===============================================================================
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, 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 October 31, 1999 there were 73,475,612 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)
(000's OMITTED)
September 30, December 31,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $117,375 $51,538
Marketable securities . . . . . . . . . . . 121,965 -
Investments . . . . . . . . . . . . . . . . 118,893 -
Accounts receivable, net. . . . . . . . . . 22,772 15,075
Accounts receivable, related party. . . . . - 1,710
Other current assets. . . . . . . . . . . . 12,058 1,705
Restricted cash . . . . . . . . . . . . . . 645 945
------------- -------------
Total current assets . . . . . . . . . 393,708 70,973
Property and equipment, net. . . . . . . . . . . 23,694 15,325
Other assets . . . . . . . . . . . . . . . . . . 28,221 2,060
Goodwill . . . . . . . . . . . . . . . . . . . . 74,405 -
------------- -------------
$520,028 $88,358
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $16,639 $3,477
Accrued liabilities . . . . . . . . . . . . 13,241 6,727
Current portion of long-term debt . . . . . 5,750 1,112
Income tax payable. . . . . . . . . . . . . 36,349 -
Deferred tax liability. . . . . . . . . . . 36,780 -
------------- -------------
Total current liabilities. . . . . . . 108,759 11,316
Long-term debt . . . . . . . . . . . . . . . . . 179,086 569
------------- -------------
Total liabilities. . . . . . . . . . . 287,845 11,885
Stockholders' equity:
Common stock. . . . . . . . . . . . . . . . 7 7
Additional paid in capital. . . . . . . . . 167,831 127,357
Other comprehensive income, net . . . . . . 55,161 -
Retained earnings (deficit) . . . . . . . . 9,184 (50,891)
------------- -------------
Total stockholders' equity . . . . . . 232,183 76,473
------------- -------------
$520,028 $88,358
============= =============
See accompanying notes to condensed consolidated financial statements
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's OMITTED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
Revenues:
Internet. . . . . . . . . . . . . $26,838 $12,930 $69,041 $32,442
Television. . . . . . . . . . . . 1,571 1,771 4,995 5,421
------------- ------------ ------------ -------------
Total revenues . . . . . . . . 28,409 14,701 74,036 37,863
Cost of revenues:
Internet. . . . . . . . . . . . . 9,155 5,484 23,611 16,677
Television. . . . . . . . . . . . 2,324 1,668 5,699 5,205
------------- ------------ ------------ -------------
Total cost of revenues . . . . 11,479 7,152 29,310 21,882
------------- ------------ ------------ -------------
Gross profit . . . . . . . . . . . . 16,930 7,549 44,726 15,981
Operating expenses:
Sales and marketing . . . . . . . 32,998 3,971 45,115 9,712
Development . . . . . . . . . . . 1,904 688 5,069 2,105
General and administrative. . . . 4,807 1,719 10,002 4,852
Amortization of goodwill. . . . . 5,224 - 6,461 -
------------- ------------ ------------ -------------
Total operating expenses . . . 44,933 6,378 66,647 16,669
------------- ------------ ------------ -------------
Operating income(loss) . . . . . . . (28,003) 1,171 (21,921) (688)
Other income (expense):
Equity losses . . . . . . . . . . - (3,126) - (11,773)
Gain on investment sales. . . . . 97,791 5,327 122,365 10,450
Interest income (expense), net. . (312) 495 112 647
------------- ------------ ------------ -------------
Total other income (expense). . . 97,479 2,696 122,477 (676)
------------- ------------ ------------ -------------
Net income (loss) before income taxes 69,476 3,867 100,556 (1,364)
Income taxes 40,222 - 40,222 -
------------- ------------ ------------ -------------
Net income (loss) after income taxes $29,254 $3,867 $60,334 ($1,364)
============= ============ ============ =============
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
arising during the period. . . . (4,627) - 55,161 -
------------- ------------ ------------ -------------
Comprehensive income (loss) $24,627 $3,867 $115,495 ($1,364)
============= ============ ============ =============
Basic net income (loss) per share. . $0.40 $0.06 $0.85 ($0.02)
============= ============ ============ =============
Diluted net income (loss) per share. $0.35 $0.05 $0.76 ($0.02)
============= ============ ============ =============
Shares used in calculating
basic per share data . . . . . . . 72,536 67,255 70,790 62,944
============= ============ ============ =============
Shares used in calculating
diluted per share data . . . . . . 86,105 72,634 79,096 62,944
============= ============ ============ =============
See accompanying notes to condensed consolidated financial statements.
CNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's OMITTED)
Nine Months Ended
September 30,
------------------------
1999 1998
------------ -----------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . $60,334 ($1,364)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . . 12,986 4,783
Amortization of program costs. . . . . . . . . . 5,616 3,888
Allowance for doubtful accounts. . . . . . . . . 204 742
Investments for services provided. . . . . . . . (3,383) -
Gain on investment sales . . . . . . . . . . . . (122,365) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . (6,057) (8,322)
Other current assets. . . . . . . . . . . . . (10,064) 470
Other assets. . . . . . . . . . . . . . . . . 260 1,979
Accounts payable. . . . . . . . . . . . . . . 13,157 (48)
Accrued liabilities . . . . . . . . . . . . . 6,490 (1,493)
Income tax liabilities. . . . . . . . . . . . 36,349 -
Benefit from exercises of stock options . . . 3,873 -
------------ -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . ( 2,600) 635
------------ -----------
Cash flows from investing activities:
Purchase of marketable securities . . . . . . . . . (136,482) -
Purchase of investments . . . . . . . . . . . . . . - (277)
Proceeds from sale of marketable securities . . . . 12,328 -
Proceeds from sale of investments . . . . . . . . . 101,729 -
Privately held companies. . . . . . . . . . . . . . (20,991) -
Acquisitions less cash acquired . . . . . . . . . . (39,113) -
Purchases of equipment, excluding capital leases. . (13,848) (3,452)
Purchases of programming assets . . . . . . . . . . (6,084) (3,899)
Deferred interest . . . . . . . . . . . . . . . . . (690) -
Loan to joint venture . . . . . . . . . . . . . . . - (63)
------------ -----------
Net cash used in investing activities. . . (103,151) (7,691)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of convertible debt. . . 166,943 -
Net proceeds from issuance of stock . . . . . . . . - 25,983
Net proceeds from employee stock purchase plan. . . 661 825
Net proceeds from exercise of options and warrants 5,666 4,122
Principal payments on capital leases. . . . . . . . (42) (295)
Principal payments on equipment note. . . . . . . . (1,640) (1,671)
------------ -----------
Net cash provided by financing activities. 171,588 28,964
------------ -----------
Net increase (decrease) in cash and cash equivalents. 65,837 21,908
Cash and cash equivalents at beginning of period . . 51,538 22,591
------------ -----------
Cash and cash equivalents at end of period . . . . . $117,375 $44,499
============ ===========
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . $4,342 $245
============ ===========
Supplemental disclosure of noncash transactions:
Issuance of debt for acquisitions . . . . . . . . . $10,098 $3,066
============ ===========
Unrealized gain in marketable securities and
investments, net of deferred tax liability. . . . $55,161 $ -
============ ===========
Deferred tax liability. . . . . . . . . . . . . . . $36,780 $ -
============ ===========
Issuance of common stock for acquisitions . . . . . $30,253 $ -
============ ===========
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/A, 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, 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 three months ended September 30, 1999
includes the effect of the potential conversion of convertible debt to
approximately 4,622,160 common shares because their effect is dilutive.
Diluted net income per share for the nine months ended September 30, 1999
does not include the effect of the potential conversion of convertible debt
to approximately 3,475,180 common shares 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net income (loss) per share:
Basic net income (loss) per share $0.40 $0.06 $0.85 ($0.02)
============= ============= ============= =============
Diluted net income (loss) per share $0.35 $0.05 $0.76 ($0.02)
============= ============= ============= =============
Net income (loss) $29,254 $3,867 $60,334 ($1,364)
Interest from convertible note 1,312 - - -
------------- ------------- ------------- -------------
Net income (loss) for dilution $30,566 $3,867 $60,334 ($1,364)
------------- ------------- ------------- -------------
Basic and diluted shares:
Weighted average common shares outstanding
used in computing basic net income (loss)
per share 72,536 67,255 70,790 62,944
------------- ------------- ------------- -------------
Common stock equivalents:
Stock options, awards and shares from
convertible debt 13,569 5,379 8,306 -
------------- ------------- ------------- -------------
Weighted average common shares and common
stock equivalents outstanding used in
computing diluted net income (loss)
per share 86,105 72,634 79,096 62,944
------------- ------------- ------------- -------------
Income Taxes
Income tax expense has been recorded based on an estimated
effective tax rate for the year ended December 31, 1999. The estimated
effective tax rate has taken into consideration the estimated gain to be
realized in the fourth quarter of 1999 from the pending transaction related
to the Company's investment in SNAP! LLC ("snap").
Marketable Securities
The Company adopted Statement of Financial SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Investments classified
as available for sale are reported at market value, with the
unrealized gains and losses, net of tax, reported as a separate
component of other comprehensive income in stockholders' 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 nine month period ended September 30, 1999 the Company
reported unrealized holding gains arising from investments classified as
available for sale. As of September 30, 1999, the Company owns 944,471
shares in Vignette Corporation ("Vignette"), owns approximately 755,000
shares of beyond.com, and owns 1.7 million shares in Mail.com, Inc.
("Mail.com"), all public companies. 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 September 30, 1999, and the net increase in value of
each stock was recorded as unrealized holding gains in comprehensive income,
net of deferred tax liability. The Company sold 1,311,000 shares of
Vignette and realized a gain of $97.8 million during the three months ended
September 30, 1999.
(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:
September 30, September 30,
1999 1998
--------- ---------
Television 1,700 2,284
CNET Online 518,328 86,074
--------- ---------
Consolidated Total 520,028 88,358
========= =========
(4) Acquisition
On July 27, 1999, the Company acquired 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 shareholders 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
acquisition was accounted for under the purchase method, resulting in goodwill
of $49.4 million, which is amortized over 3 years. The results of operations
of GDT and the estimated fair value of assets acquired and liabilities
assumed are included in the Company's financial statements from the date of
acquisition.
On July 29, 1999, the Company acquired Nordby International, Inc.,
a Colorado corporation, ("Nordby") through a merger of Nordby into the
the Company. Pursuant to the merger, the Company paid $5.0 million in
cash, issued a note payable due July 29, 2001 for $5.0 million and issued
230,017 shares 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 customized financial
information will be used to enhance the Company's coverage of technology
stock through its News and Investing channel. The acquisition was
accounted for under the purchase method, resulting in goodwill of $20.0
million, which is amortized over 3 years. The results of operations
of Nordby and the estimated fair value of assets acquired and liabilities
assumed are included in the Company's financial statements from the date of
acquisition.
(5) Subsequent Events
On October 7, 1999, the Company acquired SavvySearch Limited,
a Massachusetts corporation ("Savvy"), through a merger of Savvy into
the Company. Pursuant to the merger, the Company paid $4.4 million and
issued 307,409 shares of common stock to Savvy shareholders in exchange
for all outstanding shares of Savvy. Savvy is a provider of metasearch
services. Savvy's advanced internet search capabilities will bring the
Company's users access to more comprehensive product information and
tech-focused resources from around the Web.
On November 4, 1999, the Company acquired Manageable Software
Services Inc., a California corporation ("MSSI"), through a merger
of MSSI into the company. Pursuant to the merger, the Company issued
58,394 shares of common stock to MSSI shareholders in exchange for all
outstanding shares of MSSI. MSSI provides automated PC management services
to keep users' software and hardware up-to-date. MSSI services will
integrate and compliment the Help.com, Download.com and Computers.com sites.
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 11.4 million pages viewed daily during the
third quarter of 1999.
Results of Operations
Revenues
Total Revenues
Total revenues were $28.4 million and $14.7 million for the three months
and $74.0 million and $37.9 million for the nine months ended September 30,
1999 and 1998, respectively.
Internet Revenues
Total Internet revenues were $26.8 million and $12.9 million for the
three months and $69.0 million and $32.4 million for the nine months ended
September 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
commitment. Advertising revenues are recognized in the period in which
the advertisements are delivered. Our ability to sustain or increase revenues
for Internet advertising will depend on numerous factors, which include,
but are not limited to, our ability to increase our inventory of delivered
Internet pages on which advertisements can be displayed and our ability
to maintain or increase advertising rates.
The increase in Internet revenues of $13.9 million for the three month and
$36.6 million for the nine month periods ended September 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 nine month periods ended September 30, 1999, were not offered during
the same periods in 1998. In addition, average daily pages delivered on our
network were approximately 11.4 million for the three month and 10.6 for the
nine month periods ended September 30, 1999 as compared to 6.8 million for the
three month and 6.5 million for the nine month periods ended September 30,
1998, or an increase of 68% and 63%, respectively. The increased traffic from
the three and nine month periods ended September 30, 1998 to the three and
nine month periods ended September 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.
Revenues related to barter transactions were $1.5 million and $1.1 million for
the three months and $4.2 million and $2.2 million for the nine months ended
September 30, 1999 and 1998, respectively.
Television Revenues
Television revenues were $1.6 million and $1.8 million for the three
months and $5.0 million and $5.4 million for the nine months ended September
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
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, was extended through
September 30, 1999 and USA Networks paid a fee of $1.0 million to carry the
programming for the three month period. The agreement with USA Networks was
subsequently extended through December 31, 1999 and will decrease the number
of programs produced under the Digital Domain from four to two. USA Networks
will pay a fee of $500,000 to carry programming for the fourth quarter of
1999. The contract with USA Networks will not be extended beyond December
31, 1999.
In May 1999 we entered into an agreement with the National
Broadcasting Company ("NBC") whereby NBC granted certain rights
to CNBC, Inc. ("CNBC") to carry the sixty minute television program
we will produce called "CNET News.com". The term of the agreement is
from October 1, 1999 through September 30, 2002, subject to the completion
of the Plan of Merger between CNET, XOOM.com, Inc. and SNAP! LLC. CNBC
will pay us a annual fee based on the cost of production, not to exceed
exceed $2.5 million. We also have the right to sell certain commercial
commercial time available on the program.
We also produce a television program, TV.com, which is exclusively
distributed by Trans World International ("TWI"). We sell advertisements on
TV.com and pay a distribution fee to TWI.
Internet operations accounted for 94% and 88% of total revenues and
television operations accounted for 6% and 12% of total revenues for the three
months ended September 30, 1999 and 1998, respectively. Internet operations
accounted for 93% and 86% of total revenues and television operations accounted
for 7% and 14% of total revenues for the nine months ended September 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 $11.5 million and $7.2 million for the
three months and $29.3 million and $21.9 million for the nine months ended
September 30, 1999 and 1998, respectively. Cost of revenues include costs
associated with the production and delivery of our Internet channels and our
television programming. The principal elements of cost of revenues for our
Internet operations have been payroll and related expenses for the editorial,
production and technology staff, and costs for facilities and equipment. The
principal elements of cost of revenues for our 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.
Cost of Internet Revenues
Cost of Internet revenues were $9.2 million and $5.5 million for the
three months and $23.6 million and $16.7 million for the nine months ended
September 30, 1999 and 1998, respectively, representing 34%, 42%, 34% and 51%
of the related revenues, respectively. The increase of $3.7 million and $6.9
million for the three month and nine month periods ended September 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
$1.3 million and $2.5 million were recognized in the three month and nine month
periods ended September 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, GDT and Nordby.
Cost of Television Revenues
Cost of television revenues were $2.3 million and $1.7 million for the
three month periods and $5.7 million and $5.2 million for the nine months ended
September 30, 1999 and 1998, representing approximately 148%, 94%, 114% and 96%
of the related revenues. The increase of $656,000 and $494,000 for the three
month and nine month periods ended September 30, 1999 as compared to the same
periods in 1998 related primarily to costs associated with the cancellations of
two of the programs produced for USA Networks.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses, consulting fees and advertising expenses. Sales and marketing
expenses were $33.0 million and $4.0 million for the three months and $45.1
million and $9.7 million for the nine months ended September 30, 1999 and 1998,
respectively, representing 116%, 27%, 65% and 26% of total revenues for each of
the periods. Sales and marketing expenses increased $29.0 million and $35.4
million for the three month and nine month periods ended September 30, 1999
respectively, compared to the same periods in 1998.
Effective July 1, 1999 we launched a multi-media advertising campaign. We
expect to spend approximately $100.0 million over a nine to eighteen month
period beginning July 1, 1999, depending on the effectiveness of the campaign.
Expenses related to this advertising campaign were $24.4 million and $24.8
million for the three and nine month periods ended September 30, 1999,
respectively.
Other advertising expenses, including barter, increased by approximately $2.7
million and $5.5 million for the three and nine month periods ended September
30, 1999 as compared to the similar periods in 1998. The remaining increases
in sales and marketing expenses were primarily related to additional personnel
in marketing, sales and sales support roles and related costs.
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 $1.9 million and $688,000 for the three months
and $5.1 million and $2.1 million for the nine months ended September 30, 1999
and 1998, respectively, representing 7%, 5%, 7% and 6% of total revenues for
each of the periods. The increase in development expenses of $1.2 million for
the three months and $3.0 million for the nine months ended September 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
$4.9 million and $1.7 million for the three months and $10.0 million and $4.8
million for the nine months ended September 30, 1999 and 1998, respectively,
representing 17%, 12%, 14% and 13% of total revenues, respectively. General and
administrative expenses increased $3.1 million and $5.1 million for the three
month and nine month periods ended September 31, 1999, respectively, compared
to the same periods in 1998. The increase in general and administrative
expenses were primarily related to additional personnel costs and other costs
related to facilitating our growth.
Goodwill Amortization
During 1999, we acquired three companies for which we are using the
purchase method of accounting. On February 26, 1999 we acquired Winfiles.com
("Winfiles") for a total purchase price of $11.5 million, on July 27, 1999
we acquired GDT for a total purchase price of $50.0 million and on July 29,
1999 we acquired Nordby for a total purchase price of $20.0 million. Goodwill
attributable to each of the acquisitions was $11.0 million, $49.4 million,
and $20.0 million for Winfiles, GDT and Nordby, respectively. We are
amortizing the goodwill related to the purchase of these companies over
three years.
Other Income (Expense)
Total other income (expense) was $97.5 million and $2.7 million for the
three months and $122.5 million and $(676,000) for the nine months ended
September 30, 1999 and 1998, respectively. Other income (expense) consists of
equity losses, gain on investment sales and net interest income (expense).
Equity losses in 1998 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 nine
months ended September 30, 1999, and equity losses were $3.1 million for the
three months and $11.8 million for the nine months ended September 30, 1998.
All of the equity losses in 1998 were related to snap.
Gain on investment sales were $97.8 million and $5.3 million for the
three months and $122.4 million and $10.5 million for the nine months ended
September 30, 1999 and 1998, respectively. The gain on investment sales of
$97.8 million for the three month period ended September 30, 1999 related to
the sale of a portion of our holdings of Vignette Corporation. The gain on
investment sales of $122.4 million for the nine month period ended September
30, 1999 included the gain related to the sale of the Vignette shares and a
gain of approximately $19.9 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 other
comprehensive income in the stockholders' equity section of our balance sheet,
net of taxes.
Income Taxes
Income taxes were $40.2 million and zero for both the three and nine
month periods ended September 30, 1999 and 1998, respectively. Income tax
was recorded based on an estimated effective tax rate of 40% for the year
ended December 31, 1999. The estimated effective tax rate has taken into
consideration the estimated gain to be realized in the fourth quarter of 1999
from the pending transaction relating to our ownership interest in snap.
Income (Loss)
We recorded net income of $29.3 million or $0.35 per diluted share and
$3.9 million or $0.05 per diluted share for the three months ended September
30, 1999 and 1998, respectively. We recorded net income of $60.3 million or
$0.76 per diluted share for the nine months ended September 30, 1999 compared
to a net loss of $1.4 million or 0.02 per share for the comparable period in
1998. Net income increased $25.4 million for the three months and $61.7
million for the nine months ended September 30, 1999 as compared to the
comparable periods in 1998, respectively.
Liquidity and Capital Resources
As of September 30, 1999, we had cash and cash equivalents of $117.4
million and investments and marketable securities of $240.9 million. Cash
used by operating activities of $2.6 million for the nine months ended
September 30, 1999 was primarily due to earnings of $60.3 million,
depreciation, goodwill amortization and the amortization of program costs
of $18.6 million, an investment for services provided of $3.4 million, a gain
on investments of $122.4 million, an increase in accounts receivable and
other current assets of $16.1 million and increases in accounts payable,
accrued liabilities, accrued income taxes and benefits from exercises of
stock options of $59.9 million. Cash provided by operating activities
of $635,000 for the nine months ended September 30, 1998 was primarily
attributable to net losses in the period of $1.4 million, depreciation
and amortization and the amortization of programming costs of $8.7 million
and an increase in accounts receivable of $8.3 million. Net cash used
in investing activities of $103.1 million for the nine months ended
September 30, 1999 was primarily attributable to purchases of marketable
securities of $136.5 million, proceeds from the sale of marketable securities
and investments of $12.3 million and $101.7 million, respectively, equity
investments of $21.0 million, cash paid related to the acquisitions of
Winfiles, GDT and Nordby of $39.1 million, and purchases of equipment and
and programming assets of $19.9 million. Net cash used in investing
activities of $7.7 million for the nine months ended September 30, 1998
were primarily attributable to purchases of equipment and programming
assets. Cash flows provided by financing activities of $171.6 million
in 1999 consisted primarily of the issuance of convertible debt with
net proceeds of $166.9 million. 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 September 30, 1999 we had obligations outstanding under notes
payable totaling $184.8 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 testing and
deployment phase of our year 2000 program. As part of this phase, we are
completing our testing of critical systems and will begin deploying upgrades
or other fixes as determined necessary.
We anticipate that we will complete both the testing and deployment
phase relating to critical systems by November 30, 1999. We have not made
estimates for the costs associated with completing our year 2000 program.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of interest rate changes and changes in the
market values of our investments.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rate
relates primarily to our marketable securities portfolio. We invest our
excess cash in our marketable securities portfolio. We have not used
derivative financial instruments in our marketable securities 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, limits
the amount of credit exposure to any one issuer. We protect and preserve
our invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments 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 income from
these marketable securities may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if force to sell
securities which have declined in market value due to changes in interest
rates.
Investment Risk
We invest in equity instruments of publicly and privately-held,
information technology companies for business and strategic purposes.
Investments in publicly owned companies are included in investments,
which are part of current assets, and privately held investments are
included in long term assets. These investments are accounted for under
the cost method when ownership is less than 20%. For these non-quoted
investments, our policy is to regularly review the assumptions underlying
the operating performance and cash flow forecasts in assessing the carrying
values. We identify and record impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired.
In 1999, two of the privately held investments became marketable equity
securities when the investees completed an initial public offering. Such
investments in the Internet industry are subject to significant fluctuations
in fair market value due to the volatility of the stock market, and are
recorded as available-for-sale securities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1998, Snap Technologies commenced an action against the
Company in the U.S. District Court for the Northern District of California
alleging trademark infringement and related claims arising from the name of
the snap portal service. The lawsuit was settled on July l5, 1999 at an
immaterial cost to the Company.
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 1993 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
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.
10.1* Amended and Restated 1997 Stock Option Plan
10.2* Amended and Restated 1996 Employee Stock Purchase Plan
27.1* Financial Data Schedule
____________________
*Filed herewith
(b) Reports on Form 8-K
On August 1, 1999, the Company filed a Current Report on Form 8-K
with respect to its acquisitions of GDT and Nordby.
On September 2, 1999, the Company filed a Current Report on Form 8-K
with respect to its agreement with USA Networks to effectively extend
broadcast of The New Edge and CNET Central television programming
on the USA Network/Sci-Fi Channel.
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 15, 1999
Date