===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to ________
COMMISSION FILE NUMBER: 0-20939
CNET NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3696170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CHESTNUT STREET
SAN FRANCISCO, CA 94111
(Address of principal executive officers) (zip code)
TELEPHONE NUMBER (415) 364-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of July 31, 2000 there were 86,985,411 shares of the registrant's common
stock outstanding.
===============================================================================
Part 1. Financial Information
Item 1. Financial Statements
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's OMITTED)
June 30, December 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $102,825 $53,063
Investments in marketable debt securities . 126,237 65,985
Investments in marketable equity securities 259,421 785,909
Accounts receivable, net. . . . . . . . . . 29,349 24,628
Other current assets. . . . . . . . . . . . 21,330 18,743
Restricted cash . . . . . . . . . . . . . . 809 740
------------- -------------
Total current assets . . . . . . . . . 539,971 949,068
Investments in marketable debt securities. . . . 108,904 109,802
Investments in marketable equity securities. . . 15,704 -
Property and equipment, net. . . . . . . . . . . 42,619 30,044
Other assets . . . . . . . . . . . . . . . . . . 95,670 50,609
Goodwill . . . . . . . . . . . . . . . . . . . . 685,015 90,788
------------- -------------
Total assets $1,487,883 $1,230,311
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $10,737 $11,461
Accrued liabilities . . . . . . . . . . . . 30,833 16,398
Current portion of long-term debt . . . . . 6,389 5,750
Tax related liabilities . . . . . . . . . . 115,081 311,750
------------- -------------
Total current liabilities. . . . . . . 163,040 345,359
Long-term debt . . . . . . . . . . . . . . . . . 197,257 179,114
------------- -------------
Total liabilities. . . . . . . . . . . 360,297 524,473
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 9 7
Additional paid in capital. . . . . . . . . 922,843 218,670
Other comprehensive income (loss) . . . . . (89,697) 121,409
Retained earnings . . . . . . . . . . . . . 317,406 365,752
Treasury stock, at cost . . . . . . . . . . (22,975) -
------------- -------------
Total stockholders' equity . . . . . . 1,127,586 705,838
------------- -------------
Total liabilities and stockholders'
equity $1,487,883 $1,230,311
============= =============
See accompanying notes to condensed consolidated financial statements
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's OMITTED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
------------- ------------ ------------- -----------
Revenues:
Internet. . . . . . . . . . . . . $49,235 $23,779 $91,278 $42,203
Broadcast . . . . . . . . . . . . 3,004 1,773 5,327 3,425
------------- ------------ ------------- -----------
Total revenues . . . . . . . . 52,239 25,552 96,605 45,628
Cost of revenues:
Internet. . . . . . . . . . . . . 14,043 7,467 28,115 14,456
Broadcast . . . . . . . . . . . . 2,161 1,768 4,883 3,375
------------- ------------ ------------- -----------
Total cost of revenues . . . . 16,204 9,235 32,998 17,831
------------- ------------ ------------- -----------
Gross profit . . . . . . . . . . . . 36,035 16,317 63,607 27,797
Operating expenses:
Sales and marketing . . . . . . . 22,823 6,996 37,551 12,116
Development . . . . . . . . . . . 4,093 1,656 6,540 3,164
General and administrative. . . . 6,686 2,408 12,680 5,195
Amortization of goodwill. . . . . 66,259 931 94,373 1,237
------------- ------------ ------------- -----------
Total operating expenses . . . 99,861 11,991 151,144 21,712
------------- ------------ ------------- -----------
Operating income(loss) . . . . . . . (63,826) 4,326 (87,537) 6,085
Other income (expense):
Gain on investments, net. . . . . 73,550 4,700 69,584 24,575
Other income (expense), net . . . 23 186 10 424
------------- ------------ ------------- -----------
Total other income (expense). . . 73,573 4,886 69,594 24,999
------------- ------------ ------------- -----------
Net income (loss) before income tax $9,747 $9,212 ($17,943) $31,084
Income tax expense . . . . . . . 30,402 - 30,402 -
------------- ------------ ------------- -----------
Net income (loss) after income tax ($20,655) $9,212 ($48,345) $31,084
============= ============ ============= ===========
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
arising during the period. . . . (143,444) 10,556 (211,106) 137,564
------------- ------------ ------------- -----------
Comprehensive income (loss) ($164,099) $19,768 ($259,451) $168,648
============= ============ ============= ===========
Basic net income (loss) per share. . ($0.24) $0.13 ($0.59) $0.44
============= ============ ============= ===========
Diluted net income (loss) per share. ($0.24) $0.11 ($0.59) $0.40
============= ============ ============= ===========
Shares used in calculating
basic per share data . . . . . . . 85,694 71,651 81,536 70,556
============= ============ ============= ===========
Shares used in calculating
diluted per share data . . . . . . 85,694 80,112 81,536 78,534
============= ============ ============= ===========
See accompanying notes to condensed consolidated financial statements.
CNET NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's OMITTED)
Six Months Ended
June 30,
------------------------
2000 1999
------------ -----------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . ($48,345) $31,084
Adjustments to reconcile net income (loss) to net
cash provided (used) in operating activities:
Depreciation and amortization. . . . . . . . . . 100,764 4,968
Amortization of program costs. . . . . . . . . . 3,771 3,294
Allowance for doubtful accounts. . . . . . . . . (179) (296)
Investments for services provided. . . . . . . . (6,260) -
Impairment of privately held investments . . . . 5,203 -
Gain on investments. . . . . . . . . . . . . . . (51,076) (24,579)
Foreign currency translation gain. . . . . . . . (393) -
Interest paid to derivative instrument holders . 1,966 -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . (4,542) (1,729)
Other current assets. . . . . . . . . . . . . (2,848) (11,284)
Other assets. . . . . . . . . . . . . . . . . (1,861) 739
Accounts payable. . . . . . . . . . . . . . . (724) 2,768
Accrued liabilities . . . . . . . . . . . . . 14,351 3,225
Tax related liabilities . . . . . . . . . . . 1,091 -
Benefit from exercises of stock options . . . 8,425 -
------------ -----------
Net cash provided by operating
activities . . . . . . . . . . . . . . . 19,343 8,190
------------ -----------
Cash flows from investing activities:
Purchase of marketable debt securities. . . . . . . (88,901) (100,562)
Purchase of equity investments. . . . . . . . . . . (31,888) (13,906)
Proceeds from sale of marketable debt securities. . 29,744 -
Proceeds from sale of marketable equity securities. 104,494 -
Investments in privately held companies . . . . . . (27,993) -
Cash deficit for acquisitions . . . . . . . . . . . (2,216) (6,642)
Purchase of treasury stock. . . . . . . . . . . . . (22,975) -
Purchases of equipment. . . . . . . . . . . . . . . (18,170) (6,689)
Purchases of programming assets . . . . . . . . . . (3,579) (3,577)
Deferred interest . . . . . . . . . . . . . . . . . - (690)
------------ -----------
Net cash used in investing activities. . . (61,484) (132,066)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of convertible debt. . . - 167,479
Proceeds from issuance of derivative instruments. . 81,629 -
Net proceeds from employee stock purchase plan. . . 819 419
Net proceeds from exercise of options and warrants 9,455 5,203
Principal payments on capital leases. . . . . . . . - (42)
Principal payments on equipment note. . . . . . . . - (1,640)
------------ -----------
Net cash provided by financing activities. 91,903 171,419
------------ -----------
Net increase in cash and cash equivalents . . . . . . 49,762 47,543
Cash and cash equivalents at beginning of period . . 53,063 51,538
------------ -----------
Cash and cash equivalents at end of period . . . . . $102,825 $99,081
============ ===========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $4,728 $165
Taxes paid. . . . . . . . . . . . . . . . . . . . . $28,459 $ -
Supplemental disclosure of noncash transactions:
Issuance of common stock for acquisitions . . . . . $685,476 $ -
Unrealized gain (loss) on marketable securities and
investments, net of deferred tax liability . . . ($211,106) $137,564
Deferred tax liability. . . . . . . . . . . . . . . $116,166 $57,337
Issuance of debt for acquisitions . . . . . . . . . $ - $5,098
See accompanying notes to condensed consolidated financial statements.
CNET NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented.
These condensed financial statements should be read in conjunction
with the audited consolidated financial statements included in the
Company's most recent annual report on Form 10-K, as filed with the
Securities and Exchange Commission, which contains additional
financial and operating information and information concerning the
significant accounting policies followed by the Company.
The condensed consolidated results of operations for the three
and six months ended June 30, 2000 are not necessarily indicative of the
results to be expected for the current year or any other period.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding during the period and
diluted net income (loss) per share is computed using the weighted average
number of shares of common stock and common stock equivalents outstanding
during the period. Net loss per share for the three months ended June 30,
2000 does not include the effect of approximately 5,307,426 common shares
related to options at an average exercise price of $13.03 or approximately
4,622,624 common shares related to the Convertible Subordinated Debt offering
at an average exercise price of $37.40 because their effect is anti-dilutive.
Net loss per share for the six months ended June 30, 2000 does not include
the effect of approximately 6,150,259 common shares related to options at
an average exercise price of $14.26 or approximately 4,622,624 common
shares related to the Convertible Subordinated Debt offering at an average
exercise price of $37.40 because their effect is anti-dilutive. Net income
per share for the period ended June 30, 1999, does not include the effect
of the potential conversion of convertible debt to approximately 4,622,624
common shares related to the Convertible Subordinated Debt offering because
their effect is anti-dilutive.
The following table sets forth the computation of net income
(loss) per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(unaudited)
Net income (loss) ($20,655) $ 9,212 ($48,345) $31,084
Basic and diluted: ============== ============ ============= ==========
Weighted average common shares
outstanding used in computing basic 85,694 71,651 81,536 70,566
net income (loss) per share ============== ============ ============= ==========
Basic net income (loss) per share ($0.24) $0.13 ($0.59) $0.44
============== ============ ============= ===========
Weighted average common shares
and dilutive common stock equivalents
outstanding used in computing diluted
net income (loss) per share 85,694 80,112 81,536 78,534
============== ============ ============= ===========
Diluted net income (loss) per share ($0.24) $0.11 ($0.59) $0.40
============== ============ ============= ===========
Income Taxes
Income tax expense has been recorded based on an estimated
effective tax rate for the year ended December 31, 2000. The estimated
effective tax rate has taken into consideration the book tax difference
for goodwill amortization in connection with the Company's acquisitions
earlier this year.
Marketable Securities
The Company adopted Statement of Financial SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Investments classified
as available for sale are reported at market value, with the
unrealized gains and losses, net of tax, reported as a separate
component of other comprehensive income (loss) in stockholders' equity.
Realized gains and losses on sales of investments and declines in
value determined to be other than temporary are included in other income
(expense).
Recent Accounting Pronouncements
The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
137 in June 1999, and SFAS No. 138 in June 2000 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. For a
derivative not designated as a hedging instrument, changes in the fair value
of the derivative are recognized in earnings in the period of change. The
Company will be required to adopt SFAS No. 133 for the year ended December
31, 2001. Management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position or operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No. 101. The SAB summarized certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB No. 101B was issued June 26, 2000 which allows registrants
until the fourth quarter of years beginning after December 15, 1999 to
implement SAB No. 101. SAB No. 101 as amended and any resulting change
in accounting principle that a registrant would have to report, is effective
no later than the Company's fiscal quarter ending December 31, 2000.
CNET does not expect the application of SAB No. 101 to have a material
effect in its financial position or results of operations, nor do we expect
to report a change in accounting principle resulting from its application.
In March 2000, FASB issued Financial Interpretation No. 44 ("FIN44").
FIN 44 clarifies (a) the definition of employee for purposes of applying
Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued
to Employees, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
this Interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this Interpretation covers
events occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
CNET does not expect the application of FIN 44 to have a material effect on
its financial position or results of operations.
(2) Debt
In February 2000, the Company issued an indexed debt instrument
in a public offering of Trust Automatic Common Exchange Securities
("Traces") by NBCi through an Automatic Common Exchange Security Trust
(the "Trust"). The Traces offering consisted of 1,250,000 instruments
which were sold for $81.38 per share, with gross proceeds to the
Company of $102 million ($82 million net of $20 million prepaid interest
described below). The Traces bear interest at an annual rate
of 7.25%, which will be paid on a quarterly basis by the Trust.
The Traces are payable on February 15, 2003, whereby the holder
can exchange each security with the Company for either (i) between
.833 shares and one share of NBCi common stock that the
Company holds, (ii) cash equal to the value of those shares, or
(iii) a combination of those shares and cash, at the election of the
Company. The Company has recorded its obligation to the Trust as
long-term debt. As a part of the transaction, the Company pledged
1,250,000 shares of NBCi common stock and contributed approximately $20
million as prepaid interest to the Trust. The Company has recorded
the pledged shares (at market value) and the prepaid interest as
long-term investment in marketable equity securities and other assets,
respectively.
The number of shares, or the amount of cash, that a holder will
receive in exchange for a security will vary, depending on the average
market price of the common stock of NBCi over the twenty business
days before the exchange date. If the average market price is between
$81.38 and $97.65, then the holder will receive the value commensurate
with one share of NBCi common stock for each Trace. If the
average market price is equal to or greater than $97.65, then the
holder will receive value commensurate with 0.833 shares of NBCi common
stock for each Trace. If the average market price is less than $81.38,
then the holder will receive value commensurate with one share of NBCi
common stock for each Trace.
On June 30, 2000 the closing price of NBCi common stock was
$12.56 per share. Accordingly the Company adjusted its long-term
debt related to the Traces to $15.7 million, resulting in an unrealized
gain of $38.1 million which was recorded in other comprehensive income
in the stockholders' equity section of the balance sheet.
(3) Other Income (Expense)
The Company's reported other income (expense) includes a 19% share
of the unconsolidated losses of CNET Asia, a joint venture CNET entered
into on January 12, 2000 with Asiacontent.com, a leading Asia
Internet media network. The operations of the joint venture began in April,
and the Company's share of the losses amounted to $381,908 for the three month
period ended June 30, 2000.
(4) Comprehensive Income
The Company has adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which established standards for
reporting and disclosures of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Financial statements for earlier
periods have been reclassified for comparative purposes.
During the three months ended June 30, 2000 the Company
reported unrealized holding losses arising from investments amounting
to $143.4 million. There was an unrealized gain in this period of $38.1
million related to the Traces debt (see Note 2) for which no taxes were
recorded.
As of June 30, 2000, the Company owns 1,982,326 shares
of Vignette Corporation ("Vignette"), 717,972 shares of beyond.com,
1,857,967 shares of Mail.com, Inc. ("Mail.com"), 6,497,584
shares of NBC Internet Inc., ("NBCi) (1,250,000 of these shares are pledged;
see Note 2), 1,000,000 shares of Niku Corp. ("Niku"), 874,056 shares of
Deltathree.com, Inc. ("deltathree"), 240,000 shares of Ebiz Enterprises,
Inc. ("Ebiz"), and 5,754 shares of Digital River, and 195,000 shares of
Siebel Systems, Inc. ("Siebel"), all public companies.
(5) Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting by public business enterprises
of information about operating segments, products and services,
geographic areas and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operating decisions and
assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenue and cost of revenue by operating segment for
purposes of making operating decisions and assessing financial performance.
The consolidated information reviewed by the CEO is identical to the
information presented in the accompanying financial statement of
operations. The Company operates in two segments, Internet operations and
broadcast operations. Asset information regarding Internet operations
and broadcast operations is as follows:
(000s)
(unaudited)
June 30, December 31,
2000 1999
--------- ---------
Broadcast 1,485 1,241
CNET Online 1,486,398 1,229,070
---------- ----------
Consolidated Total 1,487,883 1,230,311
========== ==========
(6) Subsequent Events
On July 14, 2000, the Company acquired the remaining 80.1 percent of Apollo
Solutions, Inc. ("Apollo"), a Delaware Corporation, through the merger of
Apollo into the Company. CNET had acquired a 19.9 percent interest in Apollo
on December 8, 1999. Pursuant to the merger, the Company paid $2.0 million
in cash and issued 312,000 shares of common stock valued at $9.4 million
as of the date of issuance. Apollo provides a Web-based application where Value
Added Resellers, IT consultants and resellers can access real time product
information, pricing and availability from multiple manufacturers and dis-
tributors. The Company will record this transaction using the purchase method
of accounting and will amortize any goodwill by use of the straight-line method
over a three year period.
On July 19, 2000, CNET announced that it had entered into a definitive
agreement to acquire Ziff-Davis, Inc., a Delaware Corporation. The merger
agreement provides for the merger of a subsidiary of CNET with and into
Ziff-Davis with Ziff-Davis surviving the merger. As a result of the merger,
each share of Ziff-Davis common stock (NYSE:ZD) will convert into 0.3397 shares
of our common stock (NASDAQ: CNET) and each share of ZDNet common stock (NYSE:
ZDZ) will convert into 0.5932 shares of our common stock. We expect to close
the merger in the fourth quarter of 2000. The merger agreement contains
customary closing conditions, including approval from the stockholders of both
companies and termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Softbank, which owns a majority of the
voting stock in Ziff-Davis, and members of the CNET management who together
own about 20% of our voting stock, have agreed to vote for the transaction.
The transaction is expected to be recorded using the purchase method of
accounting.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Overview
CNET Networks, Inc. is a global media company, producing a branded
Internet network, a computer product database and television and radio
programming for both consumers and businesses. Using unbiased content as
our platform, we have built marketplaces for technology products, and,
through our CNET Data Services subsidiary, are the primary provider of
information powering the computer and electronics sales and distribution
channels. Our Internet network serves millions of users each day. CNET Data
Services licenses its multi-lingual product database to U.S. and European
online computer retailers, re-sellers and e-commerce companies. CNET
television programming airs on CNBC and in national syndication, as well as
in nearly 100 foreign countries. CNET Radio airs in the San Francisco Bay
Area on KNEW 910 AM.
We seek to use our editorial, technical, and programming expertise and
our product databases to provide news, product information, product
reviews, prices and availability to help business and consumers make
informed technology buying decisions. Based on the volume of traffic over
our branded online network,we have established a leadership position in our
market. In 1999, CNET's millions of online users viewed more than 4
billion pages making CNET the most used source for computer and technology
information.
Our products and services provide a platform for advertisers to create
brand awareness and sell products to our large, tech-savvy audience. CNET
is also actively providing information and services to businesses to enable
and enhance online retailing of computer and technology products. Our
products and services are designed to inform buyers and link them with
sellers of products and services to create a dynamic, efficient
marketplace.
We earn revenues from:
- sales of banner and sponsorship advertisements on our
online network
- fees based on the number of CNET users who visit the
websites of our merchant partners, which we refer to
as leads
- advertising sales and licensing fees from our television
and radio programming
- revenues from licensing our original content
- revenues from merchandising services within our product database
On February 29, 2000 we completed our acquisition of mySimon, Inc., the
Internet's leading comparison shopping service. We have accounted for this
transaction using the purchase method of accounting, thus have consolidated
the results of mySimon in our financial statements beginning February 29,
2000.
Results of Operations
Revenues
Total Revenues
Total revenues were $52.2 million and $25.6 million for the three
months and $96.6 million and $45.6 million for the six months ended June
30, 2000 and 1999, respectively.
Internet Revenues
Total Internet revenues were $49.2 million and $23.8 million for
the three months and $91.3 million and $42.2 million for the six months
ended June 30, 2000 and 1999, respectively. Internet revenues consist
primarily of revenues derived from the sale of advertisements on pages
delivered to users of our Internet network. Revenues also include revenues
from licensing our original content and from licensing our product
database. Advertising programs are generally delivered on either an
"impression" based program or a "performance" based program. An impression
based program earns revenues when an advertisement is delivered to a user
of our Internet network. A performance based program earns revenues when a
user of our Internet network responds to an advertisement by linking to an
advertiser's Internet network. Performance based programs include revenues
generated from lead-based compensation from our shopping services.
Advertising rates vary depending upon whether a program is impression or
performance based, where advertisements are placed, and the amount and
length of the advertiser's commitment. Advertising revenues are recognized
in the period in which the advertisements are delivered. Our ability to
sustain or increase revenues for Internet advertising will depend on
numerous factors, which include, but are not limited to, our ability to
increase our inventory of delivered Internet pages on which advertisements
can be displayed and our ability to maintain or increase advertising rates.
The increase in Internet revenues of $25.5 million for the three month
and $49.1 million for the six month periods ended June 30, 2000 compared to
the same periods in 1999 were primarily attributable to an increase in
impression and performance based advertising programs sold on our network.
This increase in advertising programs sold was due to increased demand from
advertisers and increased availability of advertising programs. Additional
advertising programs were available due to an increase in the number of
pages delivered to users of our network and increased leads sent to
advertisers on our network. Average daily pages delivered were 16.9 million
for the three month period and 16.5 million pages for the six month
period ended June 30, 2000 an increase of 57% over 10.8 million for the
three month period and an increase of 63% for the six month period in 1999,
respectively. Our shopping services generated an average of approximately
200,000 leads per day during the three month period and approximately
209,000 leads per day during the six month period ended June 30, 2000, an
increase of 54% and 48% over the same periods in 1999.
Internet revenues included revenues from mySimon, which we began to
consolidate into our financial results effective February 29, 2000.
Revenues related to mySimon were approximately $2.7 million for the three
months and $3.4 million for the period from March 1, 2000 through
June 30, 2000.
A portion of our Internet revenues were derived from barter
transactions whereby we delivered advertisements on our Internet channels
in exchange for advertisements on the Internet sites of other companies.
Revenues related to barter transactions were $3.0 million and $1.5 million
for the three months and $4.6 and $2.7 for the six months ended June 30,
2000 and 1999, respectively.
Broadcast Revenues
Broadcast revenues were $3.0 million and $1.8 million for the three
months and $5.3 million and $3.4 million for the six months ended June 30,
2000 and 1999, respectively.
For the three and six month periods ended June 30, 1999, a significant
portion of our broadcast revenues were derived from our licensing
agreements with USA Networks. These licensing agreements with USA Networks
generated revenues of approximately $1.5 million and $3.0 million for the
three and six month periods ended June 30, 1999, respectively. Our
agreement with USA Networks expired on December 31, 1999 and was not
renewed.
In May 1999 we entered into an agreement with the National
Broadcasting Company ("NBC") whereby NBC granted certain rights to CNBC,
Inc. ("CNBC") to carry the sixty minute television program we produce
called "CNET News.com". The term of the agreement is from October 1, 1999
through September 30, 2002 and CNBC will pay us an annual fee based on the
cost of production, not to exceed $2.5 million per year. We also have the
right to sell certain commercial time available on the program. We also
produce a television program, TV.com, which is exclusively distributed by
Trans World International ("TWI"). We sell advertisements on TV.com and pay
a distribution fee to TWI. In January 2000 we announced the launch of CNET
Radio, an all technology news station broadcast in the San Francisco Bay
Area. CNET Radio was launched in collaboration with AMFM, Inc. We will
share revenues earned from advertising on CNET Radio with AMFM, Inc.
Internet operations accounted for 94% and 93% of total revenues and
broadcast operations accounted for 6% and 7% of total revenues for the
three months ended June 30, 2000 and 1999, respectively. Internet
operations accounted for 94% and 92% of total revenues and broadcast
operations accounted for 6% and 8% of total revenues for the six months
ended June 30, 2000 and 1999, respectively. We expect to experience
fluctuations in Internet and broadcast revenues in the future as a result
of many factors, including demand for the Company's Internet sites and
broadcast programming and our ability to develop, market and introduce new
and enhanced Internet content and broadcast programming.
Cost of Revenues
Total Cost of Revenues
Total cost of revenues were $16.2 million and $9.2 million for the
three months and $33.0 million and $17.8 million for the six months ended
June 30, 2000 and 1999, respectively. Cost of revenues include costs
associated with the production and delivery of our Internet channels and
our broadcast programming. The principal elements of cost of revenues for
our Internet operations have been payroll and related expenses for the
editorial, production and technology staff, and costs for facilities and
equipment. The principal elements of cost of revenues for our broadcast
operations have been the production costs of our broadcast programs, which
primarily consist of payroll and related expenses for the editorial and
production staff and costs for facilities and equipment.
Cost of Internet Revenues
Cost of Internet revenues were $14.0 million and $7.5 million for
the three months and $28.1 million and $14.5 million for the six months
ended June 30, 2000 and 1999, respectively, representing 29%, 31%, 31% and
34% of the related revenues, respectively. The increase of $6.6 million
and $13.7 million for the three and six month periods ended June 30, 2000
as compared to the same periods in 1999 were primarily attributable to
increases in personnel and personnel related costs. In addition, we had
additional costs for server depreciation and bandwidth costs related to
delivering an increased number of average daily pages.
Cost of Broadcast Revenues
Cost of broadcast revenues were $2.2 million and $1.8 million for
the three months and $4.9 million and $3.4 million for the six months ended
June 30, 2000 and 1999, respectively, representing approximately 72%, 100%,
92% and 99% of the related revenues. The increase of $393,000 and $1.5
million for the three and six month periods ended June 30, 2000 as compared
to the same periods in 1999 related primarily to increases in personnel and
personnel related costs for CNET Radio and costs associated with CNET
News.com and TV.com.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and
related expenses, consulting fees and advertising expenses. Sales and
marketing expenses were $22.8 million and $7.0 million for the three months
and $37.6 million and $12.1 million for the six months ended June 30, 2000
and 1999, respectively, representing 44%, 27%, 39% and 27% of total
revenues for each of the periods. Sales and marketing expenses increased
$15.8 million and $25.4 million for the three and six month periods ended
June 30, 2000 compared to the same periods in 1999. The increase in sales
and marketing expenses primarily related to marketing campaigns designed
to continue to build awareness of our brands, both CNET and mySimon, and to
drive additional traffic to our sites. Prior to July 1999, we had not
significantly marketed our brand. A portion of the increase in sales and
marketing expense primarily related to increases in sales and marketing
personnel and their related expenses.
Development
Development expenses include expenses for the development and
production of new Internet channels and research and development of new or
improved technologies, including payroll and related expenses for
editorial, production and technology staff, as well as costs for facilities
and equipment.
Development expenses were $4.1 million and $1.7 million for the three
months and $6.5 million and $3.2 million for the six months ended June 30,
2000 and 1999, respectively, representing 8%, 6%, 7% and 7% of total
revenues for each of the periods. The increase in development expenses of
$2.4 million and $3.4 million for the three and six month periods ended
June 30, 2000 as compared to the same periods in 1999 were attributable to
additional personnel costs related to the enhancement of the functionality
of our Internet network, including mySimon.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, finance and administrative personnel, professional
fees and other general corporate expenses. General and administrative
expenses were $6.7 million and $2.4 million for the three months and $12.7
million and $5.2 million for the six months ended June 30, 2000 and 1999,
respectively, representing 13%, 9%, 13% and 11% of total revenues for each
of the periods, respectively. General and administrative expenses increased
$4.3 million and $7.5 million for the three and six month periods ended
June 30, 2000 compared to the same periods in 1999. The increases
primarily related to facilitating our growth, such as increased personnel
and personnel related costs.
Goodwill Amortization
Goodwill amortization expenses relate to the amortization of the
goodwill we record for companies we have acquired where we use the purchase
method of accounting. Goodwill amortization expenses were $66.3 million and
$931,000 for the three months and $94.4 million and $1.2 million for the
six months ended June 30, 2000 and 1999, respectively. During 1999 we
acquired six companies for which we used the purchase method of accounting.
These acquisitions included Winfiles.com, GDT, Nordby, Savvy Search
and Manageable Software Services, Inc. During the six months ended
June 30, 2000 we acquired mySimon and Digital Media Services ("DMS") for
which we used the purchase method of accounting. We began amortizing the
goodwill associated with the acquisitions of mySimon and DMS on the
effective dates of the acquisitions, which were February 29, 2000 and
February 16, 2000, respectively. Goodwill attributed to the mySimon and DMS
acquisitions totaled $686.4 million. We are amortizing goodwill related to
these acquisitions on a straight-line basis over an estimated useful life
of three years.
Gain (loss) on Investments
We had a net gain on investments of $73.6 million and $4.7 million
for the three months and $69.6 million and $24.6 million for the six months
ended June 30, 2000 and 1999, respectively. The gain on investments for the
three and six months ended June 30, 2000 was primarily related to sales of
a portion of our equity holdings in Vignette for gains of approximately
$50.0 million and a gain of approximately $23.9 million which we recognized
related to a merger between a privately-held company in which we held an
equity investment and Siebel Systems Inc. The gains on investments for the
three months ended March 31, 1999 related to the merger agreement between
beyond.com and BuyDirect.com which resulted in our owning shares of
beyond.com.
Income Taxes
We recorded an income tax expense of $30.4 million for the three
months ended June 30, 2000. We did not record income tax expense in the
previous quarter, thus our income tax expense for the six months ended June
30, 2000 is also $30.4 million. The income tax expense recorded during the
three months ended June 30, 2000 was based on an estimated tax rate for the
year ended December 31, 2000, and is primarily related to the net gains on
investment sales. The estimated effective tax rate has taken into
consideration the goodwill amortization in connection with various
acquisitions which is not tax deductible. We did not record an income tax
expense in the similar periods in 1999 as we had sufficient net operating
loss carryforwards to offset our net income.
Net Income (Loss)
We recorded a net loss of $20.7 million or $0.24 per diluted share
for the three months ended June 30, 2000 compared to net income of $9.2
million or $0.11 per diluted share for the three months ended June 30,
1999. We recorded a net loss of $48.3 million or $0.59 per diluted share
for the six months ended June 30, 2000 compared to net income of $31.1
million or $0.40 per diluted share for the six months ended June 30, 1999.
Net income decreased $29.9 million for the three months ended June 30, 2000
as compared to the comparable period in 1999. The decrease related
primarily to additional goodwill amortization of $65.3 million, an increase
in net gains on investments of $68.9 million and an increase in the
provision for income taxes of $30.4 million. Net income decreased $79.4
million for the six months ended June 30, 2000 as compared to the
comparable period in 1999. The decrease related primarily to additional
goodwill amortization of $93.1 million, an increase in gain (loss) on
investments of $45.0 million and an increase in the provision for income
taxes of $30.4 million.
Liquidity and Capital Resources
As of June 30, 2000, we had cash and cash equivalents of $102.8
million compared to $53.1 million on December 31, 1999. In addition, on
June 30, 2000 we had investments in short term and long term marketable
debt securities of $235.1 million and investments in short term and long
term marketable equity securities of $275.1 million. Net cash provided by
operating activities of $19.3 million for the six months ended June 30,
2000 was primarily due to changes in operating assets and liabilities of
$13.9 million. Net cash provided by operating activities for the six
months ended June 30, 2000 also included a net loss of $48.3 million and
non-cash gains on investments of $51.1 million, which were offset by
depreciation and amortization totaling $100.8 million. Net cash provided by
operating activities of $8.2 million for the six months ended June 30, 1999
was primarily due to net income of $31.1 million, offset by changes in
operating assets and liabilities of $6.3 million and non-cash gains on
investments of $24.6 million. Net cash used in investing activities of
$61.5 million for the six months ended June 30, 2000 was primarily
attributable to proceeds from the sale of marketable debt and equity
securities offset by the purchase of marketable debt and equity securities,
investments in privately held companies, cash paid for acquisitions and
capital expenditures. Net cash used in investing activities also included
the purchase of treasury stock for $23.0 million during the six months ended
June 30, 2000. Net cash used in investing activities of $132.1 million for
the six months ended June 30, 1999 was primarily related to investments in
marketable debt securities. Cash provided by financing activities of $91.9
million for the six months ended June 30, 2000 was primarily attributable
to the net proceeds from the issuance of our TRACES security of $81.6
million. Cash provided by financing activities of $171.4 million for the
six months ended June 30, 1999 was primarily attributable to proceeds from
the issuance of convertible debt of $167.5 million. We believe that
existing funds will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for the next 12 months.
As of June 30, 2000 we had obligations outstanding under notes
payable totaling $203.6 million. Notes payable included $173 million of 5%
Convertible Subordinated Notes, due 2006. In addition, the liability
related to our TRACES security was $15.7 million on June 30, 2000. Such
obligations were incurred to obtain proceeds for general corporate
purposes, to finance acquisitions and increases in marketing expenditures.
Seasonality and Cyclicality
We believe that advertising sales in traditional media, such as
television, are generally lower in the first and third calendar quarters of
each year than in the respective preceding quarters and that advertising
expenditures fluctuate significantly with economic cycles. Depending on
the extent to which the Internet is accepted as an advertising medium,
seasonality and cyclicality in the level of advertising expenditures
generally could become more pronounced for Internet advertising.
Advertising expenditures account for substantially all of our revenues, and
seasonality and cyclicality in advertising expenditures generally, or with
respect to Internet-based advertising specifically, could therefore have a
material adverse effect on our business, financial condition or operating
results. We may also experience seasonality in connection with our shopping
services, which may reflect seasonal trends in the retail industry. The
level of consumer retail spending generally decreases in the first and
third calendar quarters.
Special Note Regarding Forward-Looking Statements and Risk
Factors
Certain statements in this Quarterly Report on Form 10-Q contain "forward-
looking statements." Forward-looking statements are any statements other
than statements of historical fact. Examples of forward-looking statements
include projections of earnings, revenues or other financial items,
statements of the plans and objectives of management for future operations,
and statements concerning proposed new products and services, and
any statements of assumptions underlying any of the foregoing. In some
cases, you can identify forward-looking statements by the use of words
such as "may", "will", "expects", "should", "believes", "plans",
"anticipates", "estimates", "predicts", "potential", or "continue", and
any other words of similar meaning.
Risks that could cause the company's projections regarding its financial
conditions or results of operations, including projections regarding revenue
or net income, to vary include a decrease in user traffic due to competition
or failure to offer attractive products, inability to continue to secure
advertising commitments due to competition or reduced advertising spending
failure of advertisers to meet their commitments under the their contracts to
purchase advertising, the cost of the launch of new lines of business,
costs associated with technological improvements or the costs associated
with acquisitions, including the acquisition of ZD. Statements regarding the
expected completion of the transaction Ziff-Davis are subject to the risk
the closing conditions will not be satisfied, including the risk that
Ziff-Davis will not complete the spin-off of its events business, that
regulatory approvals will not be obtained or that the stockholders of CNET
will not approve the merger. Investors are urged to read the joint proxy
statement/prospectus regarding the merger when it is filed with the SEC
(www.sec.gov) because it will contain important information. Additional
cautionary statements and risk factors that could cause actual results to
differ materially from those reflected in the Company's forward-looking
statements are disclosed in "Management's Discussion and Analysis" and in
the Company's latest quarterly report on Form 10-Q and under the caption "Risk
Factors" in the Company's latest annual report on Form 10-K, copies of which
may be obtained from the Company or from the Securities and Exchange
Commission at prescribed rates and at the web-site www.sec.gov. All sub-
sequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
such factors.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in the discussion in this
report will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially. We undertake no obligation to publicly update any forward-
looking statements, whether as a result of new information, future events
or otherwise. You are advised, however, to consult any further disclosures
we make on related subjects in our reports to the SEC. Also note that we
provide the following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our businesses. These are
factors that we think could cause our actual results to differ materially
from expected and historical results. Other factors besides those listed
here could also adversely affect us. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
factors besides those listed here could also adversely affect us.
This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to the impact of interest rate changes and changes in
the market values of our investments.
Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We have not
used derivative financial instruments in our investment portfolio. We
invest our excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limit the
amount of credit exposure to any one issuer. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
Investment Risk. We invest in equity instruments of privately-held,
information technology companies for business and strategic purposes.
These investments are included in other long-term assets and are accounted
for under the cost method when our ownership is less that 20% and the
Company doesn't exert significant influence. For these non-quoted
investments, our policy is to regularly review the assumptions underlying
the operating performance and cash flow forecasts in assessing the carrying
values. We identify and record impairment losses on investments when
events and circumstances indicate that such assets might be impaired.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In August 1999, the Simon Property Group filed a complaint
against mySimon, Inc., which became a subsidiary of CNET Networks, Inc.
on February 29, 2000. The Simon Property Group is a real estate invest-
ment trust that owns and develops mall properties nationwide. The
complaint, which was filed in the Southern District of Indiana at
Indianapolis, alleges that our "mySimon" mark infringes the Simon Property
Group's "SIMON" mark. In October 1999, the Simon Property Group
moved for a temporary restraining order in the matter, which was
denied. Discovery has been completed and a jury trial has been set
for August 21, 2000. We still continue to vigorously defend mySimon
in this litigation. Although CNET believes that an unfavorable outcome
in this case is unlikely, it is impossible to predict the actual outcome.
If the court were to determine that the mySimon mark infringes the Simon
Property Group mark and force the combined company to discontinue use of
the mark and/or pay significant damages to Simon Property Group, there
could be a material adverse effect on the business, financial condition
and results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 14, 2000, the Company acquired the remaining 80.1 percent of
Apollo Solutions, Inc. ("Apollo"), a Delaware Corporation, that it did not
already own in exchange for $2.0 million in cash and 312,000 shares of common
stock. No underwriters wre involved in the transaction and we did not pay
any underwriting discounts or commission. The issuance of shares was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2000, CNET held its annual meeting of stockholders at which
Shelby Bonnie and Eric Robinson were re-elected as directors. Halsey Minor,
John "Bud" Colligan, Eric Robinson and Mitchell Kertzman continued as
directors following the meeting. The stockholder at the meeting voted on
the amendment of CNET's 1997 Stock Option Plan to approve additional shares.
Although a majority of shares represented at the meeting voted in favor of the
amendment, due to an error in the proxy statement, the vote was null and void.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of July 19, 2000, among
Ziff-Davis, the Company and Merger Sub. (1)
10.1 Office Lease by and between 235 Second Street LLC and CNET
Networks, Inc.
99.1 Press Release, dated as of July 19, 2000, of the Company. (1)
99.2 Stockholder Agreement, dated as of July 19, 2000, among the
Company, Softbank America Inc. and Softbank Corp. (1)
99.3 Voting Agreement, dated as of July 19, 2000, among the Company,
Softbank America Inc. and Merger Sub. (1)
99.4 Voting Agreement, dated as of July 19, 2000, between Ziff-Davis
and Shelby Bonnie. (1)
99.5 Voting Agreement, dated as of July 19, 2000, between Ziff-Davis
and Halsey M. Minor. (1)
(b) Reports on Form 8-K.
Current Report on Form 8-K filed:
March 10, 2000
March 13, 2000
April 27, 2000
27.1* Financial Data Schedule
____________________
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CNET, INC.
(Registrant)
/s/ Douglas N. Woodrum
________________________
Douglas N. Woodrum
Executive Vice President,
Chief Financial Officer
August 14, 2000
Date