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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 SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20939
CNET, INC.
(Name of small business issuer 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) 395-7800
(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 October 31, 1998 there were 16,993,525 shares of the registrant's common
stock outstanding.
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Part 1. Financial Information
Item 1. Financial Statements
CNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1998 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $44,469,870 $22,553,988
Accounts receivable, net. . . . . . . . . . 12,618,819 9,149,762
Accounts receivable, related party. . . . . 3,277,093 -
Other current assets. . . . . . . . . . . . 1,053,836 1,134,957
Restricted cash . . . . . . . . . . . . . . 1,352,183 1,599,113
------------- -------------
Total current assets . . . . . . . . . 62,771,801 34,437,820
Property and equipment, net. . . . . . . . . . . 15,495,100 19,553,537
Other assets . . . . . . . . . . . . . . . . . . 5,059,211 4,270,321
------------- -------------
$83,326,112 $58,261,678
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $3,099,987 $3,567,783
Accrued liabilities . . . . . . . . . . . . 7,956,285 10,080,504
Current portion of long-term debt . . . . . 1,039,928 1,358,772
------------- -------------
Total current liabilities. . . . . . . 12,096,200 15,007,059
Long-term debt . . . . . . . . . . . . . . . . . 964,340 2,611,815
------------- -------------
Total liabilities. . . . . . . . . . . 13,060,540 17,618,874
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 1,678 1,468
Additional paid in capital. . . . . . . . . 125,690,093 94,697,595
Accumulated deficit . . . . . . . . . . . . (55,426,199) (54,056,259)
------------- -------------
Total stockholders' equity . . . . . . 70,265,572 40,642,804
------------- -------------
$83,326,112 $58,261,678
============= =============
See accompanying notes to condensed consolidated financial statements.
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1998 1997 1998 1997
----------- ------------ ------------ -------------
Revenues:
Television. . . . . . . . . . . . $1,771,098 $1,813,052 $5,421,379 $5,288,054
Internet. . . . . . . . . . . . . 12,619,013 6,859,139 31,796,533 18,016,304
----------- ------------ ------------ -------------
Total Revenues . . . . . . . . 14,390,111 8,672,191 37,217,912 23,304,358
Cost of revenues:
Television. . . . . . . . . . . . 1,667,506 1,806,913 5,205,002 5,274,623
Internet. . . . . . . . . . . . . 5,375,659 4,112,616 16,496,231 11,703,045
----------- ------------ ------------ -------------
Total cost of revenues . . . . 7,043,165 5,919,529 21,701,233 16,977,668
----------- ------------ ------------ -------------
Gross profit . . . . . . . . . . . . 7,346,946 2,752,662 15,516,679 6,326,690
Operating expenses:
Sales and marketing . . . . . . . 3,970,684 2,791,085 9,711,832 7,805,486
Development . . . . . . . . . . . 687,567 4,735,718 2,104,884 10,943,340
General and administrative. . . . 1,632,881 1,525,986 4,681,186 4,330,366
Unusual items. . . . . . . .. . . - - - 7,000,000
----------- ------------ ------------ -------------
Total operating expenses . . . 6,291,132 9,052,789 16,497,902 30,079,192
----------- ------------ ------------ -------------
Operating income(loss) . . . . . . . 1,055,814 (6,300,127) (981,223) (23,752,502)
Other income (expense):
Equity losses . . . . . . . . . . (3,125,545) - (11,773,044) (1,811,930)
Gain on sale of equity investments 5,327,290 - 10,450,342 11,026,736
Interest income (expense), net. . 486,803 147,892 648,109 513,308
----------- ------------ ------------ -------------
Total other income (expense). . . 2,688,548 147,892 (674,593) 9,728,114
----------- ------------ ------------ -------------
Net income (loss) . . . . . . . . $3,744,362 ($6,152,235) ($1,655,816) ($14,024,388)
=========== ============ ============ =============
Basic net income (loss) per share. . $0.22 ($0.43) ($0.11) ($1.00)
=========== ============ ============ =============
Diluted net income (loss) per share. $0.21 ($0.43) ($0.11) ($1.00)
=========== ============ ============ =============
Shares used in calculating
basic per share data . . . . . . . 16,696,441 14,165,200 15,618,679 14,019,977
=========== ============ ============ =============
Shares used in calculating
diluted per share data . . . . . . 18,041,018 14,165,200 15,618,679 14,019,977
=========== ============ ============ =============
See accompanying notes to condensed consolidated financial statements.
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . .($1,655,816)($14,024,388)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . 4,783,077 3,467,006
Amortization of program costs. . . . . . . . . 3,887,662 5,548,481
Allowance for doubtful accounts. . . . . . . . 742,154 202,092
Reserve for joint venture. . . . . . . . . . . - (1,665,299)
Warrant compensation expense. . . . . . . . . - 7,000,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . (8,322,202) (3,222,165)
Other current assets. . . . . . . . . . . . 469,767 (879,314)
Other assets. . . . . . . . . . . . . . . . 1,979,481 (419,922)
Accounts payable. . . . . . . . . . . . . . (48,125) (481,131)
Accrued liabilities . . . . . . . . . . . . (1,469,849) 3,210,793
------------ ------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . 366,149 (1,263,847)
------------ ------------
Cash flows from investing activities:
Purchases of equipment, excluding capital leases. (3,451,922) (8,621,329)
Purchases of programming assets . . . . . . . . . (3,899,180) (5,208,049)
Loan to joint venture . . . . . . . . . . . . . . (63,436) (1,531,945)
------------ ------------
Net cash used in investing activities. . (7,414,538) (15,361,323)
------------ ------------
Cash flows from financing activities:
Proceeds from debt. . . . . . . . . . . . . . . . - 3,280,806
Net proceeds from issuance of stock . . . . . . . 25,984,438 5,250,000
Net proceeds from employee stock purchase plan. . 824,649 525,837
Net proceeds from exercise of options . . . . . . 4,121,504 773,450
Principal payments on capital leases. . . . . . . (295,111) (144,320)
Principal payments on equipment note. . . . . . . (1,671,209) (97,330)
------------ ------------
Net cash provided by financing activities. 28,964,271 9,588,443
------------ ------------
Net increase(decrease) in cash and cash equivalents 21,915,882 (7,036,727)
Cash and cash equivalents at beginning of period . 22,553,988 20,155,935
------------ ------------
Cash and cash equivalents at end of period . . . .$44,469,870 $13,119,208
============ ============
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . $245,178 $131,073
============ ============
Supplemental disclosure of noncash transactions:
Equity investment in Snap . . . . . . . . . . . . $3,066,449 $ -
============ ============
Capital Lease obligations incurred. . . . . . . . $ - $194,317
============ ============
See accompanying notes to condensed consolidated financial statements.
CNET, 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 nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the current year or any
other period.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
Issued Statement of Financial Accounting Standards ("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. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined
the manner in which it will present the information required by SFAS
No. 130 in its annual consolidated financial statements for the year
ending December 31, 1998. The Company's total comprehensive income
(loss) for all periods presented herein would not have differed from
those amounts reported as net income (loss) in the consolidated
statements of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements
for periods beginning after December 31, 1997. The Company has not
yet determined whether it has any separately reportable business
segments.
In March 1998, the American Institute of Certified Public
Accountants issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No.
98-1 requires that certain costs related to the development or
purchase of internal-use software be capitalized and amortized over
the estimated useful life of the software. SOP No. 98-1 is
effective for financial statements issued for fiscal years beginning
after December 15, 1998. The Company does not expect the adoption
of SOP No.98-1 to have a material impact on its results of
operations.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting
standards for derivative instruments including certain derivative
instruments embedded in other contacts, (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 these instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated and accounted for as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-
for-sale security, or a foreign-currency-denominated forecasted
transaction. For a derivative not designated as a hedge instrument,
changes in the fair value of the derivative are recognized in
earnings in the period of change. This statement will be effective
for all fiscal quarters of all fiscal years beginning after June 15,
1999 and management does not believe the adoption of SFAS No. 133
will have a material effect on the financial position of the
Company.
Net Loss Per Share
Basic net loss per share is computed using the weighted-
average number of common shares outstanding during the period.
Diluted net loss per share is computed using the weighted-average
number of common shares and common equivalent shares from stock
options outstanding, when dilutive, using the treasury stock method.
In the nine months ended September 30, 1998 there were 2,596,686
options outstanding that could potentially dilute basic earnings per
share ("EPS") in the future that were not included in the
computation of diluted EPS because to do so would have been
antidilutive for that period.
(2) Snap Divestiture
Pursuant to an agreement dated June 4, 1998 among the Company,
NBC Multimedia, Inc., a Delaware corporation ("NBC Multimedia"), and
Snap LLC, a Delaware limited liability company (the "LLC"), the
Company and NBC Multimedia agreed to form the LLC to operate the
Snap Internet portal service, which was previously operated as a
division of the Company. In connection with the formation and
initial capitalization of the LLC, which was completed on June 30,
1998, the Company contributed to the LLC substantially all of its
assets used exclusively in the operation of the Snap service.
Initially, the LLC will be owned 81% by the Company and 19% by NBC
Multimedia, however, NBC Multimedia has an option to increase its
ownership stake in the LLC to 60%. The accompanying consolidated
financial statements present Snap's financial results using the
equity method of accounting effective January 1, 1998. During the
three months ended September 30, 1998, the Company recorded an
equity loss related to its investment in the LLC of $3.1 million,
the balance of its investment in the LLC. As of September 30, 1998,
the Company had a $1.6 million receivable balance from the LLC for
payments made on the LLC's behalf. The receivable is included on
the balance sheet as a related party accounts receivable.
(3) BuyDirect Divestiture
BUYDIRECT.COM (BuyDirect) was a wholly owned division of the
Company that distributed electronic software. On March 31, 1998,
the Company contributed its ownership in BuyDirect, and net assets
related to BuyDirect of approximately $600,000, to a new venture
that is separately owned and operated by BuyDirect's existing
management group. As part of the transaction, the Company received
a 19% ownership interest in the new venture. The Company uses the
cost method of accounting for its BuyDirect investment thus recorded
an investment of approximately $600,000 on its balance sheet. As a
part of the agreement CNET licensed certain technology to BuyDirect
and also entered into a multi-year arrangement with the new venture
to provide marketing and promotion in exchange for $5.4 million in
cash payable through April 30, 2000. For the nine months ended
September 30, 1998, the Company recognized $1.8 million in revenues
related to advertising purchased by BuyDirect and to the licensing
of technology. As of September 30, 1998 the Company had a $1.7
million receivable balance from BuyDirect related to advertising
purchased, licensing of technology and payments made by CNET on
behalf of the venture. The balance is included on the balance sheet
as a related party accounts receivable.
(4) U.Vision Acquisition
On May 12, 1998, the Company completed the acquisition of
U.Vision Inc., a California corporation ("U.Vision"), through a
merger between U.Vision and a wholly-owned acquisition subsidiary of
the Company (the "Merger"), in which the Company issued 544,965
shares of common stock in exchange for all of the outstanding shares
of U.Vision. U.Vision owned and operated ComputerESP
(www.computeresp.com), a pricing and availability engine for buying
computer products on the Internet. Subsequent to the merger, the
Company relaunched ComputerESP as CNET Shopper.com. The Company
recorded this transaction using the pooling-of-interests accounting
method and recorded the financial results of U.Vision in its
consolidated financial statements effective April 1, 1998. The consolidated
financial statements of the Company prior to April 1, 1998 have not
been adjusted for the consolidated financial results of U.Vision as
the impact was not material. The shares used in calculating basic
and diluted per share data have been adjusted in prior periods to
reflect the U.Vision transaction.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
CNET: The Computer Network is a media company focused on
providing original Internet content and television programming
relating to information technology and the Internet. CNET Television
includes the Digital Domain, a two hour programming block which
includes CNET Central, The New Edge, Cool Tech and The Web. CNET
Television also produces the nationally syndicated program TV.com.
The Company's CNET Online division includes the following nine
technology-focused Internet sites: CNET.com, News.com,
Gamecenter.com, Shareware.com, Search.com, Builder.com,
Download.com, Computers.com and Shopper.com.
The Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by start-up
companies in the television programming industry and in the new and
rapidly evolving market for Internet products, content and services.
To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing
relationships with its advertising customers, their advertising
agencies and other third parties, provide original and compelling
content to Internet users and television viewers, develop and
upgrade its technology, respond to competitive developments and
attract, retain and motivate qualified personnel. There can be no
assurance that the Company will succeed in addressing such risks and
the failure to do so could have a material adverse effect on the
Company's business, financial condition or operating results.
Additionally, the limited operating history of the Company makes the
prediction of future operating results difficult or impossible, and
there can be no assurance that the Company's revenues will increase
or even continue at their current level or that the Company will
maintain profitability or generate cash from operations in future
periods. Since inception, the Company has incurred significant
losses and, as of September 30, 1998, had an accumulated deficit of
$55.4 million. The Company may continue to incur losses in the
future.
Results of Operations
Revenues
Total Revenues
Total revenues were $14.4 million and $8.7 million for the three
months and $37.2 million and $23.3 million for the nine months ended
September 30, 1998 and 1997, respectively.
Television Revenues
Television revenues were $1.8 million for each of the three
months and $5.4 million and $5.3 million for the nine months ended
September 30, 1998 and 1997, respectively. Pursuant to an amended
agreement, effective July 1, 1996, between the Company and USA
Networks, USA Networks licensed the right to carry the Digital
Domain on its networks for an initial one-year term for a fee equal
to the cost of production of those programs up to a maximum of $5.2
million. In January 1997, USA Networks agreed to extend the
agreement for an additional year beginning July 1, 1997 and revenues
were again limited to the costs of producing such programs, subject
to a maximum amount of $5.5 million. During the second quarter of
1998, the Company and USA Networks entered into an agreement for an
additional year of programming beginning July 1, 1998. The
agreement added a fourth program to the Digital Domain called Cool
Tech and decreased the length of The Web from 60 minutes to 30
minutes. Revenues are limited to the costs of production, subject
to a maximum of $5.9 million.
Prior to March 1, 1998, the Company had an agreement with Trans
World International ("TWI"), whereby the Company produced a
television program, TV.com, which was exclusively distributed by
TWI. Revenue from the distribution of TV.com was first used to
offset costs of distribution and production, with any excess being
shared equally by CNET and TWI. Beginning March 1, 1998, the Company
assumed responsibility for the sale of advertisements on TV.com and
began paying a distribution fee to TWI.
Internet Revenues
Total Internet revenues were $12.6 million and $6.9 million
for the three months and $31.8 million and $18.0 million for the
nine months ended September 30, 1998 and 1997, respectively. All
Internet revenues for 1998 were attributable to the Company's CNET
Online division as the Company divested a portion of its ownership
in Snap and began accounting for Snap's financial results under the
equity method retroactively to January 1, 1998. Internet revenues
related to Snap were $58,000 for each of the three and nine month
periods in 1997. Internet revenues consist primarily of revenues
derived from the sale of advertisements on pages delivered to users
of the Company's Internet sites. The delivery of an advertisement
is recognized by the Company as an "impression." Advertising
revenues are derived principally from arrangements with the
Company's advertising customers that provide for a guaranteed number
of impressions. Advertising rates vary depending primarily on the
particular Internet site on which advertisements are placed, the
type and total number of impressions purchased and the length of the
advertiser's commitment. Advertising revenues are recognized in the
period in which the advertisements are delivered. The Company's
ability to sustain or increase revenues for Internet advertising
will depend on numerous factors, which include, but are not limited
to, the Company's ability to increase its inventory of delivered
Internet pages on which advertisements can be displayed and its
ability to maintain or increase its advertising rates.
The increase in revenues for CNET Online of $5.8 million for
the three month and $13.8 million for the nine month periods of 1998
compared to the similar periods in 1997 was attributable to
increased pages delivered of 58% for the three month periods and 71%
for the nine month periods ended September 1998 as compared to the
same periods in 1997 and increased advertisements sold on these
pages. Average daily page views for CNET Online equaled 7.2
million for September 1998. Internet revenues include non-
advertising revenues of $192,000 and $1.1 million for the three
months and $2.3 million for each of the nine months ended September
30, 1998 and 1997, respectively. Non-advertising revenues include
fees earned from Company sponsored trade shows, electronic commerce
revenues, content licensing revenues, technology licensing and
consulting.
A portion of the Company's Internet revenues were derived from
barter transactions whereby the Company delivered advertisements on
its Internet sites in exchange for advertisements on the Internet
sites of other companies. Barter transactions accounted for $1.1
million and $136,000 for the three months and $2.2 million and
$632,000 for the nine months ended September 30, 1998 and 1997,
respectively.
Television operations accounted for 12% and 21% of total
revenues and Internet operations accounted for 88% and 79% of total
revenues for the three months ended September 30, 1998 and 1997,
respectively. Television operations accounted for 15% and 23% of
total revenues and Internet operations accounted for 85% and 77% of
total revenues for the nine months ended September 30, 1998 and
1997, respectively. The Company expects to experience fluctuations
in television and Internet revenues in the future that may be
dependent on many factors, including demand for the Company's
Internet sites and television programming, and the Company's ability
to develop, market and introduce new and enhanced Internet content
and television programming.
Cost of Revenues
Total Cost of Revenues
Total cost of revenues were $7.0 million and $5.9 million for
the three months and $21.7 million and $17.0 million for the nine
months ended September 30, 1998 and 1997, respectively. Cost of
revenues includes costs associated with the production and delivery
of the Company's television programming and the production of its
Internet sites. The principal elements of cost of revenues for the
Company's television programming have been the production costs of
its television programs, which primarily consist of payroll and
related expenses for the editorial and production staff and costs
for facilities and equipment. The principal elements of cost of
revenues for the Company's Internet sites have been payroll and
related expenses for the editorial, production and technology staff,
as well as costs for facilities and equipment.
Cost of Television Revenues
Cost of television revenues were $1.7 million and $1.8 million
for the three month periods and $5.2 million and $5.3 million for
the nine month periods ended September 30, 1998 and 1997,
representing approximately 94% and 100% of the related revenues for
the three month periods and 96% and 100% for the nine month periods
ended September 30, 1998 and 1997, respectively.
Cost of Internet Revenues
Cost of Internet revenues were $5.4 million and $4.1 million
for the three months and $16.5 million and $11.7 million for the
nine months ended September 30, 1998 and 1997, representing 43%,
60%, 52% and 65% of the related revenues, respectively. All
Internet cost of revenues were attributable to the Company's CNET
Online division due to the Company's divestiture of Snap. The
increase of $1.3 million for the three months and $4.8 million for
the nine months ended September 30, 1998 as compared to the same
periods in 1997 was primarily attributable to $767,000 and $2.3
million, respectively, of costs associated with an Internet site
that was launched in November 1997, costs related to an Internet
site acquired in May 1998, costs associated with a Company sponsored
trade show held in April 1998 and increases in personnel related
costs for its Internet sites.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and
related expenses, consulting fees and advertising expenses. Sales
and marketing expenses were $4.0 million and $2.8 million for the
three months and $9.7 million and $7.8 million for the nine months
ended September 30, 1998 and 1997, representing 28%, 32%, 26% and
33% of total revenues, respectively. The increase in sales and
marketing expenses of $1.2 million for the three months and $1.9
million for the nine months ended September 30, 1998 compared to the
same periods in 1997 were primarily attributable to increases in
advertising expenses. The increase in advertising expenses was
primarily related to increased expenses for barter transactions of
$1.0 million for the three month periods and $1.6 million for the
nine month periods.
Development
Development expenses consist of expenses relating to
technology and creative design staff who are involved in the
research and development of new or improved technologies to enhance
the performance of the Company's Internet sites, as well as expenses
incurred in the development of new Internet sites. Development
expenses for technology and creative design enhancements and for
development of new Internet sites include payroll and related
expenses for editorial, production and technology staff, as well as
costs for facilities and equipment. Costs associated with the
development of a new Internet site are recognized as development
expenses until the new site begins generating revenue.
Development expenses were $688,000 and $4.7 million for the
three months and $2.1 million and $10.9 million for the nine months
ended September 30, 1998 and 1997, representing 5%, 55%, 6% and 47%
of total revenues, respectively. The decrease in development
expenses of approximately $4.0 million for the three months and $8.8
million for the nine months ended September 30, 1998 as compared to
the same periods in 1997 was primarily attributable to decreased
activities related to the development of new Internet sites. During
1997, the Company incurred development expenses related to the
development of Snap of $3.0 million for the three month period and
$7.8 million for the nine month period ended September 30, 1997,
respectively.
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 $1.6 million and $1.5
million for the three months and $4.7 million and $4.3 million for
the nine months ended September 30, 1998 and 1997, representing 11%,
18%, 13% and 19% of total revenues, respectively.
Unusual Items
In January 1997, the Company incurred a one-time, non-cash
expense of $7.0 million related to an amendment to the warrant
agreement with USA Networks whereby the Company agreed that the
warrants held by USA Networks will vest in full on December 31,
2006, to the extent that they have not previously vested.
Additionally, USA Networks exercised its option to extend its
agreement with the Company to carry the Company's four television
programs through June 30, 1998.
Equity Losses
Equity losses consist of losses accounted for under the equity
method of accounting from the Company's joint venture with E!
Entertainment and from the Company's investment in Snap. Total
equity losses were $3.1 million and $0 for the three months and
$11.8 million and $1.8 million for the nine months ended September
30, 1998 and 1997, respectively. Losses related to the Snap LLC were
recorded using the equity method of accounting effective January 1,
1998. All of the equity losses in 1998 were related to Snap and all
of the equity losses in 1997 were related to the Company's joint
venture with E! Entertainment.
Gain On Sale Of Equity Investments
Gain on sale of equity investments consists primarily of gains
on the sale of the Company's 50% equity position in the joint
venture with E! Entertainment, which was sold in June 1997, and
gains on the sales of a portion of the Company's equity interest in
Vignette Corporation in the second and third quarters of 1998.
Liquidity and Capital Resources
Net cash provided by operating activities of $366,000 for the
nine months ended September 30, 1998 was attributable to a net loss
for the period as offset by adjustments for depreciation and
amortization and changes in operating assets and liabilities. Net
cash used by operating activities of $1.3 million for the nine
months ended September 30, 1997 was attributable to a net loss in
the period as reduced by adjustments to reconcile net loss to net
cash. Net cash used in investing activities of $7.4 million and
$15.4 million for the nine months ended September 30, 1998 and 1997,
respectively, was primarily attributable to purchases of equipment
and programming assets. Cash flows provided by financing activities
of $29.0 million for the nine months ended September 30, 1998
consisted primarily of proceeds from the issuance of common stock.
The Company currently has obligations under notes payable and
capital leases of $2.0 million. Such obligations were incurred to
finance equipment purchases and are payable through June 2001.
As of September 30, 1998, the Company's principal source of
liquidity was approximately $44.5 million in cash and cash
equivalents. The Company believes that these funds will be
sufficient to meet its anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. However,
any projections of future cash needs and cash flows are subject to
substantial uncertainty. See "Additional Factors That May Affect
Future Results" below. If currently available cash and cash
generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may be required to sell
additional equity or debt securities. The sale of additional equity
or convertible debt securities would result in additional dilution
to the Company's stockholders. There can be no assurance that
financing will be available to the Company in amounts or on terms
acceptable to the Company.
Seasonality and Cyclicality
The Company believes 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. Seasonality
and cyclicality in advertising expenditures generally, or with
respect to Internet-based advertising specifically, could have a
material adverse effect on the Company's business, financial
condition or operating results.
Year 2000 Compliance
The Company is aware of the issues associated with the
programming code and embedded technology in existing systems as the
year 2000 approaches. The "Year 2000 Issue" arises from the
potential for computers to fail or operate incorrectly because their
programs incorrectly interpret the two digit date fields "00" as 1900
or some other year, rather than the year 2000. The year 2000 issue
creates risk for the Company from unforeseen problems in its own
computer systems and from third parties, including customers, vendors
and manufacturers, with whom the Company deals. Failures of the
Company's and/or third parties' computer systems could result in an
interruption in, or a failure of certain normal business activities
or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity, and financial
condition, though the impact is unknown at this time.
To mitigate this risk, the Company has established a formal
year 2000 program to oversee and coordinate the assessment,
remediation, testing and reporting activities related to this issue.
The Company believes that with the completion of the project as
scheduled, the possibility of significant interruptions of normal
operations should be reduced.
The Company is currently in the assessment phase of its year
2000 program. As part of this assessment, the Company's application
systems (e.g., financial systems, various custom-developed business
applications), technology infrastructure (e.g., networks, servers,
desktop equipment), facilities (e.g., security systems, fire alarm
systems), vendors/partners and products will be reviewed to determine
their state of year 2000 compliance. This review will include the
collection of documentation from software and hardware manufacturers,
the detailed review of programming code for custom applications, the
physical testing of desktop equipment using software designed to test
for year 2000 compliance, the examination of key vendors'/partners'
year 2000 programs and the ongoing testing of the Company's products
as part of normal quality assurance activities.
Subsequent to the completion of the Company's assessment phase
the Company will implement both a certification and testing phase of
its program. Testing of the Company's internal software will be
accomplished through simulation situations. The Company will
simulate January 1, 2000 on its network, servers and desktop
equipment to ensure compliance with year 2000 readiness. It is
forecast that all important systems (both computer systems and
systems dependent on embedded technologies) will be tested by June
30, 1999. All other testing will be done by December 31, 1999.
The Company has not made estimates for the costs associated
with completing its year 2000 program, but will do so after
completion of the assessment phase of the project. Costs incurred to
date have not been material. There can be no assurance that the
Company will not experience serious unanticipated negative
consequences and/or additional material costs caused by undetected
errors or defects in the technology used in its internal systems, or
by failures of its vendors/partners to address their year 2000 issues
in a timely and effective manner.
Should miscalculations or other operational errors occur as a
result of the year 2000 issue, the Company or the parties on which it
depends may be unable to produce reliable information or to process
routine transactions. Furthermore, in the worst case, the Company or
the parties on which it depends may, for an extended period of time,
be incapable of conducting critical business activities which
include, but are not limited to, the production and delivery of the
Company's Internet sites, invoicing customers and paying vendors.
Additional Factors That May Affect Future Results
The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors,
many of which are outside the Company's control. Factors that may
adversely affect the Company's quarterly operating results
attributable to its Internet operations include the level of use of
the Internet, demand for Internet advertising, seasonal trends in
both Internet use and advertising placements, the addition or loss
of advertisers, advertising budgeting cycles of individual
advertisers, the level of traffic on the Company's Internet sites,
the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's Internet operations, the
introduction of new sites and services by the Company or its
competitors, price competition or pricing changes in the industry,
technical difficulties or system downtime, general economic
conditions and economic conditions specific to the Internet and
Internet media. Quarterly operating results attributable to the
Company's television operations are generally dependent on the costs
incurred by the Company in producing its television programming. If
the cost of producing television programs for USA Networks exceeds
the maximum licensing fee payable by USA Networks, the Company could
incur a gross deficit with respect to its television operations.
Further, the size and demographic characteristics of the Company's
viewing audience may be adversely affected by the popularity of
competing television programs, including special events, the time
slots chosen for the Company's programs by the cable network
carrying such programs and the popularity of programs immediately
preceding the Company's programs. As a result of the Company's
strategy to cross market its television and Internet operations, the
Company believes that any decrease in the number of viewers of its
television programs will have a negative effect on the usage of its
Internet sites. Accordingly, a decrease in viewership of the
Company's television programs could have a material adverse effect
on the Company's business, financial condition or operating results.
Due to all of the foregoing factors, it is likely that the
Company's operating results may fall below the expectations of the
Company, securities analysts or investors in some future quarter.
In such event, the trading price of the Common Stock would likely be
materially and adversely affected.
Certain information in this Quarterly Report may contain
"forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any
projections of earnings, revenues, expenses or other financial
items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new services,
any statements regarding future economic conditions or performance,
and any statement of assumptions underlying any of the foregoing.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, it can give no assurance
that such expectations or any of its forward-looking statements will
prove to be correct, and actual results could differ materially from
those projected or assumed in the Company's forward-looking
statements. The Company's future financial condition and results,
as well as any forward-looking statements, are subject to inherent
risks and uncertainties, including those summarized in this section.
Additional information concerning these and other risk factors is
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, a copy of which may be obtained from
the Company upon request.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 --Financial Data Schedules
(b) Reports on Form 8-K
On July 15, 1998, the Company filed a Current Report on Form
8-K with respect to the closing of its transaction with NBC and NBC
Multimedia, Inc. related to Snap LLC and the sale of Common Stock to
NBC.
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
November 14, 1998
Date