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EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lycos, Inc.:
We have audited the accompanying consolidated balance sheets of Lycos, Inc.
as of July 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for each of the years in the three year period ended July 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lycos, Inc. at July 31, 2000 and 1999, and the results of its operations and
cash flows for each of the years in the three year period ended July 31, 2000,
in conformity with generally accepted accounting principles in the United States
of America.
KPMG LLP
Boston, Massachusetts
August 15, 2000
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LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, JULY 31,
2000 1999
---------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 640,064 $166,506
Accounts receivable, less allowance for doubtful accounts
of $7,070 and $2,442 at July 31, 2000 and 1999,
respectively........................................... 29,197 25,830
Electronic commerce and other receivable.................. 67,531 71,843
Prepaid expenses and other current assets................. 5,147 8,783
---------- --------
Total current assets.............................. 741,939 272,962
---------- --------
Property and equipment, less accumulated depreciation....... 10,689 7,726
Electronic commerce and other receivable.................... 32,109 48,029
Investments................................................. 419,898 48,001
Intangible assets, less accumulated amortization............ 544,812 505,682
Other assets................................................ 2,997 7,399
---------- --------
Total assets...................................... $1,752,444 $889,799
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- current.................................. $ 6,396 $ 2,949
Accounts payable.......................................... 4,455 2,055
Accrued expenses.......................................... 57,491 22,637
Deferred revenues......................................... 93,906 64,016
---------- --------
Total current liabilities......................... 162,248 91,657
Deferred tax liability...................................... 76,255 138
Notes payable............................................... 2,011 2,600
Deferred revenues........................................... 34,216 55,934
---------- --------
112,482 58,672
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized,
none issued or outstanding............................. -- --
Common stock, $.01 par value; 300,000 shares authorized,
112,496 shares at July 31, 2000 and 100,312 shares at
July 31, 1999 issued and outstanding................... 1,125 1,003
Additional paid-in capital................................ 1,522,169 815,706
Deferred compensation..................................... (818) (75)
Accumulated deficit....................................... (71,746) (92,751)
Treasury stock, at cost, 1,923 shares at July 31, 2000 and
1,815 shares at July 31, 1999.......................... (4,356) (3,286)
Accumulated other comprehensive income.................... 31,340 18,873
---------- --------
Total stockholders' equity........................ 1,477,714 739,470
---------- --------
Total liabilities and stockholders' equity........ $1,752,444 $889,799
========== ========
See accompanying notes to consolidated financial statements.
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LYCOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
--------------------------------
JULY 31, JULY 31, JULY 31,
2000 1999 1998
-------- -------- --------
Revenues:
Advertising............................................. $191,653 $ 96,459 $ 42,854
Electronic commerce and other........................... 99,297 42,081 14,292
-------- -------- --------
Total revenues.................................. 290,950 138,540 57,146
Cost of revenues.......................................... 52,800 29,273 12,758
-------- -------- --------
Gross profit.................................... 238,150 109,267 44,388
Operating expenses:
Research and development................................ 47,352 26,963 9,724
In process research and development..................... -- -- 17,280
Sales and marketing..................................... 148,768 79,325 35,251
General and administrative.............................. 31,781 17,528 5,883
Amortization of intangible assets....................... 134,063 52,428 7,614
-------- -------- --------
Total operating expenses........................ 361,964 176,244 75,752
-------- -------- --------
Operating loss............................................ (123,814) (66,977) (31,364)
Interest income, net...................................... 23,398 6,273 3,050
Minority interest and other, net.......................... (2,263) -- --
Equity share of losses in affiliates, net................. (32,407) (1,360) --
Gain on sale of investments............................... 270,237 10,120 --
-------- -------- --------
Income (loss) before income taxes......................... 135,151 (51,944) (28,314)
Provision for income taxes................................ 114,146 138 --
-------- -------- --------
Net income (loss)......................................... $ 21,005 $(52,082) $(28,314)
======== ======== ========
Basic net income (loss) per share......................... $ 0.20 $ (0.59) $ (0.44)
======== ======== ========
Diluted net income (loss) per share....................... $ 0.19 $ (0.59) $ (0.44)
======== ======== ========
Weighted average shares used in computing basic net income
(loss) per share........................................ 105,211 88,960 64,144
======== ======== ========
Weighted average shares used in computing diluted net
income (loss) per share................................. 111,695 88,960 64,144
======== ======== ========
See accompanying notes to consolidated financial statements.
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LYCOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK OTHER
---------------- PAID-IN COMPENSATION ACCUMULATED ---------------- COMPREHENSIVE
SHARES AMOUNT CAPITAL AMOUNT DEFICIT SHARES AMOUNT INCOME
------- ------ ---------- ------------ ----------- ------ ------- -------------
BALANCES AT JULY 31, 1997.......... 57,464 $ 574 $ 49,461 $(185) $(12,355) -- -- --
Comprehensive income (loss):
Net loss.......................... -- -- -- -- (28,314) -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale
securities.....................
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 17 -- 66 -- -- -- -- --
Cancellation of stock options...... -- -- (23) 23 -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 4,094 41 3,201 -- -- 1,339 (468) --
Issuance of common stock in
connection with exercise of
warrants.......................... 415 4 1,359 -- -- 38 (114) --
Issuance of common stock in
connection with strategic
investments....................... 602 6 7,877 -- -- -- -- --
Issuance of common stock and
warrants in connection with
acquisitions...................... 8,298 84 104,766 -- -- 40 (403) --
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 9,350 94 111,098 -- -- -- -- --
Issuance of common stock in
connection with services
rendered.......................... 21 -- 300 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 46 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 1998.......... 80,261 803 278,105 (116) (40,669) 1,417 (985) --
Comprehensive income (loss):
Net loss.......................... -- -- -- -- (52,082) -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $12,582.......... $ 28,993
Less: Reclassification
adjustment for gains included
in net loss.................... (10,120)
--------
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 19 -- 247 -- -- -- -- --
Issuance of non-qualified stock
options........................... -- -- 30 (30) -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 3,120 31 15,512 -- -- 398 (2,301) --
Tax benefit of stock option
exercises......................... -- -- 12,582 -- -- -- -- --
Issuance of common stock in
connection with acquisitions...... 13,307 133 495,317 -- -- -- -- --
Issuance of common stock of
subsidiary........................ 3,605 36 13,913 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 71 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 1999.......... 100,312 1,003 815,706 (75) (92,751) 1,815 (3,286) 18,873
Comprehensive income (loss):
Net income........................ -- -- -- -- 21,005 -- -- --
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $8,318........... 12,467
Comprehensive income (loss)....
Issuance of common stock in
connection with ESPP.............. 12 -- 414 -- -- -- -- --
Issuance of common stock in
connection with exercise of stock
options........................... 3,425 34 46,898 -- -- 108 (1,070) --
Issuance of common stock in
connection with exercise of
warrants.......................... 12 -- 126 -- -- -- -- --
Issuance of common stock and
warrants in connection with
acquisitions...................... 1,911 19 115,812 (818) -- -- -- --
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 6,163 62 455,556 -- -- -- -- --
Tax benefit of stock option
exercises......................... -- -- 45,983 -- -- -- -- --
Issuance of common stock in
connection with strategic
investments....................... 661 7 41,674 -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- 75 -- -- -- --
------- ------ ---------- ----- -------- ----- ------- --------
BALANCES AT JULY 31, 2000.......... 112,496 $1,125 $1,522,169 $(818) $(71,746) 1,923 $(4,356) $ 31,340
======= ====== ========== ===== ======== ===== ======= ========
COMPREHENSIVE
TOTAL INCOME (LOSS)
---------- -------------
BALANCES AT JULY 31, 1997.......... $ 37,495
Comprehensive income (loss):
Net loss.......................... (28,314) $(28,314)
Other comprehensive income (loss):
Unrealized gains on
available-for-sale
securities..................... --
--------
Comprehensive income (loss).... $(28,314)
========
Issuance of common stock in
connection with ESPP.............. 66
Cancellation of stock options...... --
Issuance of common stock in
connection with exercise of stock
options........................... 2,774
Issuance of common stock in
connection with exercise of
warrants.......................... 1,249
Issuance of common stock in
connection with strategic
investments....................... 7,883
Issuance of common stock and
warrants in connection with
acquisitions...................... 104,447
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 111,192
Issuance of common stock in
connection with services
rendered.......................... 300
Amortization of deferred
compensation...................... 46
----------
BALANCES AT JULY 31, 1998.......... 237,138
Comprehensive income (loss):
Net loss.......................... (52,082) $(52,082)
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $12,582..........
Less: Reclassification
adjustment for gains included
in net loss.................... 18,873 18,873
--------
Comprehensive income (loss).... $(33,209)
========
Issuance of common stock in
connection with ESPP.............. 247
Issuance of non-qualified stock
options........................... --
Issuance of common stock in
connection with exercise of stock
options........................... 13,242
Tax benefit of stock option
exercises......................... 12,582
Issuance of common stock in
connection with acquisitions...... 495,450
Issuance of common stock of
subsidiary........................ 13,949
Amortization of deferred
compensation...................... 71
----------
BALANCES AT JULY 31, 1999.......... 739,470
Comprehensive income (loss):
Net income........................ 21,005 $ 21,005
Other comprehensive income (loss):
Unrealized gains on
available-for-sale securities,
net of tax of $8,318........... 12,467 12,467
--------
Comprehensive income (loss).... $ 33,472
========
Issuance of common stock in
connection with ESPP.............. 414
Issuance of common stock in
connection with exercise of stock
options........................... 45,862
Issuance of common stock in
connection with exercise of
warrants.......................... 126
Issuance of common stock and
warrants in connection with
acquisitions...................... 115,013
Issuance of common stock in
connection with Secondary Public
Offering, net of offering costs... 455,618
Tax benefit of stock option
exercises......................... 45,983
Issuance of common stock in
connection with strategic
investments....................... 41,681
Amortization of deferred
compensation...................... 75
----------
BALANCES AT JULY 31, 2000.......... $1,477,714
==========
See accompanying notes to consolidated financial statements.
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LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
---------------------------------
JULY 31, JULY 31, JULY 31,
2000 1999 1998
--------- -------- --------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 21,005 $(52,082) $(28,314)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Amortization of deferred compensation................... 75 71 47
Amortization of intangible assets....................... 134,063 52,428 7,614
Depreciation............................................ 2,676 3,549 1,525
Allowance for doubtful accounts......................... 4,628 1,234 654
Gain on sale of investments............................. (270,237) (10,120) --
Equity share of losses in affiliates.................... 32,407 1,360 --
In process research and development..................... -- -- 17,280
Issuance of common stock for services rendered.......... -- -- 300
Deferred taxes.......................................... 76,117 138 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (7,651) (7,281) (4,778)
Electronic commerce and other fees receivable........... 20,232 (68,111) (42,046)
Prepaid expenses........................................ 3,696 (1,580) (1,593)
Other assets............................................ 6,998 (3,273) (2,895)
Accounts payable........................................ (2,236) (5,771) 854
Accrued expenses........................................ 23,794 (9,209) 8,343
Deferred revenues....................................... 7,425 60,433 40,450
Other liabilities....................................... -- (37) (29)
--------- -------- --------
Net cash provided by (used in) operating activities......... 52,992 (38,251) (2,588)
--------- -------- --------
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (3,408) (1,915) (1,187)
Sale of investments......................................... 200 12,159 --
Cash acquired through (paid for) acquisitions, net.......... (31,577) 21,751 2,541
Investment in affiliates.................................... (73,802) (5,120) (992)
--------- -------- --------
Net cash provided by (used in) investing activities......... (108,587) 26,875 362
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of stock, net of offering costs...... 455,618 13,857 111,224
Proceeds from exercise of stock options..................... 84,598 15,543 3,299
Proceeds from issuance of common stock under Employee Stock
Purchase Plan............................................. 414 247 66
Proceeds from exercise of warrants.......................... 126 -- 1,250
Repayments of notes payable................................. (10,533) (3,443) --
Cash used to repurchase treasury stock...................... (1,070) (2,302) (468)
--------- -------- --------
Net cash provided by financing activities................... 529,153 23,902 115,371
--------- -------- --------
Net increase in cash and cash equivalents................... 473,558 12,526 113,145
Cash and cash equivalents at beginning of year.............. 166,506 153,980 40,835
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 640,064 $166,506 $153,980
========= ======== ========
Schedule of non-cash financing and investing activities:
Issuance of common stock in connection with
acquisitions............................................ $ 115,013 $495,450 $104,447
Assets and liabilities recognized in connection with
acquisitions:
Accounts receivable................................... 183 8,643 209
Prepaid expenses...................................... 16 1,302 23
Property and equipment................................ 2,004 5,318 1,996
Developed technology.................................. -- -- 12,331
Goodwill and other intangible assets.................. 126,700 479,322 72,827
Marketable securities................................. -- 5,950 --
Other assets.......................................... 2,491 774 --
Accounts payable...................................... 1,469 2,830 810
Accrued expenses...................................... 5,399 17,869 1,858
Notes payable......................................... 7,448 8,219 --
Deferred revenues..................................... -- 1,946 93
Issuance of common stock in connection with strategic
investments............................................. $ 41,681 -- $ 7,882
See accompanying notes to consolidated financial statements.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Lycos, Inc., ("Lycos" or the "Company") is a network of globally branded
media properties and aggregated content distributed primarily through the World
Wide Web. Under the "Lycos Network" brand, Lycos provides aggregated third-party
content, Web search and directory services, community and personalization
features, personal Web publishing and online shopping. Lycos seeks to draw a
large number of viewers to its Websites by providing a one-stop destination for
information, communication and shopping services on the Web. The Company was
formed in June 1995 by CMG@Ventures L.P., a wholly-owned subsidiary of CMGI,
Inc. ("CMGI"). The Company conducts its business in one segment, generating
revenue from selling advertising, electronic commerce and other services. The
Company's fiscal year end is July 31.
The consolidated financial statements of Lycos give retroactive effect to
the merger with Gamesville, Inc. ("Gamesville"), which was consummated on
December 3, 1999. The merger was accounted for as pooling of interests. On
December 3, 1999, each issued and outstanding share of common stock of
Gamesville was converted into the right to receive 0.1822 shares of common stock
of Lycos. Lycos issued 3,605,044 shares in exchange for all of the outstanding
shares of Gamesville. Additionally, Lycos converted all outstanding Gamesville
stock options and warrants into approximately 423,085 Lycos options and
warrants. The consolidated financial statements reflect the combination of the
historical consolidated financial statements of Lycos with the historical
financial statements of Gamesville, which have been restated to reflect the same
fiscal year end of Lycos. Intercompany transactions have been eliminated.
Merger with Terra Networks, S.A.
On May 16, 2000, Lycos and Terra Networks, S.A. ("Terra Networks"), entered
into an agreement and plan of reorganization to combine and create Terra Lycos
(the "Combination"). As part of the Combination, each issued and outstanding
share of Lycos common stock will be converted into Terra Networks American
Depositary Shares ("Terra Networks ADSs") representing a number of ordinary
shares of Terra Networks (or if the applicable Lycos stockholder elects, into a
number of Terra Networks ordinary shares in account entry form instead of Terra
Networks ADSs) equal to the Exchange Ratio. The Exchange Ratio shall be equal to
(1) $97.55 divided by (2) the U.S. dollar equivalent of the average closing
price of Terra Networks ordinary shares on the Spanish Continuous Market
Exchange for the ten full Spanish Continuous Market Exchange trading days ending
on the tenth Spanish Continuous Market Exchange trading day prior to the
completion of the Combination. However, if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or greater than $68.06,
the exchange ratio shall be 1.433, and if the average closing price of Terra
Networks ordinary shares in clause (2) above is equal to or less than $45.37,
the exchange ratio shall be 2.150.
In connection with the Combination, Terra Networks, Lycos and Telefonica,
S.A., Terra Networks' majority owner ("Telefonica"), entered into a rights
offering agreement (the "Rights Offering"). Pursuant to the Rights Offering,
Terra Networks will make a rights offering prior to the Combination whereby it
will issue to its shareholders rights to purchase Terra Networks ordinary shares
for an aggregate of $2.0 billion at a price per share of $56.13, which was the
closing price of Terra Networks ordinary shares on May 16, 2000. Under the
Rights Offering, Telefonica has agreed to subscribe for all shares not
subscribed for by other shareholders. On September 15, 2000 the Rights Offering
was completed and all of the shares were subscribed at a per share price of
$56.13.
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Combination and following the Rights Offering, Lycos
stockholders are expected to own between 37.5% and 51.6% of the shares of Terra
Lycos. However, Lycos has agreed in the agreement and plan of reorganization not
to take any action, including issuing new Lycos shares, that could reasonably be
expected to result in its shareholders owning or having voting power in excess
of 50% of Terra Lycos upon completion of the combination. Telefonica is expected
to own between 33.6% and 43.5% of Terra Lycos after the Combination. The
Combination is expected to be accounted for by Terra Networks as an acquisition
under the purchase method of accounting for business combinations.
The Combination is expected to be completed during the fourth quarter of
calendar year 2000 and is subject to customary closing conditions, including
approval by stockholders of Lycos and receipt of all necessary regulatory
approvals. There can be no assurance such approvals will be obtained.
Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from the
Company's Websites. Electronic commerce revenues are generally recognized upon
delivery provided that no significant Company obligations remain and collection
of the receivable is probable. In cases where there are significant remaining
obligations, the Company defers such revenue until those obligations are
satisfied.
Cost of Revenues
Cost of revenues specifically attributable to advertising, electronic
commerce and other revenues are not separately identifiable and therefore are
not separately disclosed in the consolidated statements of operations.
Deferred Revenues
Deferred revenues are comprised of electronic commerce fees to be earned in
the future on non-cancelable agreements existing at the balance sheet date.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents. At July
31, 2000 and 1999, the Company had no investments with maturities greater than
three months.
Investments
The Company accounts for marketable securities under Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 establishes accounting and reporting
requirements for all debt securities and for investments in equity securities
that have readily determinable fair value. All marketable securities must be
classified as one of the following: held-to-maturity, available-for-sale, or
trading. All of the Company's investments are classified as available-for-sale
and, as such, are carried at fair value,
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with unrealized holding gains and losses, net of deferred taxes, reported as a
separate component of stockholders' equity.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized on a straight-line basis over the lesser of
the estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets primarily relate to the Company's acquisitions and
include developed technology, licensed technology, trademarks, trade names,
content copyrights, customer base and goodwill. In connection with acquisitions
accounted for under the purchase method of accounting (see Note 4), the Company
recorded these intangible assets based on the excess of the purchase price over
the identifiable tangible net assets of the acquiree on the date of purchase.
Intangible assets are reported at cost, net of accumulated amortization, and are
being amortized over their estimated useful life of three to five years. At July
31, 2000 and 1999, the balance of developed technology, trade names and other
intangible assets, net of accumulated amortization was $45.3 million and $17.8
million, respectively.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited of three to five years. The Company evaluates whether
changes have occurred that would require revision of the remaining estimated
useful life or impact the recoverability of the goodwill. If such changes occur,
the Company would use an estimate of the undiscounted future operating cash
flows to determine the recoverability of the goodwill. At July 31, 2000 and 1999
the balance of goodwill, net of accumulated amortization, was $499.5 million and
$487.9 million, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those
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LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company's effective income tax rate has been established after
adjustment for amortization of intangible assets and certain other items which
are not deductible for tax purposes. The provision for income taxes relates
primarily to deferred taxes recorded on the gain from the initial public
offering of Lycos Europe, as discussed in Note 2.
Research and Development Costs
Research and development expenditures are expensed as incurred. Software
development costs are required to be capitalized when a product's technological
feasibility has been established either by completion of a detail program design
or a working model of the product and ending when a product is available for
general release to consumers. To date, attainment of technological feasibility
of the Company's products and general release to customers have substantially
coincided. As a result, the Company has not capitalized any software development
costs since such costs have not been significant.
Advertising Costs
The Company expenses advertising production costs as incurred. Advertising
expense was approximately $23.4 million, $11.8 million, and $5.7 million for the
years ended July 31, 2000, 1999, and 1998, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("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 (loss) and earnings (loss) per share in the notes to
the consolidated financial statements. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized under SFAS 123 for the Company's stock
option plans, and footnote disclosure is provided in Note 7.
Employee Benefit Plan
The Company maintains a 401(K) Profit Sharing Plan (the "Plan") for its
employees. Each participant in the Plan may elect to contribute from 1% to 20%
of their annual compensation to the Plan. The Company matches employee
contributions at a rate of one-half of the first six percent of compensation
deferred. For the years ended July 31, 2000, 1999, and 1998 the Company's
contributions amounted to approximately $440,000, $230,000, and $87,000,
respectively.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations. Bad debt expense was $9.4 million, $1.2 million, and
$654,000 in 2000, 1999, and 1998, respectively. No single customer accounted for
greater than 10% of total revenues during the years ended July 31, 2000, 1999,
and 1998.
9
10
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's services are provided to customers in several industries
primarily in North America. Sales to foreign customers for the years ended July
31, 2000, 1999, and 1998 were approximately $2.6 million, $2.0 million, and $2.6
million, respectively.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, accounts payable, accrued expenses, notes payable and deferred
revenues, approximate their fair market values as of July 31, 2000 and 1999. The
Company has no investments in derivative financial instruments.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Treasury Stock
In connection with a license agreement with Carnegie Mellon University,
CMG@Ventures, Inc. has agreed to sell to the Company the number of shares of
common stock equal to the shares issuable upon exercise of certain options
granted, as defined, at a price equal to the exercise price of the underlying
options exercised (see Note 7). Under this agreement, the Company issues shares
of Company stock to employees upon exercise of options and subsequently buys an
equivalent number of Company shares at the respective exercise price from
CMG@Ventures, resulting in treasury stock.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130
("SFAS 130"), "Reporting Comprehensive Income" during the year ended July 31,
1999. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency translation
adjustment and unrealized gains and losses on available-for-sale securities.
The components of comprehensive income (loss), net of tax, are as follows
(in thousands):
TWELVE MONTHS ENDED JULY 31,
-------------------------------
2000 1999 1998
------- -------- --------
Net income (loss).................................. $21,005 $(52,082) $(28,314)
Unrealized gain on available-for-sale securities... 12,467 28,993 --
Less: Reclassification adjustment for gains
included in net income (loss).................... -- (10,120) --
------- -------- --------
Comprehensive income (loss)........................ $33,472 $(33,209) $(28,314)
======= ======== ========
Accumulated other comprehensive income consists of the unrealized gains on
available-for-sale securities, net of tax, as presented on the accompanying
consolidated balance sheets.
10
11
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and Diluted Net Income (Loss) per Share.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and, if
dilutive, common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the treasury stock method). For
the year ended July 31, 2000, common equivalent shares approximated 6.5 million
shares and related to shares issuable upon the exercise of stock options. During
the year ended July 31 1999 and 1998, options to purchase common shares were not
included in the computation because they were antidilutive.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. The Company adopted SOP 98-1 effective August 1,
1999. The adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial statements.
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company adopted SOP 98-5
effective August 1, 1999. The adoption of SOP 98-5 did not have a material
impact on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet at their fair value. The Company currently expects to adopt SFAS
133, as amended by SFAS 137, for the year ending July 31, 2001. Management does
not expect there to be a material impact on its results of operations or
financial position resulting from the adoption of SFAS 133 because the Company
currently does not hold derivative instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of calendar 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on its
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" -- an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
applies prospectively to new stock option awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000. Application of FIN 44 did
not have a material impact on the Company's financial position or its results of
operations for the year ended July 31, 2000.
11
12
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS
The Company invests in equity instruments of privately held internet
related companies. These investments are accounted for under the cost method as
the Company's ownership represents less than 20% of each investee. The Company's
carrying value of these investments approximates fair value at July 31, 2000.
For non-quoted investments, the Company regularly reviews the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values.
Marketable Securities
The cost of marketable securities carried at fair value was $80.3 million
and $11.8 million at July 31, 2000 and 1999, respectively. These investments had
a fair value of $137.3 million and $48.0 million at July 31, 2000 and 1999,
respectively. Gross unrealized gains and losses relating to securities held as
available-for-sale for the year ended July 31, 2000 and 1999 are as follows (in
thousands):
YEAR ENDED JULY 31,
--------------------
2000 1999
-------- --------
Gross unrealized gains...................................... $60,661 $33,118
Gross unrealized losses..................................... (39,876) (1,663)
------- -------
Net unrealized gains...................................... $20,785 $31,455
======= =======
Proceeds from the sale of marketable securities available for sale were
$12.2 million in the year ended July 31, 1999. Gross realized gains included in
net loss were $10.1 million in the year ended July 31, 1999. Sales of marketable
securities were not material in the years ended July 31, 2000 or 1998.
Joint Ventures
In May 1997, the Company established Lycos Europe, N.V. ("Lycos Europe") as
the basis for a joint venture agreement with Bertelsmann Internet Services
("Bertelsmann") to create localized versions of the Lycos search and navigation
service throughout Europe. The joint venture initially was owned 50% by Lycos
and 50% by Bertelsmann. Bertelsmann Internet Services, a subsidiary of
Bertelsmann AG, has committed to provide capital, infrastructure and employees
for the venture while Lycos will provide the core technology and brand name.
During March 2000, Lycos Europe completed an initial public offering on the
German Neuer Markt stock exchange which raised approximately $625 million, net
of offering costs. As a result of the offering, the Company's percentage
ownership in Lycos Europe was reduced to approximately 43.8% from 50% and the
Company recognized a one-time gain of $270 million. At July 31, 2000 the
Company's carrying value of Lycos Europe, which is recorded in investments on
the balance sheet, is $246 million. The fair value of the Company's investment
in Lycos Europe, based on the quoted trading price, was approximately $766
million at July 31, 2000. The investment is accounted for under the equity
method. For the year ending July 31, 2000, Lycos' share of the net loss was
$24.1 million. For the year ending July 31, 1999 and 1998, Lycos' share of the
net loss of Lycos Europe was not material.
In April 1998, the Company established Lycos Japan KK as the basis for a
joint venture with Sumitomo Corporation, one of Japan's largest trading
companies, and Internet Initiative Japan, the country's largest Internet Service
Provider. During November 1999 the Company invested $14.5 million in Lycos Japan
in exchange for convertible bonds and warrants issued by Lycos Japan. This
investment followed Lycos' initial investment of $1 million in April 1998. Also
during November 1999,
12
13
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's joint venture partner, Sumitomo Corporation, invested an
additional $14.5 million in Lycos Japan in exchange for convertible bonds. A new
partner, Kadokawa Publishing Co., Ltd. also joined the joint venture via an
investment of $7.3 million in exchange for common stock and convertible bonds.
As a result of the additional investments and new partner, the Company's
ownership of the joint venture changed to approximately 37% and, assuming full
conversion of the convertible bonds and warrants, the Company's ownership would
be approximately 44.7%. The investment is accounted for under the equity method.
For the year ending July 31, 2000 and 1999, Lycos' share of the net loss of
Lycos Japan KK was approximately $6.2 million and $1.0 million, respectively.
For the year ending July 31, 1998, Lycos' share of the net loss was not
material.
In March 1999, the Company established Lycos Korea as the basis for a joint
venture agreement with Mirae Corporation to create a localized version of the
Lycos Network services to be offered in Korea. Lycos' ownership in the joint
venture is approximately 43.2%. The investment is accounted for under the equity
method. For the year ending July 31, 2000, Lycos' share of the net loss was not
material. For the year ending July 31, 1999, Lycos' share of the net loss was
approximately $360,000.
During 2000 the Company invested $25 million in Lycos Asia, a joint venture
owned 50% by Lycos and 50% owned by Singapore Telecommunications Limited, a
telecommunications provider in Singapore. The Company accounts for this
investment under the equity method of accounting. For the year ending July 31,
2000, Lycos' share of the net loss of Lycos Asia was approximately $4.9 million.
In February 2000, the Company announced the formation of a new Internet
joint venture in Canada, "Sympatico-Lycos", to provide expanded Internet
resources for the business-to-consumer marketplace in Canada. Under the terms of
the agreement, Bell ActiMedia contributed $25 million in cash and certain
on-line assets, including Internet portal Sympatico. Lycos' ownership in the
joint venture is 29%. Lycos contributed its technologies and brands in exchange
for a royalty, which is based on certain milestones achieved by Sympatico-Lycos.
Separately, Bell ActiMedia and Lycos signed a $40 million three-year
distribution agreement under which Bell ActiMedia products and services will be
promoted to users who access the Lycos Network from Canada. For the year ending
July 31, 2000, Lycos' share of the net loss was not material.
Lycos Ventures Limited Partnership
In July 1999, the Company formed a venture capital fund to make strategic
early-stage investments in companies that are involved with electronic commerce,
online media or the development of Internet technology, content or services. The
Company, as a limited partner, is committed to providing $10 million to Lycos
Ventures, L.P. (the "Fund"). The other limited partners, which include Bear
Stearns, Mellon Ventures, Inc., Mirae Corporation, Sumitomo Corporation, Vulcan
Ventures, and others, will provide approximately $60 million to the Fund. The
general partner of the fund is Lycos Triangle Partners, LLC, a Delaware limited
liability company formed by Lycos and Triangle Capital Corporation. As of July
31, 2000 the Company has provided $2.9 million of its $10 million commitment to
the Fund.
13
14
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following (in thousands):
JULY 31,
------------------
2000 1999
------- -------
Computers, equipment & purchased software................... $17,032 $15,734
Furniture and fixtures...................................... 2,017 1,637
Leasehold improvements...................................... 2,739 2,986
------- -------
21,788 20,357
Less accumulated depreciation............................... (11,099) (12,631)
------- -------
$10,689 $ 7,726
======= =======
4. ACQUISITIONS
Tripod, Inc.
On February 11, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") by and among the Company, Pod Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company ("PAC"),
Tripod, Inc., a Delaware corporation ("Tripod"), William Peabody and Richard
Sabot, providing for the merger of PAC with and into Tripod (the "Merger"). On
February 12, 1998, the Company completed the closing of the Merger and Tripod
became a wholly-owned subsidiary of the Company. In accordance with the terms of
the Agreement, Richard Sabot was elected, effective May 1, 1998, to the
Company's Board of Directors for a term expiring at the first Annual Meeting of
the Company's stockholders held after the Company's fiscal year ending July 31,
2000.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Tripod have been included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of common stock and preferred stock
of Tripod and options and warrants to purchase common stock and preferred stock
of Tripod were converted into 6,241,652 shares and options and warrants to
purchase common stock of the Company. All outstanding options to purchase common
stock of Tripod have been assumed by the Company and converted into options to
purchase common stock of the Company, and all outstanding warrants to purchase
preferred stock of Tripod have been assumed by the Company and converted into
warrants to purchase common stock of the Company.
The purchase price of Tripod was allocated as follows (in thousands):
In process research and development......................... $ 7,200
Developed technology, goodwill and other intangible
assets.................................................... 52,220
Other assets, principally cash and equipment................ 3,634
Liabilities assumed......................................... (1,604)
-------
$61,450
=======
Accumulated amortization on intangible assets was $25.7 million and $15.2
million at July 31, 2000 and 1999, respectively.
14
15
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WiseWire Corporation
On April 30, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, Wise Acquisition Corp., a
Pennsylvania corporation and a wholly-owned subsidiary of the Company ("WAC"),
and WiseWire Corporation, a Pennsylvania corporation ("WiseWire"), pursuant to
which WAC was merged with and into WiseWire (the "Merger"). As a result of the
Merger, WiseWire became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WiseWire are included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of common stock and preferred stock
of WiseWire and options to purchase common stock of WiseWire were converted into
3,297,020 shares and options to purchase common stock of the Company. All
outstanding options to purchase common stock of WiseWire have been assumed by
the Company.
The purchase price of WiseWire was allocated as follows (in thousands):
In process research and development......................... $ 9,080
Developed technology, goodwill and other intangible
assets.................................................... 30,108
Other assets, principally cash and equipment................ 1,085
Liabilities assumed......................................... (857)
-------
$39,416
=======
Accumulated amortization on intangible assets was $13.5 million and $7.5
million at July 31, 2000 and 1999, respectively.
GuestWorld, Inc.
On June 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, VW Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VW"), GuestWorld,
Inc., a California corporation ("GuestWorld"), and all of the stockholders of
GuestWorld, acquired all of the outstanding capital stock of GuestWorld through
the merger of VW with and into GuestWorld (the "Merger"). As a result of the
Merger, GuestWorld became a wholly-owned subsidiary of the Company.
In the Merger, all outstanding shares of common stock of GuestWorld were
converted into an aggregate of 252,368 shares of common stock of the Company.
The acquisition was accounted for as a purchase. Results of operations for
GuestWorld are included with those of the Company for periods subsequent to the
date of acquisition.
The purchase price of GuestWorld was allocated as follows (in thousands):
In process research and development......................... $1,000
Goodwill and other intangible assets........................ 2,831
Property and equipment...................................... 50
Liabilities assumed......................................... (300)
------
$3,581
======
15
16
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated amortization on intangible assets was $1.2 million and $637,000
at July 31, 2000 and 1999.
Acquisition of WhoWhere? Inc.
On August 7, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?,
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WhoWhere? have been included
with those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of common stock and preferred stock
of WhoWhere? were converted into an aggregate of 8,285,714 shares of common
stock of the Company, and all outstanding options and warrants to purchase
common stock or preferred stock of WhoWhere? were assumed by the Company and
became options or warrants, as the case may be, to purchase an aggregate of
2,670,488 shares of Lycos common stock.
The purchase price of WhoWhere? was allocated as follows (in thousands):
Goodwill and other intangible assets........................ $161,322
Other assets, principally cash and equipment................ 8,118
Liabilities assumed......................................... (10,381)
--------
$159,059
========
Accumulated amortization on intangible assets was $63.3 million and $30.9
million at July 31, 2000 and 1999.
Acquisition of Wired Ventures, Inc.
On October 5, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") by and among the Company and Wired Ventures, Inc., a
California corporation ("Wired"). On June 30, 1999, the Company completed the
closing of the Merger and Wired became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Wired have been included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of common stock and preferred stock
of Wired were converted into an aggregate of 6,192,848 shares of common stock of
the Company. All outstanding options to purchase common stock of Wired have been
assumed by the Company and converted into options to purchase common stock of
the Company.
16
17
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price of Wired was allocated as follows (in thousands):
Goodwill and other intangible assets........................ $268,000
Other assets, principally cash and equipment................ 38,915
Liabilities assumed......................................... (16,017)
--------
$290,898
========
Accumulated amortization on intangible assets was $58.1 million and $4.5
million at July 31, 2000 and 1999.
Acquisition of Internet Music Distribution, Inc.
On July 17, 1999, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company and Internet Music Distribution,
Inc., a California corporation ("IMDI"). On July 27, 1999 the Company completed
the closing of the Merger and IMDI became a wholly-owned subsidiary of the
Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for IMDI have been included with
those of the Company for periods subsequent to the date of acquisition.
All outstanding shares of common stock of IMDI were converted into an
aggregate of 1,106,094 shares of common stock of the Company. Terms of the
merger also provide for future purchase payments, not to exceed $15,000,000,
contingent upon unique user downloads of the Sonique Player. No payments have
been made as of July 31, 2000.
The purchase price of IMDI was allocated as follows (in thousands):
Goodwill and other intangible assets........................ $50,000
Other assets, principally cash and equipment................ 78
Liabilities assumed......................................... (1,090)
-------
$48,988
=======
Accumulated amortization on intangible assets was $10 million at July 31,
2000 and insignificant at July 31, 1999.
Pooling-of-Interests Merger with Gamesville, Inc.
On December 3, 1999 Lycos issued 3,605,044 shares of its common stock in
exchange for all of the outstanding shares of Gamesville, Inc. This business
combination has been accounted for as a
17
18
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pooling-of-interests combination. The results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements are as follows (in thousands):
YEAR ENDED JULY 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net Revenues:
Lycos.............................................. $289,869 $135,521 $ 56,060
Gamesville......................................... 3,081 3,019 1,086
Eliminations....................................... (2,000) -- --
-------- -------- --------
$290,950 $138,540 $ 57,146
======== ======== ========
Net Income (Loss):
Lycos.............................................. $ 24,243 $(52,044) $(28,440)
========
Gamesville......................................... (3,238) (38) 126
-------- -------- --------
$ 21,005 $(52,082) $(28,314)
======== ======== ========
Acquisition of Quote.com, Inc.
On September 2, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger") with Quote.com, Inc., a California corporation ("Quote")
in a stock-for-stock transaction. On December 6, 1999 the Company completed the
closing of the Merger and Quote became a wholly-owned subsidiary of the Company.
As a result, all outstanding shares of common stock and preferred stock of Quote
were converted into an aggregate 1,346,630 shares of common stock of the
Company. Additionally, the Company converted all outstanding Quote stock options
and warrants into approximately 239,000 Lycos options and warrants.
The acquisition of Quote was accounted for as a purchase. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values. Results of operations for Quote are included with
those of the Company for periods subsequent to the date of acquisition.
The purchase price was allocated as follows (in thousands):
Developed technology, goodwill and other intangible
assets.................................................... $ 77,000
Other assets, principally cash.............................. 6,269
Liabilities assumed......................................... (14,166)
--------
$ 69,103
========
Accumulated amortization on intangible assets was $12.8 million at July 31,
2000.
Acquisition of Valent Software Corporation, Inc.
In December 1998, the Company entered into an agreement with Valent
Software Corporation ("Valent") pursuant to which the Company invested $2
million of cash in Valent. Valent provides the infrastructure and tools to link
online clubs. In exchange for the $2 million, the Company received 191,667
shares of Valent Series C preferred stock representing approximately a 16.7%
interest in Valent and an option to acquire all of the remaining outstanding
capital stock of Valent.
In January 2000, the Company exercised its option to acquire all of the
remaining outstanding capital stock of Valent. On February 2, 2000 the Company
completed the closing of the merger and
18
19
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Valent became a wholly-owned subsidiary of the Company. As a result, all
outstanding shares of common stock and preferred stock of Valent were converted
into an aggregate 564,045 shares of common stock of the Company. Additionally,
the Company converted all outstanding Valent stock options and warrants into
40,129 Lycos options and warrants.
The acquisition of Valent was accounted for as a purchase. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values. Results of operations for Valent are included with
those of the Company for periods subsequent to the date of acquisition.
The purchase price was allocated as follows (in thousands):
Developed technology, goodwill and other intangible
assets.................................................... $49,700
Other assets................................................ 16
Liabilities assumed......................................... (150)
-------
$49,566
=======
Accumulated amortization on intangible assets was $8.3 million at July 31,
2000.
Acquisition of Metrosplash, Inc.
On June 20, 2000, the Company entered into an agreement to acquire
Metrosplash, Inc. ("Metrosplash"), owner of Matchmaker.com, a leading personal
classifieds site. On July 31, 2000 the Company completed the acquisition and
Metrosplash became a wholly-owned subsidiary of the Company. As a result, all
outstanding shares of common stock and preferred stock of Metrosplash were
purchased by the Company in cash plus the assumption of debt for approximately
$45 million. Additionally, the Company converted certain outstanding Metrosplash
stock options into approximately 29,401 Lycos options.
The acquisition of Metrosplash was accounted for as a purchase. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. Results of operations for Metrosplash are
included with those of the Company for periods subsequent to the date of
acquisition.
The purchase price was allocated as follows (in thousands):
Developed technology, goodwill and other intangible
assets.................................................... $ 46,500
Other assets................................................ 778
Liabilities assumed......................................... (14,012)
--------
$ 33,266
========
Accumulated amortization on intangible assets was not significant at July
31, 2000.
In-Process Research and Development
In connection with the acquisitions of Tripod, WiseWire and GuestWorld, the
Company recorded an in process research and development charge of $17.3 million
representing purchased in-process research and development that has not yet
reached technological feasibility and has no alternative future use. The
Company's management made certain assessments with respect to the determination
of all identifiable assets resulting from, or to be used in, research and
development activities as of the respective acquisition dates. Each of these
activities was evaluated as of the respective acquisition dates so as to
determine their stage of development and related fair value.
19
20
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's review, as of the acquisition date, indicated that the in-process
research and development had not reached a state of technological feasibility
and evidenced no alternative future use. In the case of in-process projects, the
Company made estimates to quantify the cost-to-complete for each project,
identifying the project date of introduction, the estimated life of the project,
the project's "fit" within the Company's own in-process research projects, the
revenues to be generated in each future period and the corresponding operating
expenses and other charges to apply to this revenue stream. In order to
determine the value of the earnings stream attributable to the in-process
research and development, the excess earnings from the projects were calculated
by deducting the earnings stream attributable to all other assets including
working capital and tangible assets. Based upon these assumptions, after-tax
cash flows attributable to the in-process project(s) were determined,
appropriately discounted back to its respective net present value, taking into
account the uncertainty surrounding the successful development of the purchased
in-process technology.
In the Tripod and WiseWire acquisitions, the in-process research and
development projects were valued using an Income Approach, which included the
application of a discounted future earnings (excess earnings) methodology. In
both methodologies, the value of the in-process technology is comprised of the
total present value of the future earnings stream attributable to the technology
throughout its anticipated life. As a basis for the valuation process, the
Company made estimates of the revenue stream to be generated in each future
period and the corresponding operating expenses and other charges to apply to
this revenue stream. In order to determine the value of the earnings stream that
was specifically attributable to the in-process technology, the excess earnings
of the projects were calculated by deducting the earnings streams attributable
to all other assets, including working capital and tangible assets. Based upon
these assumptions, the future after-tax income streams relating to the
in-process technologies were discounted to present value using a risk adjusted
discount rate that reflected the uncertainty involved in successfully completing
and commercializing the in-process technologies.
The significant assumptions used as a basis for the in-process research and
development valuations include: future revenues and expenses forecasted for each
project; future working capital needs; estimated costs to complete; date of
project completion and product launch; and the probability and risk of project
completion as reflected in the discount rate selected to compute net present
values.
The period in which material net cash inflows from significant projects was
expected to commence was within three to six months or less after the respective
acquisition dates of Tripod and WiseWire. In the case of the Tripod acquisition,
the projects required an additional four months beyond the initial time estimate
to complete the in-process technology. In the case of the WiseWire acquisition,
the in-process technology was completed in December 1998.
In the case of Tripod, management does believe that other intangible assets
had been created at the acquisition date. As a result, in addition to valuing
in-process research and development, management has also allocated a proportion
of the purchase price, based on their respective fair values, to existing
technology employed in the creation and management of pods as well as to other
intangible assets associated with the existing community members.
WhoWhere? offers an array of products that allow users to locate home
addresses, e-mail addresses and phone numbers. In addition, through its MailCity
product, WhoWhere? also offers its users free, personalized, web-based e-mail.
Identifiable assets at the acquisition date consisted primarily of developed
technology, and projects under development at that time were determined to be
enhancements or refinements to existing developed technologies. As a result,
management
20
21
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined that there was no technology which would qualify for in-process
research and development.
Wired offers search capabilities through HotBot, a popular search and
navigation site. Wired licenses the HotBot principal technology and subsequent
enhancements from a third party. Other Wired properties, which include Wired
News, HotWired and Suck.com provide online content. Wired either produces,
licenses or purchases this content. Based upon the nature of Wired businesses,
management determined the Company does not possess any significant technology
assets nor was there any technology which would qualify for in-process research
and development.
Management assessed the fair market value in continued use of Internet
Music Distributors, Inc., Quote, Valent and Metrosplash assets to serve as a
basis for allocation of purchase price. It was determined that intangible assets
consisted of developed technology and trade names. Each identifiable asset was
analyzed and valued based upon an Income Approach. In performing its assessment,
management determined there was no in-process research and development.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the
combined results of operations of Lycos, Wired, IMDI, Quote, Valent and
Metrosplash as if the acquisitions had occurred as of the beginning of fiscal
2000 and 1999, after giving effect to certain adjustments, including
amortization of goodwill and other intangible assets. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Lycos, Wired, IMDI, Quote, Valent and Metrosplash constituted
a single entity during such period.
PRO FORMA YEAR ENDED JULY 31,
-----------------------------
2000 1999
---------- -----------
(UNAUDITED AND IN THOUSANDS)
Revenues................................................ $305,130 $ 181,474
Net loss................................................ $(38,908) $(197,518)
Basic and diluted net income (loss) per share........... $ (0.37) $ (2.17)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
JULY 31, JULY 31,
2000 1999
-------- --------
Compensation and benefits................................... $12,931 $ 7,430
Content and webhosting fees................................. 12,143 915
Professional fees........................................... 10,686 5,199
Royalties................................................... 6,999 2,047
Advertising................................................. 5,390 1,644
Other....................................................... 9,342 5,402
------- -------
$57,491 $22,637
======= =======
21
22
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2006. Future noncancelable minimum
payments as of July 31, 2000 under these leases for each fiscal year end are as
follows:
2001........................................................ $21,258
2002........................................................ 18,539
2003........................................................ 6,089
2004........................................................ 2,099
2005 and thereafter......................................... 2,202
-------
$50,187
=======
Rent expense under non-cancelable operating leases was $23.4 million, $12.1
million, and $5.1 million for the years ended July 31, 2000, 1999 and 1998,
respectively.
7. STOCKHOLDERS' EQUITY
Stock Splits
In July 1998, the Company's Board of Directors approved a two-for-one
common stock split. On August 25, 1998, shareholders received one additional
share for every share held on August 14, 1998 (the record date). In May 1999,
the Company's Board of Directors approved a two-for-one common stock split. On
July 26, 1999, shareholders received one additional share for every share held
on July 16, 1999 (the record date). All share and per share numbers in these
supplemental consolidated financial statements and notes thereto have been
adjusted for all periods presented to reflect the two-for-one common stock
splits.
Secondary Offerings
On June 4, 1998, the Company completed a secondary offering of its common
stock in which 9,000,000 of the Company's shares were sold under a registration
statement filed with the Securities and Exchange Commission ("SEC"). Of the
9,000,000 shares sold, 8,000,000 shares were sold by the Company and 1,000,000
were sold by CMGI. The Company did not receive any proceeds from the sale of
shares by CMGI. Proceeds to the Company were approximately $95 million, before
deduction of expenses payable by the Company of $350,000. The Underwriters
exercised an option to purchase 1,350,000 additional shares of common stock,
resulting in additional proceeds to the Company of approximately $16 million.
On January 25, 2000, the Company completed a secondary offering of its
common stock in which 6,000,000 shares of the Company's common stock were sold
under a registration statement filed with the SEC. Proceeds to the Company were
$443.5 million, net of offering costs. In February 2000, the Underwriters
exercised an option to purchase 163,000 additional shares of common stock,
resulting in additional proceeds to the Company of $12 million.
1995 Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which nonqualified stock options to purchase common stock may be
granted to officers and other key employees. Under the Plan, options to purchase
4,000,000 shares of common stock may be granted at an exercise price determined
by the Board of Directors. Options granted under the 1995 Plan vest
22
23
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over a five year period from date of grant, except that the vesting of certain
options are subject to acceleration upon the occurrence of certain events.
Options under the 1995 Plan expire six years from date of grant. The total
weighted average contractual life of options outstanding at July 31, 2000 was
1.5 years.
A summary of option activity under the 1995 Plan is as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ---------
Outstanding at July 31, 1997................................ 3,639,216 $1.37
Granted................................................... -- --
Exercised................................................. (1,260,368) 0.17
Terminated................................................ (424,160) 0.63
----------
Outstanding at July 31, 1998................................ 1,954,688 1.56
----------
Granted................................................... -- --
Exercised................................................. (274,880) 0.67
Terminated................................................ (7,200) 0.58
----------
Outstanding at July 31, 1999................................ 1,672,608 1.71
----------
Granted................................................... -- --
Exercised................................................. (248,984) 0.54
Terminated................................................ (140,640) 2.36
----------
Outstanding at July 31, 2000................................ 1,282,984 $1.86
==========
Exercisable at July 31, 2000................................ 1,122,040 $1.94
==========
The following table summarizes information about the Company's stock
options outstanding under the 1995 Plan at July 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
1995 STOCK OPTION PLAN OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
- ------------------------- -------------- ------------ --------- -------------- ---------
$0.01 - $0.58 324,288 1.2 $0.01 227,344 $0.01
$2.40 - $2.40 873,696 1.5 $2.40 865,696 $2.40
$2.84 - $3.97 85,000 2.7 $3.41 29,000 $3.42
--------- ---------
1,282,984 1,122,040
========= =========
Pursuant to the License Agreement, CMG@Ventures has agreed to sell to the
Company a number of shares of common stock equal to the shares issuable upon
exercise of options granted under the 1995 Plan prior to the initial public
offering at a price equal to the exercise price of the options as such options
are exercised.
1996 Stock Option Plan
On February 2, 1996, the 1996 Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors. Pursuant to the 1996 Plan, 4,000,000 shares
of common stock may be issued upon exercise of options. On June 27, 1997, the
Company's Board of Directors voted to authorize an
23
24
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional 8,800,000 shares for grant under the 1996 Plan. On September 9, 1998
the Company's Board of Directors voted to authorize an additional 12,000,000
shares for grant under the 1996 Plan. Additionally, the Board of Directors
approved an amendment to the 1996 Plan, which provides that the shares
authorized under the 1996 Plan will increase annually, beginning on August 1,
1999, in an amount equal to 5% of the Company's issued and outstanding shares as
of each fiscal year end.
Under the 1996 Plan, incentive stock options may be granted to employees
and officers of the Company and non-qualified stock options may be granted to
consultants, employees and officers of the Company. The exercise price of such
incentive stock options cannot be less than the fair market value of the common
stock on the date of grant, or less than 110% of fair market value in the case
of employees or officers holding 10% or more of the voting stock of the Company.
The Compensation Committee of the Board of Directors has the authority to select
optionees and to determine the terms of the options granted. Options granted
under the 1996 Plan on June 30, 1999 or prior generally vest over a five year
period from date of grant. Options granted under the 1996 Plan on July 1, 1999
or later generally vest over a four year period from date of grant. Options
under the 1996 Plan expire ten years from the date of grant and certain options
are subject to acceleration of vesting upon the occurrence of certain events.
The total weighted average contractual life of options outstanding at July 31,
2000, was 8.5 years.
A summary of option activity under the 1996 Plan is as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ---------
Outstanding at July 31, 1997................................ 4,754,088 $ 2.97
Granted................................................... 6,895,800 11.30
Exercised................................................. (709,192) 2.90
Terminated................................................ (716,400) 4.07
----------
Outstanding at July 31, 1998................................ 10,224,296 7.68
----------
Granted................................................... 13,429,588 38.51
Exercised................................................. (1,491,960) 6.89
Terminated................................................ (1,071,300) 13.70
----------
Outstanding at July 31, 1999................................ 21,090,624 27.06
----------
Granted................................................... 9,836,300 43.29
Exercised................................................. (2,513,663) 17.16
Terminated................................................ (6,004,871) 25.93
----------
Outstanding at July 31, 2000................................ 22,408,390 $34.80
==========
Exercisable at July 31, 2000................................ 3,184,762 $33.06
==========
24
25
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding under the 1996 Plan at July 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
1996 STOCK OPTION PLAN OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
- ------------------------ -------------- ------------ --------- -------------- ---------
$ 0.01 - $ 3.94 1,058,658 6.4 $ 2.62 328,382 $ 2.53
$ 3.95 - $ 5.38 1,189,607 6.9 $ 4.38 338,207 $ 4.38
$ 5.39 - $12.50 1,517,234 7.5 $ 9.76 237,300 $ 9.92
$12.51 - $25.00 3,487,536 7.8 $14.34 528,955 $14.51
$25.01 - $35.00 4,720,890 8.9 $32.38 116,640 $28.05
$35.01 - $45.00 2,736,626 9.4 $39.06 154,931 $42.28
$45.01 - $55.00 3,175,163 8.8 $48.02 738,740 $46.94
$55.01 - $65.00 1,585,176 9.5 $61.74 28,875 $63.62
$65.01 - $75.00 2,814,500 8.8 $66.28 712,732 $65.38
$75.01 - $85.38 123,000 9.4 $83.28 -- --
---------- ---------
22,408,390 3,184,762
========== =========
In September 1996, the Company canceled 338,928 options previously granted
to employees under the 1995 Plan and 1996 Plan at various exercise prices and
granted an equivalent number of additional options to those same employees
pursuant to the 1996 Plan at an exercise price of $2.40 per share. No
compensation expense was recognized by the Company as the exercise price of
these options on the date of grant was at or above fair market value.
1995 Tripod Stock Option Plan
In connection with the acquisition of Tripod, the Company assumed the 1995
Stock Option Plan under which incentive stock options and nonqualified stock
options to purchase common stock may be granted to officers, key employees and
advisors. Under the Plan, options to purchase 735,852 shares of common stock
were reserved for grants. Options under the 1995 Tripod Stock Option Plan vest
over a four year period from date of grant. Options under the 1995 Tripod Stock
Option Plan expire ten years from the date of grant. The total weighted-average
contractual life of options outstanding at July 31, 2000 was approximately 7.6
years.
A summary of option activity under the 1995 Tripod Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at February 12, 1998............................ 735,852 $0.33
Granted................................................... -- --
Exercised................................................. (268,984) 0.32
Terminated................................................ (49,640) 0.41
--------
Outstanding at July 31, 1998................................ 417,228 0.32
--------
Granted................................................... -- --
Exercised................................................. (220,766) 0.31
Terminated................................................ (76,264) 0.37
--------
25
26
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at July 31, 1999................................ 120,198 0.31
--------
Granted................................................... -- --
Exercised................................................. (52,222) 0.31
Terminated................................................ (20,167) 0.31
Outstanding at July 31, 2000................................ 47,809 $0.31
========
Exercisable at July 31, 2000................................ 19,699 $0.31
--------
The following table summarizes information about stock options outstanding
under the 1995 Tripod Stock Option Plan at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
TRIPOD 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
- ----------------------------- -------------- ------------ --------- -------------- ---------
$0.25 - $0.38 47,446 7.7 $0.31 19,699 $0.31
$0.39 - $1.00 363 0.3 $0.77 -- --
------ ------
47,809 19,699
====== ======
1995 and 1996 WiseWire Stock Option Plans
In connection with the acquisition of WiseWire, the Company assumed the
1995 and 1996 Stock Option Plan under which incentive stock options and
nonqualified stock options to purchase common stock may be granted to officers,
key employees and advisors. Under these plans, the Company may grant either
incentive stock options or non-qualified stock options. 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 vesting 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. The total weighted average contractual life of options outstanding
under the 1995 and 1996 WiseWire Stock Option Plans at July 31, 2000 was
approximately 5.9 and 6.8 years, respectively.
A summary of option activity under the 1995 WiseWire Stock Option Plan is
as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at April 30, 1998............................... 420,548 $1.34
Granted................................................... -- --
Exercised................................................. (126,048) 1.01
Terminated................................................ (54,192) 3.19
--------
26
27
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at July 31, 1998................................ 240,308 1.35
--------
Granted................................................... -- --
Exercised................................................. (139,016) 0.98
Terminated................................................ (33,678) 1.92
--------
Outstanding at July 31, 1999................................ 67,614 1.82
--------
Granted................................................... -- --
Exercised................................................. (16,154) 1.79
Terminated................................................ (25,762) 2.01
--------
Outstanding at July 31, 2000................................ 25,698 $1.64
--------
Exercisable at July 31, 2000................................ 14,376 $1.68
========
The following table summarizes information about stock options outstanding
under the 1995 WiseWire Stock Option Plan at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
WISEWIRE 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE AT JULY 31, 2000 PRICE
- ----------------------------- -------------- ------------ --------- ---------------- ---------
$0.50 - $ 1.00 18,706 5.8 $0.67 12,320 $0.67
$2.50 - $26.88 6,992 5.9 $4.25 2,056 $7.78
------ ------
25,698 14,376
====== ======
A summary of option activity under the 1996 WiseWire Stock Option Plan is
as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at April 30, 1998............................... 42,068 $6.60
Granted................................................... -- --
Exercised................................................. -- --
Terminated................................................ (26,932) 6.55
-------
Outstanding at July 31, 1998................................ 15,136 6.68
-------
Granted................................................... -- --
Exercised................................................. (4,964) 6.68
Terminated................................................ -- --
-------
Outstanding at July 31, 1999................................ 10,172 6.68
-------
Granted................................................... -- --
Exercised................................................. (10,000) 6.68
Terminated................................................ -- --
-------
Outstanding at July 31, 2000................................ 172 $6.68
=======
Exercisable at July 31, 2000................................ 172 $6.68
=======
27
28
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 2000, the stock options outstanding under the 1996 WiseWire
Stock Option Plan have an exercise price of $6.68 and a weighted average
contractual life of 6.8 years.
1995 WhoWhere? Stock Option Plan
In connection with the acquisition of WhoWhere?, the Company assumed the
1995 Stock Option Plan under which incentive stock options and nonqualified
stock options to purchase common stock may be granted to officers, key employees
and advisors. Under this plan, the Company may grant either incentive stock
options or non-qualified stock options. These options vest over a four year
period from date of grant. These options generally have a term of ten years from
the date of grant. Upon consummation of the acquisition of WhoWhere? by the
Company, vesting of all outstanding options accelerated by six months. The total
weighted average contractual life of options outstanding under the 1995
WhoWhere? Stock Option Plan at July 31, 2000 was approximately 7.5 years.
A summary of option activity under the 1995 WhoWhere? Stock Option Plan is
as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at August 13, 1998.............................. 1,922,784 $4.01
Granted................................................... -- --
Exercised................................................. (869,126) 2.95
Terminated................................................ (439,764) 3.40
---------
Outstanding at July 31, 1999................................ 613,894 5.94
---------
Granted................................................... -- --
Exercised................................................. (244,000) 5.12
Terminated................................................ (146,796) 5.41
Outstanding at July 31, 2000................................ 223,098 $7.20
=========
Exercisable at July 31, 2000................................ 122,696 $7.62
=========
The following table summarizes information about stock options outstanding
under the 1995 WhoWhere? Stock Option Plan at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
WHOWHERE 1995 STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE AT JULY 31, 2000 PRICE
- ----------------------------- -------------- ------------ --------- ---------------- ---------
$0.01 - $ 0.50 12,002 6.6 $ 0.46 10,332 $ 0.46
$0.51 - $ 6.55 72,164 7.5 $ 2.56 26,532 $ 2.37
$6.56 - $13.10 138,932 7.5 $10.19 85,832 $10.11
------- -------
223,098 122,696
======= =======
Gamesville 1999 and 1997 Stock Option Plans
In connection with the acquisition of Gamesville, the Company assumed the
1999 and 1997 Stock Option Plans under which incentive stock options and
nonqualified stock options to purchase common stock may be granted to officers,
employees, directors, consultants and advisors. Options under the Stock Option
Plans vest over periods of one to four years from date of grant and expire
28
29
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ten years from the date of grant. The weighted-average exercise price for these
shares was $4.36 at July 31, 2000. The total weighted-average contractual life
of options outstanding at July 31, 2000 was approximately 8.9 years.
A summary of option activity under the Gamesville Stock Option Plans is as
follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at December 31, 1997............................ -- --
Granted................................................... 47,834 $2.20
Exercised................................................. -- --
Terminated................................................ -- --
--------
Outstanding at July 31, 1998................................ 47,834 2.20
--------
Granted................................................... 277,572 4.39
Exercised................................................. -- --
Terminated................................................ -- --
--------
Outstanding at July 31, 1999................................ 325,406 4.07
--------
Granted................................................... 182,405 4.39
Exercised................................................. (208,727) 3.90
Terminated................................................ (196,261) 4.39
--------
Outstanding at July 31, 2000................................ 102,823 $4.36
========
Exercisable at July 31, 2000................................ 5,409 $4.24
========
The following table summarizes information about stock options outstanding
under Gamesville Stock Option Plans at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
GAMESVILLE STOCK OPTION OUTSTANDING AT LIFE EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 (YEARS) PRICE JULY 31, 2000 PRICE
- ----------------------------- -------------- ----------- --------- -------------- ---------
$2.20 1,458 3.9 $2.20 364 $2.20
$4.39 101,365 9.0 $4.39 5,045 $4.39
------- -----
102,823 5,409
======= =====
Quote.com Stock Option Plan
In connection with the acquisition of Quote.com, the Company assumed the
Quote.com Stock Option Plan under which incentive stock options to purchase
common stock may be granted to employees and nonqualified stock options to
purchase common stock may be granted to officers, employees, directors,
consultants and advisors. Options granted under the Stock Option Plan generally
vest over a period of four years from date of grant. All unvested options
outstanding on the one year anniversary of the acquisition of Quote.com by Lycos
will fully accelerate. Option grants under this plan expire ten years from the
date of grant. The weighted average exercise price for these shares was $11.03
at July 31, 2000. The total weighted-average contractual life of options
outstanding at July 31, 2000 was approximately 8.2 years.
29
30
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the Quote.com Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at December 6, 1999............................. 216,190 $ 8.37
Granted................................................... -- --
Exercised................................................. (164,556) 7.51
Terminated................................................ (3,441) 11.88
--------
Outstanding at July 31, 2000................................ 48,193 $11.03
========
Exercisable at July 31, 2000................................ 17,020 $ 9.14
========
The following table summarizes information about stock options outstanding
under the Quote.com Stock Option Plan at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
QUOTE.COM STOCK OPTION OUTSTANDING AT LIFE EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 (YEARS) PRICE JULY 31, 2000 PRICE
- ----------------------------- -------------- ----------- --------- -------------- ---------
$3.62-$3.62 451 6.1 $ 3.62 363 $ 3.62
$6.51-$6.51 1,176 6.9 $ 6.51 740 $ 6.51
$7.23-$7.23 31,003 7.9 $ 7.23 12,765 $ 7.23
$7.96-$7.96 5,089 8.6 $ 7.96 1,159 $ 7.96
$21.70-$21.70 8,265 8.9 $21.70 1,651 $21.70
$35.45-$35.45 2,209 9.1 $35.45 342 $35.45
------ ------
48,193 17,020
====== ======
Valent Stock Option Plan
In connection with the acquisition of Valent, the Company assumed Valent's
Stock Option Plan under which incentive stock options to purchase common stock
may be granted to employees and nonqualified stock options to purchase common
stock may be granted to officers, employees, directors, consultants and
advisors. Options granted under the Stock Option Plan generally vest over a
period of four years from date of grant and expire ten years from the date of
grant. The weighted average exercise price for these shares was $2.77 at July
31, 2000. The total weighted-average contractual life of options outstanding at
July 31, 2000 was approximately 8.5 years.
30
31
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity under the Valent Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding at February 2, 2000............................. 40,129 $6.14
Granted................................................... -- --
Exercised................................................. (9,093) 1.88
Terminated................................................ (4,749) 1.97
------ -----
Outstanding at July 31, 2000................................ 26,287 $8.36
====== =====
Exercisable at July 31, 2000................................ 2,624 $2.77
====== =====
The following table summarizes information about stock options outstanding
under the Valent Stock Option Plan at July 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
VALENT STOCK OPTION OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PLAN RANGE OF EXERCISE PRICES JULY 31, 2000 LIFE (YEARS) PRICE JULY 31, 2000 PRICE
- ----------------------------- -------------- ------------ --------- -------------- ---------
$0.95-$3.14 646 7.9 $ 1.58 646 $ 1.58
$3.15-$3.16 9,496 8.1 $ 3.16 1,978 $ 3.16
$3.17-$3.95 9,814 8.5 $ 3.95 -- --
$3.96-$23.69 6,331 9.0 $23.69 -- --
------ ------
26,287 2,624
====== ======
Metrosplash, Inc. Incentive Stock Plan
In connection with the acquisition of Metrosplash Inc., the Company assumed
the Matchmaker.com Incentive Stock Plan under which incentive stock options to
purchase common stock may be granted to employees, officers and directors and
nonqualified stock options to purchase common stock may be granted to officers,
employees, directors, consultants and advisors. Options granted under the
Incentive Stock Plan generally vest over periods of one to four years from date
of grant and expire ten years from the date of grant. There were 29,601 options
outstanding in this plan as of July 31, 2000 and 2,171 were exercisable. The
weighted average exercise price for these shares was $5.98 at July 31, 2000. The
total weighted-average contractual life of options outstanding at July 31, 2000
was approximately 9.2 years.
1996 Non-Employee Director Stock Option Plan
On February 2, 1996, the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") was approved by the Board of Directors. The Director Plan
authorizes the issuance of a maximum of 400,000 shares of common stock. The
Director Plan is administered by the Board of Directors. Under the Director Plan
each non-employee director first elected to the Board of Directors after the
completion of the initial public offering will receive an option for 10,000
shares on the date of his or her election. In addition, an amendment to the Plan
was approved in December 1999 allowing the Board of Directors to grant periodic
option grants from time to time to non-employee directors. The exercise price
per share for all options granted under the Director Plan will be equal to the
fair market value of the common stock as of the date of grant. All options vest
in three equal
31
32
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
installments beginning on the first anniversary of the date of grant. Options
under the Director Plan will expire ten years from the date of grant and are
exercisable only while the optionee is serving as a director of the Company. As
of July 31, 2000, 270,000 options had been granted at exercise prices ranging
from $2.88 to $57.50 per share and remained outstanding under the Director Plan,
of which 93,334 were exercisable.
1996 Employee Stock Purchase Plan
On February 2, 1996, the 1996 Employee Stock Purchase Plan ("1996 Purchase
Plan") was adopted by the Company's Board of Directors. The 1996 Purchase Plan
authorizes the issuance of a maximum of 1,000,000 shares of common stock and is
administered by the Compensation Committee of the Board of Directors. All
employees of the Company who have completed six months of service with the
Company are eligible to participate in the 1996 Purchase Plan with the exception
of those employees who own 5% or more of the Company's stock and directors who
are not employees of the Company may not participate in this plan. Employees
elect to have deducted from 1%-10% of their base compensation. The exercise
price for the option is the lesser of 85% of the fair market value of the common
stock on the first or last business day of the purchase period (6 months). An
employee's rights under the 1996 Purchase Plan terminate upon his or her
voluntary withdrawal from the Plan at any time or upon termination of
employment.
Stock-Based Compensation
The Company has recorded deferred compensation for the difference between
the grant price and the estimated fair value of certain of the Company's stock
options granted in connection with acquisitions, in accordance with Statement of
Financial Accounting Standards Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation". The deferred compensation is
being amortized over the vesting period of the individual options on a
straight-line basis, determined separately for each portion of the options that
vest in each year. Deferred compensation expense recognized for the years ended
July 31, 2000, 1999 and 1998 was approximately $75,000, $71,000, and $46,000
respectively.
The Company has adopted the disclosure provisions of SFAS No. 123 with
respect to its stock-based compensation. The effects of applying SFAS No. 123 in
this pro forma disclosure may not be representative of the effects on reported
income or loss for future years. SFAS 123 does not apply to awards prior to
1995. The Company anticipates additional awards in future years. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the grant date fair value in accordance with SFAS 123, the
Company's net loss and net loss per share for the years ended July 31, 2000,
1999 and 1998 would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
AS REPORTED PRO FORMA
------------------------------ ------------------------------
NET INCOME DILUTED INCOME NET INCOME DILUTED INCOME
(LOSS) (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
---------- ---------------- ---------- ----------------
Year ended July 31, 2000.......... $ 21,005 $ 0.19 $ (98,432) $(0.94)
Year ended July 31, 1999.......... $(52,082) $(0.59) $(133,617) $(1.51)
Year ended July 31, 1998.......... $(28,314) $(0.44) $ (35,449) $(0.55)
The grant date fair value of each stock option was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected life
of four years for 2000, 1999 and 1998; volatility of 96% for 2000, 115% for 1999
and 100% for 1998; dividend yield of 0% for 2000, 1999 and 1998; weighted
average risk-free interest rate of 6.0% in 2000, 6.0% in 1999 and 5.5% in 1998.
32
33
\ LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average grant date fair values of options granted in 2000, 1999 and
1998 were $30.58, $8.24 and $2.44, respectively.
8. INCOME TAXES
The provision for income taxes reflected in the consolidated statements of
operation consist of the following:
YEAR ENDED JULY 31,
------------------------
2000 1999 1998
-------- ---- ----
(IN THOUSANDS)
Current:
Federal............................................... $29,553 $-- $ --
State................................................. 8,112 -- --
-------- ---- ----
37,665 -- --
Deferred:
Federal............................................... 60,007 138 --
State................................................. 16,474 -- --
-------- ---- ----
76,481 138 --
-------- ---- ----
$114,146 $138 $ --
======== ==== ====
Substantially all of the Company's current tax liability is offset by the
tax benefit of employee stock options.
The actual tax expense for 2000, 1999 and 1998 differs from expected tax
expense (benefit), computed by applying the statutory U.S. Federal corporate tax
rate of 34% to earnings before income taxes, as follows:
YEAR ENDED JULY 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Computed expected tax expense (benefit)............ $ 45,951 $(17,660) $(9,626)
State income taxes, net of federal benefit......... 16,227 -- --
Nondeductible amounts and other differences:
In process research and development.............. -- -- 5,875
Goodwill and other intangible asset
amortization.................................. 45,581 16,881 2,301
Tax on conversion of S Corporation to C
Corporation................................... -- 138 --
S Corporation earnings not taxed................. -- -- (43)
Other............................................ 420 91 85
Change in valuation allowance for deferred taxes
allocated to income tax expense.................. 5,967 688 1,408
-------- -------- -------
$114,146 $ 138 $ --
======== ======== =======
33
34
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 2000 and 1999 deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these temporary
differences are presented below:
JULY 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Book over tax basis of developed technology............... $ 8,443 $ 5,259
Financial basis in excess of income tax basis of
available-for-sale securities.......................... 20,893 12,582
Financial basis in excess of income tax basis of gain on
Lycos Europe........................................... 80,328 --
-------- --------
Total deferred liabilities.................................. 109,664 17,841
-------- --------
Deferred tax assets:
Deferred Revenue.......................................... 422 2,086
Reserves.................................................. 7,028 4,977
Tax in excess of book basis for differences in equity
investments............................................ (2,380) (2,410)
Net operating losses and credit carryforwards............. 87,788 57,050
Basis difference in equity loss........................... 6,130 --
Other..................................................... 1,846 2,501
-------- --------
Total gross deferred tax assets............................. 100,834 64,204
Less valuation allowance.................................... (67,425) (46,501)
-------- --------
Net deferred tax asset...................................... 33,409 17,703
-------- --------
Net deferred income tax liability........................... $ 76,255 $ 138
======== ========
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some or all of the deferred
tax asset will not be realized. The Company believes that sufficient uncertainty
exists regarding the realizability of the deferred tax assets such that
valuation allowances of $67.4 million and $46.5 million for July 31, 2000 and
1999 respectively, have been established for deferred tax assets.
At July 31, 2000, the Company had approximately $230.6 million of federal
and state net operating loss carryforwards which will begin to expire in 2007
for federal purposes and 2004 for state purposes. Utilization of the net
operating losses may be subject to an annual limitation imposed by change in
ownership provisions of Section 382 of the Internal Revenue Code and similar
state provisions.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and recognized subsequent to
the acquisitions will be applied first to reduce to zero any goodwill and other
noncurrent intangible assets related to the acquisitions. Any remaining benefits
would be recognized as reduction of income tax expense. As of July 31, 2000,
$29.8 million of the Company's deferred tax assets and the valuation allowance
pertain to acquired companies, the future benefits of which will be applied
first to reduce to zero any goodwill and other noncurrent intangible assets
related to the acquisitions prior to reducing the Company's income tax expense.
The deferred tax assets and related valuation allowance of approximately $37.1
million relate to certain operating loss carryforwards resulting from the
exercise of employee stock options,
34
35
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the tax benefit of which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of income tax expense.
The Company's deferred tax liability relates solely to the difference in
basis of acquired assets as well as the tax effects of unrealized gains of
available-for-sale securities and the tax effects of the gain of the Lycos
Europe investment. A portion or all of net operating loss carryforwards which
can be utilized in any year may be limited by changes in ownership of the
Company, pursuant to Section 382 of the Internal Revenue Code and similar
statutes.
9. RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, Lycos, Carnegie Mellon
University ("CMU"), CMG@Ventures and CMGI entered into a license agreement
("License Agreement") pursuant to which CMU granted the Company a perpetual,
exclusive (with certain limited exceptions), worldwide license to use the Lycos
Internet search and indexing technology and the Lycos Catalog. The Company paid
licensing fees and additional payments equal to 50% of certain cash receipts, as
defined, totaling approximately $1.25 million. All amounts due under the License
Agreement were paid as of July 31, 1996. The Company also issued 4,000,000
shares of common stock in connection with this Agreement. The License Agreement
was fully amortized as of July 31, 1998.
On February 9, 1996, the Company sold 366,320 shares and 160,000 shares of
common stock and options to acquire 238,904 shares and 104,344 shares of common
stock to CMU and Dr. Michael Mauldin, respectively, for an aggregate purchase
price of $328,950, pursuant to the exercise of preemptive rights granted to
these parties in the License Agreement. These preemptive rights were exercised
in connection with the issuance of shares of common stock pertaining to the
Company's acquisition of Point Communications on October 12, 1995. The options
granted to Dr. Mauldin and CMU have an exercise price of $0.50 per share and
became fully vested upon completion of the Company's initial public offering in
April 1996.
In addition to amounts paid to CMU in connection with the License
Agreement, the Company was also required to pay to CMU an additional $525,000
pursuant to two licenses granted by CMU which were assigned to the Company.
In April 1998 the remaining carrying value of the License Agreement of
approximately $831,000 was written off as it was not considered to have any
remaining future economic benefit.
During 2000, the Company entered into certain agreements in connection with
its joint ventures whereby the Company licensed certain of its technology and
tradenames to its joint venture partners. For the year ended July 31, 2000 the
company recognized advertising revenue of $417,000, $38,000 and $1,944,000 from
license agreements with Lycos Bertelsmann, Lycos Japan KK and Lycos Canada,
respectively. For the year ended July 31, 2000 the company recognized electronic
commerce revenue of $2,083,000, $188,000 and $1,944,000 from license agreements
with Lycos Bertelsmann, Lycos Japan KK and Lycos Canada, respectively.
10. LITIGATION
In November 1999 and July 2000, Fleming W. Reynolds, Sr., Trustee of AIWF
Trust, a former shareholder of WiseWire Corporation, filed related lawsuits in
the Court of Common Pleas of Allegheny County, Pennsylvania against WiseWire,
representatives of former shareholders of WiseWire, and Lycos, as WiseWire's
alleged successor in interest. In these lawsuits, subsequently consolidated,
Reynolds alleged that pursuant to a 1996 subscription agreement between AIWF
Trust and WiseWire, AIWF Trust was entitled to 2,500,000 shares of WiseWire
common stock instead of the 25,000 shares it received. AIWF Trust seeks the
equivalent of 2,500,000 shares of WiseWire
35
36
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock in Lycos common stock, which amounts to approximately 748,000
shares of Lycos common stock. Lycos believes that the allegations in these
complaints are without merit and intends to contest them vigorously. In August
2000, Reynolds, as Trustee of AIWF Trust, filed a separate lawsuit in Chancery
Court, Sussex County, Delaware, seeking a declaration that AIWF Trust is
entitled to 748,000 shares of Lycos and an injunction of the combination with
Terra Networks until a determination regarding its shares has been made. Lycos
believes that the allegations in this complaint are without merit and intends to
contest them vigorously. Lycos filed a counterclaim for a determination of the
number of shares to which AIWF Trust is entitled. The Chancery Court has set
trial for this matter for October 2000. In addition, Lycos has asserted a claim
against the escrow deposit created in connection with Lycos' acquisition of
WiseWire, which currently contains approximately 329,000 shares of Lycos common
stock.
In February 1999, the Company announced its intention to enter into a
transaction with USA Networks, Inc. and certain affiliated companies pursuant to
which, among other things, Lycos would have been merged into a subsidiary of USA
Networks. In May 1999, the parties to the proposed transaction terminated the
merger by mutual agreement.
Prior to such termination, eight purported class action lawsuits were filed
in the Court of Chancery for the State of Delaware in and for New Castle County,
by shareholders of the Company allegedly on behalf of all common stockholders of
the Company. The complaints request, among other things, that the proposed
transaction be enjoined or that rescissionary damages be awarded to the
purported class and that plaintiffs be awarded all costs and fees, including
attorneys' fees. Although the proposed merger has since been terminated, the
suits have not been dismissed. Lycos believes that the allegations in the
complaints are without merit and intends to contest them vigorously.
Also prior to the termination of the proposed merger, a series of purported
securities class action lawsuits were filed in the United States District Court
for the District of Massachusetts. The suits, which have since been
consolidated, allege, among other claims, violations of United States Federal
securities law through alleged misrepresentations and omissions relating to the
announced transaction with USA Networks. The consolidated complaint seeks an
unspecified award of damages. Lycos believes that the allegations in the
consolidated complaint are without merit and intends to contest them vigorously.
A motion to dismiss the consolidated complaint is pending.
In July 2000, Lycos filed a lawsuit in Superior Court for Middlesex County,
Commonwealth of Massachusetts, against TJ Motorsports, Inc. (d/b/a Tyler Jet
Motorsports), Burl Outlaw and ISM Motorsports Corp. seeking a declaratory
judgment that Lycos had fulfilled all its contractual obligations in connection
with a sponsorship agreement between Lycos and TJ Motorsports, the owner and
operator of a NASCAR Winston cup race car. Subsequently, in July 2000, Tyler
Jet, L.L.C. (an entity allegedly related to TJ Motorsports) and TeamXtreme
Racing, L.L.C. filed suit against Lycos in United States District Court for the
Eastern District of Texas, Lufkin Division, seeking damages for breach of
contract and fraudulent inducement in connection with the above-referenced
sponsorship agreement and an earlier sponsorship agreement between TeamXtreme
Racing and Lycos. Plaintiffs in the Texas action seek actual damages of $15
million and punitive damages of $100 million. Lycos believes that plaintiffs'
allegations in the Texas action are without merit and intends to contest them
vigorously.
The Company is also 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 such actions will not materially affect the
financial position, results of operation or cash flows of the Company.
36
37
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT (UNAUDITED)
On September 20, 2000, Lycos Europe signed an agreement to acquire all of
the outstanding share capital of Spray Network N.V. ("Spray") in exchange for
the issuance of 84,300,000 shares of Lycos Europe. Spray is a private company
incorporated in the Netherlands and operates an internet new media company that
offers a branded network of media, commerce and communication products and
services throughout Europe. Under the terms of the agreement, Lycos Europe also
may issue up to an additional 10,000,000 shares to certain Spray shareholders in
exchange for cash consideration of 100 million euro. As a result of the
transaction, Spray shareholders will own approximately 29.26% of Lycos Europe's
outstanding share capital and Lycos' equity ownership in Lycos Europe will be
reduced from 43.86% to 31.03% of the total outstanding share capital assuming
the issuance of 94,300,000 shares.
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial information for
the years ended July 31, 2000 and 1999. The operating results for any given
quarter are not necessarily indicative of results for any future period.
FISCAL 2000 QUARTER ENDED FISCAL 1999 QUARTER ENDED
------------------------------------- -------------------------------------
OCT. 31 JAN. 31 APR. 30 JUL. 31 OCT. 31 JAN. 31 APR. 30 JUL. 31
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues.............. $55,858 $68,575 $78,603 $87,914 $25,139 $31,115 $35,838 $46,448
Gross profit................ 43,860 55,732 64,839 73,720 19,784 24,542 28,561 36,380
Net income (loss)........... (30,919) (30,995) 122,410 (39,490) (3,576) (13,813) (13,220) (21,473)
Net income (loss) per share:
Basic..................... $ (.31) $ (.31) $ 1.11 $ (.36) $ (.04) $ (.16) $ (.15) $ (.22)
Diluted................... $ (.31) $ (.31) $ 1.05 $ (.36) $ (.04) $ (.16) $ (.15) $ (.22)
37