend rate, a zero
volatility rate (minimum value method), and zero forfeitures.
F-10
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. GRANTS RECEIVED
The Company was awarded grants of $60,000 and $83,000 by the Ben Franklin
Partnership of the Commonwealth of Pennsylvania in 1996 and 1997,
respectively. To receive these funds, the Company must provide matching funds
of in-kind costs of $253,683 and $297,233, respectively. At May 31, 1996, the
Company had earned all of the 1996 grant and recorded the $60,000 as grant
income. At May 31, 1997, the Company has earned and reported as grant income
approximately $72,000 of the $83,000 1997 grant. The Company recorded the
grants earned through May 31, 1997 as income, since management believes that
there is an uncertainty as to whether the project will be successful. If the
project is successful, the Company is committed to pay a royalty to the Ben
Franklin Partnership of between 2% to 3% of project gross revenues until, at a
minimum, the grant amounts and at a maximum, twice the grant amounts are
repaid over the next 10 years.
9. INCOME TAXES
The Company is in the development stage and has incurred losses since its
inception. The components of net deferred tax assets and liabilities are as
follows:
MAY 31,
---------------------
1997 1996
----------- --------
Deferred tax asset:
Federal tax credits............................... $ 69,000 --
Net operating loss carryforwards.................. 1,238,000 $109,000
Non-qualified stock option expense, and stock
issued for services.............................. 30,000 19,000
Others............................................ 11,000 --
----------- --------
1,348,000 128,000
----------- --------
Deferred tax liability:
Capitalized software.............................. (78,000) (40,000)
Computers and equipment........................... (6,000) (2,500)
----------- --------
(84,000) (42,500)
----------- --------
Valuation allowance................................. (1,264,000) (85,500)
----------- --------
Net deferred taxes.................................. $ -- $ --
=========== ========
Net operating loss carryforwards for federal income tax purposes of $272,000
will expire in 2011, and $2,776,000 in 2012. Net operating loss carryforwards
for state income tax purposes of $272,000 will expire in 1999 and $2,776,000
in the year 2000. Federal tax credits related to increasing research
activities expire in the year 2012.
The Company may be limited in the amount of its net operating loss
carryforwards and tax credits which it may use in future years. The Internal
Revenue Code limits the amount of tax benefits available to be used annually
after certain changes in ownership of more than fifty percentage points.
In the opinion of management, it is more likely than not that some or all
deferred tax assets will not be realized due to the potential limitations of
the utilization of net operating loss carryforwards and the uncertainty
surrounding the Company's ability to generate future income sufficient to
realize deferred tax assets.
F-11
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENT AND CONTINGENCIES
The Company leases office space under an agreement for its offices. This
lease is accounted for as an operating lease. The Company incurred rental
expense of $97,728 for the year ended May 31, 1997 and $20,314 for the period
ended May 31, 1996.
In July 1996, the Company modified the terms of the office lease and
extended the terms of the lease until April 30, 2001, but it may be terminated
early by the Company on October 31, 2000. The minimum annual future rental
commitments under the modified lease terms are $112,125 from 1998 through
2000, and $46,719 in 2001. Minimum rentals increase annually based on
increases in the consumer price index.
11. MANAGEMENT'S FINANCIAL PLANS
The Company incurred a net loss of $2,755,360 and $215,588 for the year
ended May 31, 1997 and for the period from June 9, 1995 (inception) through
May 31, 1996, respectively. The Company also had negative cash flows from
operations of $2,282,729 and $138,837 for the year ended May 31, 1997 and for
the period from June 9, 1995 (inception) through May 31, 1996, respectively.
Continuance of the Company as a going concern is dependent on the Company's
ability to continue marketing its intranet service and its ability to continue
to raise additional capital in order to meet its current obligations. In 1998,
management anticipates a continued growth in revenues from existing and new
customers. Additionally, as discussed in Note 12, on September 24, 1997, the
Company completed an additional round of financing for approximately $3
million.
Management continues to implement a business plan that focuses on growth of
revenues. The financial statements do not include any adjustments relating to
the net realizable value or classification of recorded assets or liabilities
should the Company be unable to continue as a going concern.
12. SUBSEQUENT EVENT
Effective September 24, 1997, the Company completed an additional round of
financing with a venture capital firm. The Company received approximately $3
million in cash in exchange for 2,941,403 shares of the Company's Series C
convertible preferred stock, par value $.01 per share, at a price of $1.02 per
share.
13. UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited balance sheet as of January 31, 1998, and the unaudited
statements of operations, changes in stockholders' equity and cash flows for
the eight month periods ended January 31, 1998 and 1997, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all significant adjustments (consisting primarily of
normal recurring adjustments) considered necessary for a fair presentation of
the results of these interim periods. Operating results for the eight month
period ended January 31, 1998, are not necessarily indicative of the results
of the entire year.
In September 1997, the Company entered into a licensing agreement with Lycos,
Inc. ("Lycos"), whereby Lycos acquired a license to use the Company's software
products on its Internet site for an initial term of one year. Under the terms
of the agreement, the Company earned license fees based on stipulated
percentages of gross advertising revenues generated by Lycos from the use of the
Company's technology. For the eight month period ended January 31, 1998,
revenues under this agreement approximated 69% of the Company's total license
revenues.
For the eight month period ended January 31, 1998, 760,900 stock options were
granted to employees and certain non employees under the Company's Stock
Option Plans at exercise prices ranging from $0.20 to $0.80. Deferred
compensation costs associated with these grants totaling $890,477 were
recorded and are being amortized to expense over the related vesting period.
Effective March 4, 1998, the Company completed an additional round of
financing with several venture capital firms. The Company received
approximately $995,000 in cash in exchange for 430,736 share of the Company's
Series D preferred stock, par value $.01, at a price of $2.31 per share.
Effective April 29, 1998, the Company entered into an agreement with the Ben
Franklin Partnership of the Commonwealth of Pennsylvania (Ben Franklin
Partnership) to satisfy in full obligations owed by the Company to the Ben
Franklin Partnership in connection with previously awarded grants for which the
Company was required to repay through royalty payments if the project were
successful. As a result of this agreement, the Company recorded a liability and
a related charge to operations of $190,000 at January 31, 1998. In the event the
Company does not maintain a material presence in Pennsylvania through April 30,
2001, the Company is obligated to make contingent payments to Ben Franklin
Partnership ranging from $230,000 to $90,000 based on the date its presence
ceases to exist in Pennsylvania.
On April 30, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, Lycos, Inc., a Delaware
corporation ("Lycos"), and Wise Acquisition Corp., a Pennsylvania corporation
and a wholly-owned subsidiary of Lycos ("WAC"), pursuant to which WAC merged
with and into the Company (the "Merger") and the Company became a wholly-owned
subsidiary of Lycos.
In connection with the Merger, all outstanding shares of common stock and
preferred stock of the Company and options to purchase common stock of the
Company were converted into 824,255 shares and options to purchase common
stock, par value $.01 per share, of Lycos at an exchange ratio of 0.07482. All
outstanding options to purchase common stock of the Company have been assumed
by Lycos and converted into options to purchase common stock of Lycos.
On May 1, 1998, the Company paid off the then remaining balance on the
Pittsburgh Urban Redevelopment Authority loan in the amount of $82,176.
F-12
WISEWIRE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
F-13
Lycos, Inc.
Pro Forma Condensed Consolidated Financial Information
In February 1998, the Company acquired Tripod, Inc. ("Tripod") for
approximately $63.2 million, including acquisition costs. See Note 7 to the
Company's Consolidated Financial Statements for the quarter ended January 31,
1998 filed on Form 10-Q with the Securities and Exchange Commission. In April
1998, the Company acquired WiseWire Corporation ("WiseWire") for approximately
$39.7 million, including acquisition costs.
The unaudited Pro Forma Condensed Consolidated Statements of Operations (the
"Pro Forma Statements of Operations") for the year ended July 31, 1997 and the
six months ended January 31, 1998 gives effect to the acquisition of Tripod as
if it had occurred on August 1, 1996 and WiseWire as if it had occurred on June
1, 1996. The Pro Forma Statements of Operations are based on historical results
of operations of the Company and Tripod for the year ended July 31, 1997 and the
six months ended January 31, 1998 and WiseWire for the year ended May 31, 1997
and six months as of January 31, 1998. The unaudited Pro Forma Condensed
Consolidated Balance Sheet (the "Pro Forma Balance Sheet") gives effect to the
acquisitions of Tripod and WiseWire as if the acquisitions had occurred on that
date. The Pro Forma Statements of Operations and Pro Forma Balance Sheet and the
accompanying notes (the "Pro Forma Financial Information") should be read in
conjunction with and are qualified by the historical financial statements of the
Company and notes thereto.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the future financial position or
future results of operations of the consolidated company after the acquisitions
of Tripod and WiseWire, or of the financial position or results of operations of
the consolidated company that would have actually occurred had the acquisitions
of Tripod and WiseWire been effected as of the dates described above.
F-14
LYCOS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998
(IN THOUSANDS)
WISEWIRE PRO FORMA PRO FORMA
LYCOS, INC. TRIPOD INC. CORPORATION ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
ASSETS
Cash.................... $41,351 $3,850 $ 723 $ -- $45,924
Accounts receivable,
net.................... 6,751 301 120 7,172
License fees
receivable............. 15,244 -- -- 15,244
Other current assets.... 2,223 -- 25 2,248
------- ------ ------ -------- -------
Current assets........ 65,569 4,151 868 70,588
Property, plant, and
equipment, net......... 2,093 1,279 809 4,181
Other non current
assets................. 4,039 -- 135 10,636(a) 14,810
------- ------ ------ -------- -------
Total assets.......... $71,701 $5,430 $1,812 $ 10,636 $89,579
======= ====== ====== ======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable and
accruals............... $12,067 $1,321 $ 440 $ $13,828
Deferred revenues....... 13,744 93 -- 13,837
Other current
liabilities............ 798 -- 449 1,247
------- ------ ------ -------- -------
Current liabilities... 26,609 1,414 889 28,912
Non current
liabilities............ 6,009 -- 230 6,239
Redeemable preferred
stock.................. -- 11,476 -- (11,476)(b) --
Stockholders' equity.... 39,083 (7,460) 693 22,112(a)(b) 54,428
------- ------ ------ -------- -------
Total liabilities and
stockholders'
equity............... $71,701 $5,430 $1,812 $ 10,636 $89,579
======= ====== ====== ======== =======
F-15
LYCOS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JANUARY 31, 1998
------------------------------------------------------------------------------
WISEWIRE PRO FORMA PRO FORMA
LYCOS, INC. TRIPOD, INC. CORPORATION ADJUSTMENTS(c) AS ADJUSTED
------------- ------------------ ----------------- -------------- ------------
Total revenues.......... $ 21,906 $ 656 $ 287 $ $ 22,849
Cost of revenues........ 4,694 706 412 5,812
----------- ------- ------- ------- -----------
Gross profit
(loss)............. 17,212 (50) (125) 17,037
Operating expenses:
Research and
development.......... 3,171 1,686 894 5,751
Sales and marketing... 12,791 1,610 348 14,749
General and
administrative....... 1,946 602 1,142 1,646(a) 5,336
----------- ------- ------- ------- -----------
Total operating
expenses........... 17,908 3,898 2,384 1,646 25,836
Operating loss.......... (696) (3,948) (2,509) (1,646) (8,799)
Interest income
(expense).............. 1,105 159 (233) 1,031
----------- ------- ------- ------- -----------
Net income (loss)....... $ 409 $(3,789) $(2,742) $(1,646) $ (7,768)
=========== ======= ======= ======= ===========
Basic income (loss) per
share.................. $ 0.03 $ (0.48)(d)
=========== ===========
Diluted income (loss)
per share.............. $ 0.03 $ (0.48)(d)
=========== ===========
Weighted average shares
used in computing Basic
income (loss) per
share.................. 14,175,061 16,176,394 (d)
=========== ===========
Weighted average shares
used in computing
Diluted income (loss)
per share.............. 14,707,809 16,176,394 (d)
=========== ===========
TWELVE TWELVE TWELVE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
JULY 31, 1997 JULY 31, 1997 MAY 31, 1997
------------- ------------------ ----------------- -------------- -----------
WISEWIRE PRO FORMA PRO FORMA
LYCOS, INC. TRIPOD, INC. CORPORATION ADJUSTMENTS(c) AS ADJUSTED
------------- ------------------ ----------------- -------------- ------------
Total revenues.......... $ 22,273 $ 517 $ 8 $ 22,798
Cost of revenues........ 4,732 370 160 5,262
----------- ------- ------- ------- -----------
Gross profit........ 17,541 147 (152) 17,536
Operating expenses:
Research and
development.......... 4,304 1,511 728 6,543
Sales and marketing... 19,130 1,150 369 20,649
General and
administrative....... 2,856 478 1,573 3,285(a) 8,192
----------- ------- ------- ------- -----------
Total operating
expenses........... 26,290 3,139 2,670 3,285 35,384
Operating loss.......... (8,749) (2,992) (2,822) (3,285) (17,848)
Interest income, net.... 2,130 4 67 2,201
----------- ------- ------- ------- -----------
Net loss................ $ (6,619) $(2,988) $(2,755) $(3,285) $ (15,647)
=========== ======= ======= ======= ===========
Basic loss per share.... $ (0.48) $ (0.99)(d)
=========== ===========
Weighted average shares
used in computing basic
loss per share......... 13,794,743 15,796,076 (d)
=========== ===========
F-16
LYCOS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(1) Pro Forma Adjustments and Assumptions
(a) The Company acquired Tripod for approximately $63.2 million in February
1998, including costs of acquisition, of which approximately $7.7 million was
allocated to intangible assets. The Company is amortizing goodwill and
developed technology over a period of five years. The Pro Forma adjustments
reflect six months and twelve months of amortization expense for the six
months ended January 31, 1998 and the year ended July 31, 1997, respectively,
assuming the transaction had occurred on August 1, 1996. The value of the
intangible assets at August 1, 1996 would have been $11.2 million. Approximately
$51.6 million of the purchase price was allocated to in-process research and
development expense which has been charged to operations during the quarter
ended April 30, 1998. This amount has not been reflected in the Pro Forma
Statements of Operations.
The Company acquired WiseWire Corporation for approximately $39.7 million in
April 1998, including costs of acquisition, of which approximately $3.0 million
was allocated to intangible assets. The Company is amortizing goodwill and
developed technology over a five year period. The Pro Forma adjustments reflect
six and twelve months of amortization expense for the six months ended January
31, 1998 and the year ended May 31, 1997, respectively, assuming the transaction
had occurred on June 1, 1996. The value of the intangible assets at June 1, 1996
would have been $2.1 million. Approximately $36 million of the purchase price
was allocated to in-process research and development expense which has been
charged to operations during the quarter ending April 30, 1998. In addition, at
April 30, 1998 the Company has expensed approximately $1 million of intangible
assets in connection with the WiseWire acquisition. This amount has not been
reflected in the Pro Forma Statements of Operations.
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of Tripod
and WiseWire at January 31, 1998, and is for illustrative pro forma purposes
only. Actual fair values will be based on financial information as of the
acquisition date (Tripod, Inc. on February 11, 1998 and WiseWire Corporation
on April 30, 1998). Assuming the transactions occurred on January 31, 1998,
the allocation would have been as follows (in thousands);
WISEWIRE
TRIPOD, INC. CORPORATION TOTAL
------------ -------------- --------
ASSETS ACQUIRED:
Cash............................... $ 3,850 $ 723 $ 4,573
Accounts receivable, net........... 301 120 421
Property, plant and equipment...... 1,279 809 2,088
Other assets....................... 160 160
In-process research and
development....................... 51,600 36,000 87,600
Developed technology............... 7,354 2,857 10,211
Goodwill........................... 305 119 424
Liabilities assumed.................. (1,415) (1,119) (2,534)
------- ------- --------
Purchase price....................... $63,274 $39,669 $102,943
======= ======= ========
The Pro Forma adjustment reconciles the historical balance sheet of Tripod
and WiseWire at January 31, 1998 to the allocated purchase price assuming the
transaction had occurred on January 31, 1998.
(b) The pro forma adjustment reflects the conversion of redeemable preferred
stock into common stock of Tripod which was then exchanged for Lycos common
stock upon acquisition of Tripod by Lycos.
F-17
(c) The pro forma adjustment assumes the conversion of shares of Tripod
common stock and WiseWire common stock upon acquisition of Tripod and WiseWire
by Lycos.
(d) The pro forma loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding. The calculation
of the weighted average number of shares outstanding assumes that the
2,001,333 shares of the Company's common stock issued in its acquisitions were
outstanding for the entire period.
F-18
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- ------------------------------------------------------------------
(c) Exhibits
* 2.1 Agreement and Plan of Merger dated as of April 30, 1998 by and among
Lycos, Inc., WiseWire Acquisition Corp., and WiseWire Corp.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
__________
* Previously filed.
F-19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYCOS, INC.
Date: May 15, 1998 By: /s/ Edward M. Philip
----------------------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
F-20