===============================================================================
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 MARCH 31, 1999
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, 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) 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 April 30, 1999 there were 35,614,023 shares of the registrant's common
stock outstanding.
===============================================================================
Part 1. Financial Information
Item 1. Financial Statements
CNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in 000's)
March 31, December 31,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $208,152 $51,534
Marketable securities . . . . . . . . . . . 194,125 -
Accounts receivable, net. . . . . . . . . . 16,667 15,074
Accounts receivable, related party. . . . . - 1,711
Other current assets. . . . . . . . . . . . 9,914 1,705
Restricted cash . . . . . . . . . . . . . . 5,916 945
------------- -------------
Total current assets . . . . . . . . . 434,774 70,969
Property and equipment, net. . . . . . . . . . . 15,337 15,325
Other assets . . . . . . . . . . . . . . . . . . 22,087 2,060
------------- -------------
$472,198 $88,354
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $3,464 $3,477
Accrued liabilities . . . . . . . . . . . . 8,946 6,593
Current portion of long-term debt . . . . . 1,063 1,112
Deferred tax liability. . . . . . . . . . . 50,300 -
------------- -------------
Total current liabilities. . . . . . . 63,773 11,182
Long-term debt . . . . . . . . . . . . . . . . . 179,118 569
------------- -------------
Total liabilities. . . . . . . . . . . 242,891 11,751
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 4 3
Additional paid-in capital. . . . . . . . . 130,719 127,770
Other comphrehensive income . . . . . . . . 127,008 -
Accumulated deficit . . . . . . . . . . . . (28,424) (51,170)
------------- -------------
Total stockholders' equity . . . . . . 229,307 76,603
------------- -------------
$472,198 $88,354
============= =============
See accompanying notes to condensed consolidated financial statements.
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in 000's)
Three Months Ended
March 31,
------------------------
1999 1998
----------- ------------
Revenues:
Internet. . . . . . . . . . . . . $17,950 $8,009
Television. . . . . . . . . . . . 1,652 1,752
----------- ------------
Total Revenues . . . . . . . . 19,602 9,761
Cost of revenues:
Internet. . . . . . . . . . . . . 6,838 5,289
Television. . . . . . . . . . . . 1,607 1,747
----------- ------------
Total cost of revenues . . . . 8,445 7,036
----------- ------------
Gross profit . . . . . . . . . . . . 11,157 2,725
Operating expenses:
Sales and marketing . . . . . . . 4,920 2,480
Development . . . . . . . . . . . 1,508 777
General and administrative. . . . 1,527 1,644
Amortization of intangible assets 306 -
----------- ------------
Total operating expenses . . . 8,261 4,901
----------- ------------
Operating income(loss) . . . . . . . 2,896 (2,176)
Other income (expense):
Equity losses . . . . . . . . . . - (3,679)
Gain on investments sales . . . . 19,875 -
Interest income(expense), net . . 237 199
----------- ------------
Total other income (expense). . . 20,112 (3,480)
----------- ------------
Net income (loss). . . . . . . . . $23,008 ($5,656)
=========== ============
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period. . . . . . . . 127,008 -
----------- ------------
Comprehensive income(loss) $150,016 ($5,656)
=========== ============
Basic net income (loss) per share. . $0.67 ($0.19)
=========== ============
Diluted net income (loss) per share. $0.61 ($0.19)
=========== ============
Shares used in calculating
basic per share data . . . . . . . 34,495 29,570
=========== ============
Shares used in calculating
diluted per share data . . . . . . 37,977 29,570
=========== ============
See accompanying notes to condensed consolidated financial
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in 000's)
Three Months Ended
March 31,
---------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income(loss) . . . . . . . . . . . . . . . . . $23,008 ($5,656)
Adjustments to reconcile net income(loss) to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . . 1,851 1,617
Amortization of program costs. . . . . . . . . . 1,949 1,701
Allowance for doubtful accounts. . . . . . . . . (80) 199
Gain on investments . . . . . . . . . . . . . (19,875) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . 332 (250)
Other current assets. . . . . . . . . . . . . (9,652) (249)
Other assets. . . . . . . . . . . . . . . . . (3,201) 182
Accounts payable. . . . . . . . . . . . . . . (18) (767)
Accrued liabilities . . . . . . . . . . . . . 2,981 (1,692)
---------- ----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . (2,705) (4,915)
---------- ----------
Cash flows from investing activities:
Purchases of equipment, excluding capital leases. . (1,358) (1,123)
Purchases of programming assets . . . . . . . . . . (2,000) (1,484)
Deferred interest . . . . . . . . . . . . . . . . . (690) -
Cash paid for acquisitions. . . . . . . . . . . . . (6,859) -
---------- ----------
Net cash used in investing activities. . . (10,907) (2,607)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of convertible debt. . . 166,943 -
Net proceeds from employee stock purchase plan. . . 190 222
Net proceeds from exercise of options . . . . . . . 3,263 784
Principal payments on capital leases. . . . . . . . (42) (87)
Principal payments on equipment note. . . . . . . . (124) (312)
---------- ----------
Net cash provided by financing activities. 170,230 607
---------- ----------
Net increase (decrease) in cash and cash equivalents. 156,618 (6,915)
Cash and cash equivalents at beginning of period . . 51,534 22,554
---------- ----------
Cash and cash equivalents at end of period . . . . . $208,152 $15,639
========== ==========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $130 $68
========== ==========
Supplemental disclosure of noncash transactions:
Issuance of debt for acquisitions . . . . . . . . . $50,300 $ -
========== ==========
Equity investments. . . . . . . . . . . . . . . . . $177,491 $582
========== ==========
Deferred tax liability. . . . . . . . . . . . . . . $5,098 $ -
========== ==========
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
months ended March 31, 1999 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 per share is computed using the weighted average
number of outstanding shares of common stock and diluted net income
per share is computed using the weighted average number of
outstanding shares of common stock and common stock equivalents.
Basic and diluted net loss per share are computed using the
weighted average number of outstanding shares of common stock. Net
loss per share for the period ended March 31, 1999 does not include the
effect of the potential conversion of convertible debt to approximately
2,311,312 common shares related to the Convertible Subordinated Debt
offering completed on March 8, 1999, because their effect is
anti-dilutive. Net loss per share for the period ended March 31,
1998 does not include the effect of approximately 4,286,068 stock options
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 March 31,
-------------------------
1999 1998
-------------- --------
Net income (loss) $23,008 ($5,656)
Basic and diluted: ============== ============
Weighted average common shares
outstanding used in computing basic 34,495 29,570
net income(loss) per share ============== ============
Basic net income(loss) per share $0.67 ($0.19)
============== ============
Weighted average common shares
and common stock equivalents
outstanding used in computing diluted
net income(loss) per share 37,977 29,570
============== ============
Diluted net income(loss) per share $0.61 ($0.19)
============== ============
Income Taxes
No income tax provision has been provided as the Company has
sufficient net operating losses for which no benefit has been
recognized, to cover anticipated taxable income for fiscal 1999.
Stock Split
On March 8, 1999, the Company effected a two-for-one split of
its common stock. The accompanying consolidated financial statements
for the period ended March 31, 1998 have been adjusted to reflect
the stock split.
Recent Accounting Pronouncements
The FASB recently 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 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 must adopt SFAS No. 133 by July 1,
1999. Management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position or operations of the
Company.
(2) 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 first quarter of 1999 the Company reported unrealized
holding gains arising from investments. The Company has an investment in
Vignette Corporation ("Vignette"), which completed an initial public
offering during the first quarter of 1999. The Company's investment in Vignette
was recorded at market value based on the closing price of Vignette's stock
on March 31, 1999. In addition, the Company recognized a gain on the
sale of BuyDirect.com ("BuyDirect"), which resulted from the merger
of beyond.com and BuyDirect as a result of the merger, the Company owns
approximately 755,000 shares of beyond.com, a public corporation.
The Company recorded a non-cash gain based on the market value of the
shares received on the date of the merger. At March 31, 1999, the
increase in value of the beyond.com shares was recorded as other
comprehensive income.
(3) 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, television and CNET
Online, the Company's Internet operation.
(4) NetVentures Acquisition
On February 16, 1999, the Company completed the acquisition of
NetVentures, Inc., a California corporation ("NetVentures"), through a
merger of NetVentures into the Company. Pursuant to the merger,
the Company issued 207,204 shares of common stock in exchange for all
of the outstanding shares of NetVentures. NetVentures owned and operated
ShopBuilder, an online store-creation system. The Company recorded
this transaction using the pooling-of-interets accounting method and
recorded the financial results of NetVentures in its consolidated financial
statements effective January 1, 1999. The consolidated financial
statements of the Company prior to January 1, 1999 have not been
adjusted for the consolidated financial results of NetVentures as
the impact was not material.
(5) Auctiongate Acquisition
On February 19, 1999, the Company completed the acquisition of
AuctionGate Interactive, Inc., a California corporation ("AuctionGate"),
through a merger of AuctionGate into the Company. Pursuant to the merger,
the Company issued 107,084 shares of common stock in exchange for all of
the outstanding shares of AuctionGate. Auctiongate owned and operated
Auctiongate.com, an online auction site specializing in computer products.
The Company recorded this transaction using the pooling-of-interests
accounting method and recorded the financial results of AuctionGate
in its consolidated financial statements effective January 1, 1999. The
consolidated financial statements of the Company prior to January 1, 1999
have not been adjusted for the consolidated financial results of AuctionGate
as the impact was not material.
(6) Winfiles Acquisition
On February 26, 1999, the Company acquired substantially all of
the assets of Winfiles.com, a download service, from Jensesys LLC, a
Washington limited liability company ("Winfiles"), for a total
purchase price of $11.5 million, of which $5.75 million was paid in
cash and a note for $5.75 will be paid August 26, 1999. The Company recorded
this transaction using the purchase method of accounting and recognized
$11.0 million in goodwill. The goodwill is being amortized on a straight-
line basis over a three year period. The goodwill is reassessed annually to
determine whether any potential impairment exists.
(7) Debt Offering
On March 8, 1999, the Company completed a private placement with gross
proceeds of $172.9 million of 5% Convertible Subordinated Notes, due
2006 (the "Notes"). The Notes are convetible into the Company's common stock
after June 7, 1999 at a conversion price of $74.8125 per share, subject
to adjustments in certain events, at the option of the noteholder.
(8) KillerApp Acquisition
On March 22, 1999, the Company completed the acquisition of
KillerApp Corporation., a California corporation ("KillerApp"), through a
merger of KillerApp into the Company. Pursuant to the merger, the Company
issued 523,400 shares of common stock in exchange for all of the outstanding
shares of KillerApp. KillerApp owned and operated KillerApp.com, an online
comparison shopping service for computer and consumer related products.
The Company recorded this transaction using the pooling-of-interests
accounting method and recorded the financial results of KillerApp in its
consolidated financial statements effective January 1, 1999. The
consolidated financial statements of the Company prior to January 1,
1999 have not been adjusted for the consolidated financial results of
KillerApp as the impact was not material.
(9) BuyDirect Merger
In March 1999, BuyDirect entered into a merger agreement with
beyond.com that resulted in the Company owning approximately 755,000
shares of beyond.com as a result of the Company's ownership interest in
BuyDirect. The Company recorded a non-cash gain related to the shares received
on the date of the merger. Our investment in beyond.com is classified as a
marketable security on the balance sheet and fluctuations in the value of this
investment have been recorded as unrecognized gain (loss) on investments
under comprehensive income.
(11) Subsequent Events
On April 21, 1999, the Company announced a two-for-one split of
its common stock for common shareholders of record as of May 10, 1999
payable on May 28, 1999.
On April 30, 1999, the Company acquired Sumo, Inc., a Florida
Corporation ("Sumo") in which the Company issued 234,742 shares of common
stock to the stockholders of Sumo. Sumo developed Internet service
directories, including webhostlist.com, webdesignlist.com and webisplist.com.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
CNET, Inc. (the Company, which may be referred to as we, us or
our) is a leading media company that provides consumers with
authoritative information online and on television regarding computers,
the Internet and digital technologies. We seek to use our editorial,
technical, product database and programming expertise to engage
consumers and attract advertisers. Based on the volume of traffic over
our branded online network, we believe that we have an established
leadership position in our market. We believe that our online network
is the most frequently used source of technology information online,
with an average of approximately 9.5 million pages viewed daily during
the first quarter of 1999.
Results of Operations
Revenues
Total Revenues
Total revenues were $19.6 million and $9.8 million for the three months
ended March 31, 1999 and 1998, respectively.
Internet Revenues
Total Internet revenues were $18.0 million and $8.0 million for
the three months ended March 31, 1999 and 1998, respectively. Internet
revenues consist primarily of revenues derived from the sale of
advertisements on pages delivered to users of our Internet network.
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 advertisers Internet network. 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.
In the fourth quarter of 1998 CNET began generating revenue from lead-
based compensation from its shopping services.
The increase in revenues for CNET Online of $9.9 million for the
three month period ended March 31, 1999 compared to the same period in
1998 was attributable to increased pages delivered and increased
advertisements sold on our network and an increase in our average
revenue yield per page delivered. Average daily pages delivered on our
network were approximately 9.5 million for the three months ended March
31, 1999 as compared to 6.3 million for the three months ended March
31, 1998, or an increase of 51%. The increased traffic from the three
months ended March 31, 1998 to the three months ended March 31, 1999
was primarily related to an increase in the number of users of our
network. In the fourth quarter of 1998, we began generating revenues
from lead-based advertising on our shopping services. These lead-based
programs, which were offered during the three months ended March 31, 1999,
but were not offered during the same period in 1998, contributed to our
increased average revenue yield per page.
In addition, Internet revenues included non-advertising revenues
of $150,000 and $1.0 million for the three months ended March 31, 1999
and 1998, 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 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. Barter transactions accounted for $1.2 million and $709,000
for the three months ended March 31, 1999 and 1998, respectively.
Television Revenues
Television revenues were $1.7 million and $1.8 million for the
three months ended March 31, 1999 and 1998, respectively. Pursuant to
our agreement with USA Networks, USA Networks licensed the right to
carry the two hour programming block, Digital Domain, on its networks
for a fee equal to the cost of production of those programs up to a
maximum of $5.5 million from July 1, 1997 to June 30, 1998 and $5.9
million from July 1, 1998 to June 30, 1999. This agreement with USA
Networks expires on June 30, 1999, but has been extended until
September 30, 1999.
We also produce a television program, TV.com, which is
exclusively distributed by Trans World International ("TWI"). Through
February 28, 1998, TWI sold the advertisements on TV.com and these
revenues were used to offset the costs of distribution and production
of the program. Beginning March 1, 1998, we assumed responsibility for
the sale of advertisements on TV.com and began paying a distribution
fee to TWI. The decrease in revenues related to our television
operations was primarily related to decreased revenues for TV.com.
Television operations accounted for 8% and 18% of total revenues
and Internet operations accounted for 92% and 82% of total revenues for
the three months ended March 31, 1999 and 1998, respectively. We expect
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 our 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 $8.4 million and $7.0 million for the
three months ended March 31, 1999 and 1998, respectively. Cost of
revenues includes costs associated with the production and delivery of
television programming and the production of our Internet channels.
The principal elements of cost of revenues for our television
operations have been the production costs of our 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 our Internet operations
have been payroll and related expenses for the editorial, production
and technology staff, as well as costs for facilities and equipment.
Cost of Internet Revenues
Cost of Internet revenues were $6.8 million and $5.3 million for
the three months ended March 31, 1999 and 1998, respectively,
representing 38% and 65% of the related revenues, respectively. The
increase of $1.5 million for the three months ended March 31, 1999 as
compared to the same period in 1998 was primarily attributable to
increases in personnel and personnel related costs. In addition, costs
of approximately $400,000 were recognized in the three months ended
March 31, 1999 related to the acquisition of Shopper.com, which was
acquired in May 1998 and the acquisitions of NetVentures, AuctionGate,
Winfiles and KillerApp which were all acquired during the three months ended
March 31, 1999.
Cost of Television Revenues
Cost of television revenues were $1.6 million and $1.7 million
for the three months ended March 31, 1999 and 1998, repsectively,
representing approximately 97% and 100% of the related revenues,
respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and
related expenses, consulting fees and advertising expenses. Sales and
marketing expenses were $4.9 million and $2.5 million for the three
months ended March 31, 1999 and 1998, respectively, representing 25% of
total revenues for each of the periods. Sales and marketing expenses
increased $2.4 million for the three months ended March 31, 1999
compared to the same period in 1998. This increase was related to
increased personnel in sales and sales support roles and their related
expenses of approximately $1.0 million and an increase in marketing
expenses of $1.4 million. The increase in marketing expenses was
primarily related to increased expenses for advertising of $1.1
million, which included an increase in barter transactions of $245,000.
We regularly evaluate our marketing efforts and may determine to
significantly increase our marketing expenditures in the future.
Development
Development expenses include expenses for the development and
production of new Internet channels and for the research and
development of new or improved technologies to enhance the features and
functionality of our Internet network, including 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 channel are no longer recognized as
development expenses when the new channel begins generating revenue.
Development expenses were $1.5 million and $777,000 for the three
months ended March 31, 1999 and 1998, respectively, representing 8% for
each of the periods. The increase in development expenses of
approximately $731,000 for the three months ended March 31, 1999 as
compared to the same period in 1998 was primarily attributable to
increased personnel costs related to the enhancement of the
functionality of our Internet network.
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 $1.5 million and $1.6 million for the
three months ended March 31, 1999 and 1998, respectively, representing
8% and 17% of total revenues, respectively.
Goodwill Amortization
We acquired Winfiles on February 26, 1999 for a total purchase
price of $11.5 million. The acquisition was a purchase of assets and
approximately $11.0 million of the purchase price was attributable to
goodwill. We are amortizing the goodwill related to the purchase of
Winfiles over three years.
Other Income (Expense)
Total other income (expense) was $20.1 million and $(3.5) million
for the three months ended March 31, 1999 and 1998, respectively.
Other income (expense) consists of equity losses, gain on the sale of
equity investments, interest income and interest expense.
Equity losses included our interest in SNAP! LLC ("snap.com") Pursuant
to an agreement in June 1998 with NBC Multimedia, snap. was formed as a
limited liability company, of which NBC Multimedia and us share
control. We have recorded snap.com's financial results using the
equity method of accounting effective January 1, 1998.
We had no equity losses for the three months ended March 31,
1999, and equity losses were $3.7 million for the three months ended
March 31, 1998. All of the equity losses in 1998 were related to
snap.com.
Gains on the sale of equity investments were $19.9 million for
the three months ended March 31, 1999 and we had no gains on the sale
of equity investments for the three months ended March 31, 1998. The
gains on sale of equity investments in the first quarter of 1999 relates
to the merger agreement between beyond.com and BuyDirect.com, which resulted
in our owning approximately 755,000 shares of beyond.com due to our ownership
interest in BuyDirect. We recorded a non-cash gain related to shares
we received on the date of the merger. Our investment in beyond.com is
classified as marketable securities on our balance sheet and
fluctuations in the value of this investment will be recorded as
unrecognized gain (loss) on investments in the comprehensive income
section of our balance sheet in future quarters until we realize a gain
or loss on actual sales of the securities.
Income (Loss)
We recorded net income of $23.0 million or $0.61 per diluted
share for the three months ended March 31, 1999 compared to net losses
of $5.7 million or $0.19 per share for the comparable period in 1998.
Net income increased $28.7 million for the three months ended March 31,
1999 as compared to the similar period in 1998. This change was
attributable to an increase in total revenues of $9.8 million and
increases to cost of revenues and operating expenses of $4.8 million,
resulting in an increase to operating profit of $5.1 million. Other
income and expense increased $23.6 million due to the gains on sales of
investments recognized in 1999 and the reduction of equity losses that
were incurred in 1998. The increases in operating income combined with
the increase in other income resulted in an increase in net income of
$28.7 million.
Liquidity and Capital Resources
As of March 31, 1999, we had cash and cash equivalents of $208.2
million. Cash used in operating activities of $2.7 million for the
three months ended March 31, 1999 was primarily due to an increase in
other current assets and other assets of $12.9 million which was due
primarily to an increase in a note receivable, an increase in accrued
liabilities of $3.0 million, increases in prepaid expenses and a
non-cash gain on investments of $19.9 million. These increases
were partially offset by net income of $23.0 million and
depreciation and amortization and the amortization of program costs of
$3.8 million. Net cash used in operating activities of $4.9 million in
for the three months ended March 31, 1998 was primarily attributable to
net losses in such periods. Net cash used in investing activities of
$10.9 million for the three months ended March 31, 1999 was primarily
related to acquisitions and to purchases of equipment and programming
assets. Net cash used in investing activities of $2.6 million for the
three months ended March 31, 1998 was primarily attributable to
purchases of equipment and programming assets. Cash flows provided by
financing activities of $170.2 million for the three months ended March
31, 1999 consisted primarily of the issuance of convertible debt
and the issuance of common stock through the exercise of stock options. Cash
flows provided by financing activities for the three months ended March
31, 1998 consisted primarily of proceeds from the issuance of common
stock through the exercise of stock options. We believe that existing
funds will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
As of March 31, 1999 we had obligations outstanding under notes
payable and under certain capital leases and under our convertible debt
obligation of $180.2 million. Such obligations were incurred to
finance equipment purchases, acquire Winfiles.com and to obtain
proceeds for general corporate purposes, which may include potentially
significant increases in marketing expenditures and working capital.
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.
Year 2000 Compliance
We are 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 us from unforeseen problems
in our computer systems and from third parties, including our customers,
vendors and manufacturers. Failures of our and/or third parties'
computer systems could result in an interruption in, or a failure of,
our normal business activities or operations. Such failures could
materially and adversely affect our business prospects, financial
condition and operating results.
To mitigate this risk, we have established a formal year 2000
program to oversee and coordinate the assessment, remediation, testing
and reporting activities related to this issue. We ares currently in
the assessment phase of our year 2000 program. As part of this
assessment, we will review the following systems to determine if they
are year 2000 compliant:
* our application systems (financial systems, various custom-
developed business applications)
* technology infrastructure (networks, servers, desktop
equipment)
* facilities (security systems, fire alarm systems)
* vendors/partners and products.
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
* the ongoing testing of our products as part of normal quality
assurance activities.
We anticipate that we will complete the assessment and
remediation phase and begin the testing phase of our year 2000 program
by the third quarter of 1999. We have not made estimates for the costs
associated with completing our year 2000 program, but will do so after
completion of the assessment phase of the project. Costs incurred to
date, including costs of personnel, have not been material. We can
offer no assurance that we will not experience serious unanticipated
negative consequences and/or additional material costs caused by
undetected errors or defects in the technology used in our internal
systems, or by failures of our 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, we or the parties on which we depend may
be unable to produce reliable information or to process routine
transactions. Furthermore, in the worst case, we or the parties on
which we depend may be incapable of conducting critical business
activities which include, but are not limited to, the production and
delivery of our Internet channels, invoicing customers and paying
vendors, which could have a material adverse effect on our business,
prospects, financial condition and operating results.
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, statements concerning proposed new
products or services, statements regarding future economic conditions
or performance and any statement 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.
The risks, uncertainties and other factors to which forward-
statements are subject include, among others, those set forth under the
caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, which is available from us, from the
SEC at prescribed rates and at the web-site www.sec.gov. Such factors
include, without limitation, the following: limited operating history;
fluctuations in quarterly operating results; failure to compete; risks
associated with anticipated growth; risks related to potential Year 2000
problems; risks associated with technological change; availability of key
personnel and changes in governmental regulations. All subsequent
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.
We are exposed to the impact of interest rate 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.
Investment in both fixed rate and floating rate interest earning
instruments carries 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 information technology companies
for business and strategic purposes. These investments are included in
marketable securities and are accounted for under the cost method when
ownership is less than 20%. Such investments, which are in the Internet
industry, are subject to significant fluctuations in fair market value
due to the volatility of the stock market.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 16, 1999, we completed the acquisition of Netventures
through a merger of Netventures into the Company. Pursuant to the
merger, we issued 207,204 shares of common stock to Netventures'
stockholders. No underwriters were involved in the transaction, and we
did not pay any underwriting discounts or commissions. The issuance of
shares in this transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2)
thereof.
On February 19, 1999, we completed the acquisition of AuctionGate
through a merger of AuctionGate into the Company. Pursuant to the
merger, we issued 107,084 shares of common stock to AuctionGate's
stockholders. No underwriters were involved in the transaction, and we
did not pay any underwriting discounts or commissions. The issuance of
shares in this transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2)
thereof.
On March 8, 1999, we completed the sale of a new issue of
$172,915,000 aggregate principal amount of 5% Convertible Subordinated
Notes due 2006 (the "Notes"). The Notes are convertible into common
stock any time after June 7, 1999 at a conversion price of $74.8125 per
share, subject to adjustments in certain events. The Notes were sold
by us to Salomon Smith Barney Inc., BancBoston Robertson Stephens Inc.
and Volpe Brown & Company, LLP, as representatives of the initial
purchasers (collectively, the "Initial Purchasers") in an unregistered
private placement. The discount to the Initial Purchasers was 3.0% of
the $172,915,000 principal amount of the Notes purchased (or an
aggregate of $5,187,450). We have been advised that the Initial
Purchasers resold the Notes in the United States to "qualified
institutional buyers" in reliance on Rule 144A under the Securities Act
of 1933, as amended.
On March 22, 1999, we completed the acquisition of KillerApp
through a merger of KillerApp into the Company. Pursuant to the
merger, we issued 523,400 shares of its common stock to KillerApp's
stockholders. The issuance of shares in this transaction was exempt
from the registration requirements of the Securities Act of 1933
pursuant to Section 4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of February 2, 1999,
by and among CNET, Inc., Netventures, Inc. and the
stockholders of Netventures, Inc. (filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K filed March 1, 1999).
2.2 Agreement and Plan of Merger, dated as of February 19,
1999, by and among CNET, Inc., AuctionGate Interactive,
Inc. and the stockholders of AuctionGate Interactive, Inc.
(filed as Exhibit 2.2 to the Company's Current Report on
Form 8-K filed March 1, 1999).
2.3 Purchase Agreement, dated as of December 18, 1998, by and
among CNET, Inc., Jenesys LLC and Steve Jenkins (filed as
Exhibit 2.3 to the Company's Current Report on Form 8-K
filed March 1, 1999).
2.4 Amendment No.1 to Purchase Agreement, dated as of January
22, 1999, by and among CNET, Inc., Jenesys LLC and Steve
Jenkins (filed as Exhibit 2.4 to the Company's Current
Report on Form 8-K filed March 1, 1999).
2.5 Amendment No. 2 to Purchase Agreement, dated as of February
11, 1999, by and among CNET, Inc., Jenesys LLC and Steve
Jenkins. (filed as Exhibit 2.5 to the Company's Current
Report on Form 8-K filed March 1, 1999).
2.6 Agreement and Plan of Merger, dated as of March 22, 1999,
by and among CNET, Inc., KillerApp Corporation and Benjamin
Chiu, majority shareholder of KillerApp Corporation (filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K
filed April 1, 1999).
27* Financial Data Schedule
____________________
*Filed herewith
(b) Reports on Form 8-K
On March 1, 1999, the Company filed a Current Report on Form 8-K
with respect to the acquisitions of AuctionGate Interactive, Inc.
and Netventures, Inc., and with respect to the acquisition of the
assets of Winfiles.com from Jenesys LLC.
On March 1, 1999, the Company filed a Current Report on Form 8-K
with respect to its intention to raise $150 million (excluding
any over-allotments) through a Rule 144A offering of convertible
subordinated notes.
On March 17, 1999, the Company filed a Current Report on Form 8-K
with respect to the pricing of its previously announced Rule 144A
offering of convertible subordinated notes.
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
March 17, 1999
Date