===============================================================================
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, 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 July 31, 1999 there were 72,900,105 shares of the registrant's common
stock outstanding.
===============================================================================
Part 1. Financial Information
Item 1. Financial Statements
CNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's OMITTED)
June 30, December 31,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $99,081 $51,538
Marketable securities . . . . . . . . . . . 320,785 -
Accounts receivable, net. . . . . . . . . . 18,945 15,075
Accounts receivable, related party. . . . . - 1,710
Other current assets. . . . . . . . . . . . 13,074 1,705
Restricted cash . . . . . . . . . . . . . . 855 945
------------- -------------
Total current assets . . . . . . . . . 452,740 70,973
Property and equipment, net. . . . . . . . . . . 18,816 15,325
Other assets . . . . . . . . . . . . . . . . . . 31,250 2,060
------------- -------------
$502,806 $88,358
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $6,250 $3,477
Accrued liabilities . . . . . . . . . . . . 9,978 6,727
Current portion of long-term debt . . . . . - 1,112
Deferred tax liability. . . . . . . . . . . 57,337 -
------------- -------------
Total current liabilities. . . . . . . 73,565 11,316
Long-term debt . . . . . . . . . . . . . . . . . 178,665 569
------------- -------------
Total liabilities. . . . . . . . . . . 252,230 11,885
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 7 7
Additional paid in capital. . . . . . . . . 131,878 127,357
Other comphrehensive income . . . . . . . . 137,564 -
Accumulated deficit . . . . . . . . . . . . (18,873) (50,891)
------------- -------------
Total stockholders' equity . . . . . . 250,576 76,473
------------- -------------
$502,806 $88,358
============= =============
See accompanying notes to condensed consolidated financial statements
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's OMITTED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
Revenues:
Internet. . . . . . . . . . . . . $23,779 $11,395 $42,203 $19,512
Television. . . . . . . . . . . . 1,773 1,898 3,424 3,650
------------- ------------ ------------ -------------
Total revenues . . . . . . . . 25,552 13,293 45,627 23,162
Cost of revenues:
Internet. . . . . . . . . . . . . 7,467 5,885 14,456 11,193
Television. . . . . . . . . . . . 1,768 1,790 3,375 3,537
------------- ------------ ------------ -------------
Total cost of revenues . . . . 9,235 7,675 17,831 14,730
------------- ------------ ------------ -------------
Gross profit . . . . . . . . . . . . 16,317 5,618 27,796 8,432
Operating expenses:
Sales and marketing . . . . . . . 6,996 3,262 12,117 5,741
Development . . . . . . . . . . . 1,656 641 3,165 1,417
General and administrative. . . . 2,408 1,484 3,995 3,133
Amortization of goodwill. . . . . 931 - 1,237 -
------------- ------------ ------------ -------------
Total operating expenses . . . 11,991 5,387 20,514 10,291
------------- ------------ ------------ -------------
Operating income(loss) . . . . . . . 4,326 231 7,282 (1,859)
Other income (expense):
Equity losses . . . . . . . . . . - (4,968) - (8,647)
Gain on sale of equity investments 4,700 5,123 24,575 5,123
Interest income (expense), net. . 186 (46) 425 151
------------- ------------ ------------ -------------
Total other income (expense). . . 4,886 109 25,000 (3,373)
------------- ------------ ------------ -------------
Net income (loss ). . . . . . . . $9,212 $340 $32,282 ($5,232)
============= ============ ============ =============
Other comprehensive income, net of tax:
Unrealized holding gains arising
during the period. . . . . . . . 10,556 - 137,564 -
------------- ------------ ------------ -------------
Comprehensive income(loss) $19,768 $340 $169,846 ($5,232)
============= ============ ============ =============
Basic net income (loss) per share. . $0.13 $0.01 $0.46 ($0.09)
============= ============ ============ =============
Diluted net income (loss) per share. $0.11 $0.01 $0.41 ($0.09)
============= ============ ============ =============
Shares used in calculating
basic per share data . . . . . . . 71,651 60,964 70,556 60,291
============= ============ ============ =============
Shares used in calculating
diluted per share data . . . . . . 80,112 68,002 78,534 60,291
============= ============ ============ =============
See accompanying notes to condensed consolidated financial statements.
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's OMITTED)
Six Months Ended
June 30,
------------------------
1999 1998
------------ -----------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . $32,282 ($5,232)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . 4,968 3,247
Amortization of program costs. . . . . . . . . . 3,294 2,019
Allowance for doubtful accounts. . . . . . . . . (296) 441
Gain on investments . . . . . . . . . . . . . (24,579) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . (1,729) (2,391)
Other current assets. . . . . . . . . . . . . (11,284) 192
Other assets. . . . . . . . . . . . . . . . . 739 (225)
Accounts payable. . . . . . . . . . . . . . . 2,768 421
Accrued liabilities . . . . . . . . . . . . . 3,225 (2,392)
------------ -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . 9,388 (3,920)
------------ -----------
Cash flows from investing activities:
Purchase of marketable securities . . . . . . . . . (100,562) -
Investments . . . . . . . . . . . . . . . . . . . . (13,906) -
Cash paid for acquisitions. . . . . . . . . . . . . (7,840) -
Purchases of equipment, excluding capital leases. . (6,689) (2,443)
Purchases of programming assets . . . . . . . . . . (3,577) (1,857)
Deferred interest . . . . . . . . . . . . . . . . . (690) -
------------ -----------
Net cash used in investing activities. . . (133,264) (4,300)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of convertible debt. . . 167,479 -
Net proceeds from issuance of stock . . . . . . . . - 25,984
Net proceeds from employee stock purchase plan. . . 419 409
Net proceeds from exercise of options . . . . . . . 5,203 1,720
Principal payments on capital leases. . . . . . . . (42) (178)
Principal payments on equipment note. . . . . . . . (1,640) (647)
------------ -----------
Net cash provided by financing activities. 171,419 27,288
------------ -----------
Net increase (decrease) in cash and cash equivalents. 47,543 19,068
Cash and cash equivalents at beginning of period . . 51,538 22,591
------------ -----------
Cash and cash equivalents at end of period . . . . . $99,081 $41,659
============ ===========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $165 $131
============ ===========
Supplemental disclosure of noncash transactions:
Issuance of debt for acquisitions . . . . . . . . . $5,098 $3,066
============ ===========
Equity investments. . . . . . . . . . . . . . . . . $195,113 $ -
============ ===========
Deferred tax liability. . . . . . . . . . . . . . . $57,337 $ -
============ ===========
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 six months ended June 30, 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 shares of common stock outstanding during the period and diluted
net income per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the period.
Diluted 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 4,622,160 common shares because their effect is anti-dilutive.
Diluted net loss per share for the six months ended June 30, 1998
does not include the effect of approximately 10,603,800 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net income (loss) per share:
Basic net income (loss) per share $0.13 $0.01 $0.46 ($0.09)
============= ============= ============= =============
Diluted net income (loss) per share $0.11 $0.01 $0.41 ($0.09)
============= ============= ============= =============
Net income (loss) $9,212 $340 $32,282 ($5,232)
------------- ------------- ------------- -------------
Basic and diluted shares:
Weighted average common shares outstanding
used in computing basic net income
per share 71,651 60,964 70,556 60,291
------------- ------------- ------------- -------------
Common stock equivalents:
Stock options and awards 8,461 7,038 7,978 -
------------- ------------- ------------- -------------
Weighted average common shares and common
stock equivalents outstanding used in
computing diluted net income (loss)
per share 80,112 68,002 78,534 60,291
------------- ------------- ------------- -------------
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 May 10, 1999, the Company effected a two-for-one split of
its common stock. The accompanying consolidated financial statements
have been retroactively adjusted to reflect the stock split.
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 shareholders' equity. Realized gains and losses
on sales of investments and declines in value determined to be other
than temporary are included in operating results.
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, 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
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.
(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 second quarter of 1999 the Company reported unrealized
holding gains arising from investments classified as available for sale.
The Company has an investment in Vignette Corporation ("Vignette"), which
completed an initial public offering during the first quarter of 1999,
owns approximately 755,000 shares of beyond.com, a public corporation,
and has an investment in Mail.com, Inc. ("Mail.com"), which completed
an initial public offering during the second quarter of 1999. The
Company's investments in Vignette, beyond.com and Mail.com were recorded
at market value based on the closing price of each stock on June 30, 1999,
and the increase in value of each stock was recorded as unrealized
holding gains in 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. Asset information regarding
television and CNET online operations is as follows:
June 30, June 30,
1999 1998
--------- ---------
Television 2,695 2,951
CNET Online 500,111 74,712
--------- ---------
Consolidated Total 502,806 77,663
========= =========
(4) Sumo Acquisition
On April 30, 1999, the Company completed the acquisition of Sumo,
Inc., a Florida Corporation ("Sumo") through a merger of Sumo into the
Company. Pursuant to the merger, the Company issued 469,484 shares of
common stock in exchange for all of the outstanding shares of Sumo. Sumo
developed Internet service directories, including webhostlist.com,
webdesignlist.com and webisplist.com. The Company recorded this transaction
using the pooling-of-interests accounting method and recorded the financial
results of Sumo in its consolidated financial statements for all
periods presented. The consolidated financial statements of the Company
for prior periods have been adjusted for the consolidated financial results
of Sumo.
(5) Subsequent Events
On July 27, 1999, the Company completed the acquisition of GDT S.A.,
a Swiss Societe Anonyme, ("GDT") through a merger of GDT into the Company.
Pursuant to the merger, the Company paid $30.0 million in cash and issued
429,185 shares of common stock to GDT shareholder in exchange for all of
the outstanding shares of GDT. GDT is based in Switzerland and has built a
multi-language, multi-market database of product information. GDT's database
of product information will be used to enhance CNET's Shopping services.
The Company will record this transaction using purchase accounting.
On July 29, 1999, the Company completed the acquisition of Nordby
International, Inc., a Colorado corporation, ("Nordby") through a merger of
Nordby into the Company. Pursuant to the merger, the Company paid $5.0 million
in cashm issued a note payable due July 29, 2001 for $5.0 million and issued
230,017 sharees of common stock to Nordby shareholders in exchange for all
outstanding shares of Nordby. Nordby is a provider of customized financial
information to online and print partners. Nordby's financial information will
be used to enhance the Company's coverage of technology stocks through its News
and Investing channel. The Company will record this transaction using purchase
accounting.
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 10.8 million pages viewed daily during
the second quarter of 1999.
Results of Operations
Revenues
Total Revenues
Total revenues were $25.6 million and $13.3 million for the three
months and $45.6 million and $23.2 million for the six months ended
June 30, 1999 and 1998, respectively.
Internet Revenues
Total Internet revenues were $23.8 million and $11.4 million for
the three months and $42.2 million and $19.5 million for the six months
ended June 30, 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
advertiser's Internet network. Performance based programs include
revenues generated from lead-based compensation from our shopping services,
which commenced in the fourth quarter of 1998. 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 committment. 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 $12.4 million for the three
month and $22.7 million for the six month periods ended June 30,
1999 compared to the same periods in 1998 were attributable to
increased pages delivered, increased advertisements sold on our
network and an increase in our average revenue yield per page
delivered. Also contributing to our increased revenues and increased
revenue yield per page were performance-based advertising on our shopping
services. These lead-based programs which were offered during the three
and six month periods ended June 30, 1999, were not offered during the same
period in 1998. In addition, average daily pages delivered on our
network were approximately 10.8 million for the three month and 10.1
for the six month periods ended June 30, 1999 as compared to 6.3
million for each of the three month and six month periods ended June
30, 1998, or an increase of 71% and 60%, respectively. The increased
traffic from the three and six month periods ended June 30, 1998 to the
three and six month periods ended June 30, 1999 was primarily related
to an increase in the number of users of our network.
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 $1.5 million and $611,000
for the three months and $2.7 million and $1.1 million for the six
months ended June 30, 1999 and 1998, respectively.
Television Revenues
Television revenues were $1.8 million and $1.9 million for the
three months and $3.4 million and $3.7 million for the six months ended
June 30, 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, which was
scheduled to expire on June 30, 1999, has been extended through
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 primarily related to decreased revenues for TV.com.
Television operations accounted for 7% and 14% of total revenues
and Internet operations accounted for 93% and 86% of total revenues for
the three months ended June 30, 1999 and 1998, respectively.
Television operations accounted for 8% and 16% of total revenues and
Internet operations accounted for 92% and 84% of total revenues for the
six months ended June 30, 1999 and 1998, respectively. We expect to
experience fluctuations in television and Internet revenues in the
future as a result of 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 $9.2 million and $7.7 million for the
three months and $17.8 million and $14.7 million for the six months
ended June 30, 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, and costs for facilities and equipment.
Cost of Internet Revenues
Cost of Internet revenues were $7.5 million and $5.9 million for
the three months and $14.5 million and $11.2 million for the six months
ended June 30, 1999 and 1998, respectively, representing 31%, 52%, 34%
and 57% of the related revenues, respectively. The increase of $1.6
million and $3.3 million for the three month and six month periods
ended June 30, 1999 as compared to the same periods in 1998 was
primarily attributable to increases in personnel and personnel related
costs. In addition, costs of approximately $611,000 and $1.2 million
were recognized in the three month and six month periods ended June 30,
1999 which related to cost of revenues associated with the acquisitions
of Netventures, Inc., a California corporation, AuctionGate
Interactive, Inc., a California corporation, substantially
all of the assets of Jenesys LLC, a Washington limited liability
company ("Winfiles"), KillerApp corporation, a California corporation
and Sumo, Inc., a Florida corporation.
Cost of Television Revenues
Cost of television revenues were $1.8 million for each of the
three month periods and $3.4 million and $3.5 million for the six
months ended June 30, 1999 and 1998, representing approximately 100%,
94%, 99% and 97% of the related revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and
related expenses, consulting fees and advertising expenses. Sales and
marketing expenses were $7.0 million and $3.3 million for the three
months and $12.1 million and $5.7 million for the six months ended June
30, 1999 and 1998, respectively, representing 27%, 25%, 27% and 25% of
total revenues for each of the periods. Sales and marketing expenses
increased $3.7 million and $6.4 million for the three month and six
month periods ended June 30, 1999 respectively, compared to the same
periods in 1998.
These increases were primarily related to additional personnel in
sales and sales support roles which accounted for approximately $1.4 million
and $2.6 million for the three and six month periods, respectively,
and increased expenses for advertising of approximately $2.1 million and
$3.2 million which included an increase in barter transactions of $560,000
and $805,000 for the three and six month periods, respectively. We expect
sales and marketing expenses to increase significantly in the future. On
July 1, 1999 we announced the launch of a multi-media advertising campaign.
We currently expect to spend approximately $100.0 million within the next
six to eighteen months in connection with this campaign. The
anticipated cost of the campaign may vary depending on its effectiveness.
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 $1.7 million and $641,000 for the three
months and $3.2 million and $1.4 million for the six months ended June
30, 1999 and 1998, respectively, representing 6%, 5%, 7% and 6% of
total revenues for each of the periods. The increase in development
expenses of approximately $1.0 million for the three months and $1.7
million for the six months ended June 30, 1999 as compared to the same
periods in 1998 were primarily attributable to additional 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 $2.4 million and $1.5 million for the
three months and $4.0 million and $3.1 million for the six months ended
June 30, 1999 and 1998, respectively, representing 9%, 11%, 9% and 14%
of total revenues, respectively. The increases in general and
administrative expenses were primarily related to additional personnel
costs and other costs related to facilitating our growth.
Goodwill Amortization
We acquired Winfiles.com 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.com over three years.
Other Income (Expense)
Total other income (expense) was $4.9 million and $109,000 for
the three months and $25.0 million and $(3.4) million for the six
months ended June 30, 1999 and 1998, respectively. Other income
(expense) consists of equity losses, gain on the sale of equity
investments and net interest income (expense).
Equity losses included our interest in SNAP! LLC ("snap").
Pursuant to an agreement in June 1998 between NBC Multimedia and us,
snap was formed as a limited liability company. Based on the structure
of the Board of snap and considering that we have no obligation for
future funding of snap, we do not control snap and accordingly do not
consolidate its results. We have recorded snap's financial results
using the equity method of accounting effective January 1, 1998. We had
no equity losses for the three and six months ended June 30, 1999, and
equity losses were $5.0 million for the three months and $8.6 million
for the six months ended June 30, 1998. All of the equity losses in
1998 were related to snap.
Gain on the sale of equity investments were $4.7 million and
$5.1 million for the three months and $24.6 million and $5.1 million
for the six months ended June 30, 1999 and 1998, respectively. The gain
on the sale of equity investments of $4.7 million for the three month period
ended June 30, 1999 related to the sale of a portion of our holdings of
Vignette Corporation. The gains on sales of equity investments of $24.6
million for the six month period ended June 30, 1999 included the gain
related to the sale of the Vignette shares and a gain of approximately
$19.2 million related 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.com. We
recorded a gain related to shares we received on the date of the
merger. Our investment in beyond.com is classified as available
for sale and fluctuations in the value of this investment are
recorded as unrecognized gain (loss) on investments in
the stockholders' equity section of our balance sheet.
Income (Loss)
We recorded net income of $9.2 million or $0.11 per diluted share
and $340,000 or $0.01 per diluted share for the three months ended June
30, 1999 and 1998, respectively. We recorded net income of $32.3
million or $0.41 per diluted share for the six months ended June 30,
1999 compared to net losses of $5.2 million or 0.09 per share for the
comparable period in 1998. Net income increased $8.9 million for the
three months and $37.5 million for the six months ended June 30, 1999
as compared to the comparable periods in 1998, respectively.
Liquidity and Capital Resources
As of June 30, 1999, we had cash and cash equivalents of $99.1
million and marketable securities of $320.8 million. Cash provided by
operating activities of $9.4 million for the six months ended June 30,
1999 was primarily due to earnings of $32.3 million, depreciation,
amortization and the amortization of program costs of $8.3 million, a
gain on sale of investments of $24.6 million and an increase in other
current assets of $11.3 million. Net cash used in operating activities
of $3.9 million for the six months ended June 30, 1998 was primarily
attributable to net losses in the period. Net cash used in investing
activities of $133.3 million for the six months ended June 30, 1999
were primarily attributable to purchases of marketable securities and
purchases of equipment and programming assets. Net cash used in
investing activities of $4.3 million for the six months ended June 30,
1998 were primarily attributable to purchases of equipment and
programming assets. Cash flows provided by financing activities of
$171.4 million in 1999 consisted primarily of the issuance of
convertible debt with net proceeds of $167.5 million and the issuance
of common stock through our stock option plans. Cash flows
provided by financing activities in 1998 consisted primarily of
proceeds from the issuance of common stock. 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 June 30, 1999 we had obligations outstanding under notes
payable totaling $179 million. Notes payable include $173 million of
5% Convertible Subordinated Notes, due 2006. Such obligations were
incurred to obtain proceeds for general corporate purchases, 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.
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 are currently in
the assessment phase of its 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
Securities and Exchange Commission 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. 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective July 23, 1999, we acquired GDT S.A., a Swiss Societe Anonyme,
for approximately $50 million in cash and stock. In connection with this
acquisition, we issued 429,185 shares of our common stock to certain
shareholders of GDT. 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.
Effective July 29, 1999, we acquired Nordby International, Inc.,
a Colorado corporation ("Nordby") for a total purchase price of
approximately $20 million, through a merger of Nordby into the Company
(the "Merger"). In connection with the Merger, the Company issued
230,017 shares, or approximately $10 million, of its common stock to
the sole shareholder of Nordby. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1* Amended and Restated Bylaws of CNET, Inc.
10.1* Employment Agreement, dated as of April 27, 1999, by and
between Richard Marino and CNET, Inc.
27.1* Financial Data Schedule
____________________
*Filed herewith
(b) Reports on Form 8-K
On April 1, 1999, the Company filed a Current Report on Form 8-K
with respect to its acquisition of KillerApp Corporation.
On April 23, 1999, the Company filed a Current Report on Form 8-K
with respect to its first quarter earnings and 2 for 1 split of
its common stock.
On May 14, 1999, the Company filed a Current Report on Form 8-K
with respect to its acquisition of Sumo, Inc.
On May 17, 1999, the Company filed a Current Report on Form 8-K
relating to its agreement to contribute its effective 40%
ownership in Snap.com into a new company called NBC Internet.
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 16, 1999
Date