-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrXc80fJ/bZ0JSrAjvJvczrY0VPOA+ANKURrXwCe/E0pCJv22DXg7HIrxAYM5jxl S/AQP679ss3eQD7IuPtqIw== 0000927016-99-002346.txt : 19990615 0000927016-99-002346.hdr.sgml : 19990615 ACCESSION NUMBER: 0000927016-99-002346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYCOS INC CENTRAL INDEX KEY: 0001007992 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 043277338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27830 FILM NUMBER: 99644930 BUSINESS ADDRESS: STREET 1: 400 2 TOTTEN POND ROAD CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7813702700 MAIL ADDRESS: STREET 1: 400-2 TOTTEN POND ROAD CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended April 30, 1999 Commission File Number 0-27830 ----------- LYCOS, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-3277338 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 400-2 Totten Pond Road, Waltham, Massachusetts 02451-2000 (Address of principal executive offices, including Zip Code) (781) 370-2700 (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 such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares outstanding of the registrant's Common Stock as of June 10, 1999 was 43,629,408. ================================================================================ Lycos, Inc. Table of Contents Page ------ PART I. Financial Information ITEM 1 Unaudited Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets April 30, 1999 and July 31, 1998............................ 3 Condensed Consolidated Statements of Operations Three and nine months ended April 30, 1999 and 1998......... 4 Condensed Consolidated Statements of Cash Flows Nine months ended April 30, 1999 and 1998................... 5 Notes to Condensed Consolidated Financial Statements........... 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 PART II OTHER INFORMATION ITEM 1 Legal Proceedings.............................................. 15 ITEM 2 Change in Securities........................................... 16 ITEM 3 Defaults Upon Senior Securities................................ 16 ITEM 4 Submission of Matters to a Vote of Securities Holders.......... 16 ITEM 5 Other Information.............................................. 16 ITEM 6 Exhibits and Reports on Form 8-K............................... 16 Signature...................................................... 17 2 LYCOS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 31, 1999 1998 ----------------- ----------------- Assets (Unaudited) Current assets: Cash and cash equivalents............................................... $132,381,243 $153,728,200 Accounts receivable, net................................................ 15,256,997 10,958,470 License fees receivable................................................. 82,439,368 30,223,986 Prepaid expenses........................................................ 13,812,266 5,559,842 Other current assets.................................................... 810,819 326,292 ----------------- ----------------- Total current assets............................................... 244,700,693 200,796,790 ----------------- ----------------- Property and equipment, less accumulated depreciation........................ 5,407,606 3,960,059 Long-term license fees receivable............................................ 65,432,067 21,537,371 Investments.................................................................. 14,652,224 8,874,568 Intangible assets, net....................................................... 203,422,710 78,787,554 Other assets ................................................................ 4,874,945 3,278,994 ----------------- ----------------- Total assets....................................................... $538,490,245 $317,235,336 ================= ================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable........................................................ $ 2,873,091 $ 4,873,302 Accrued expenses........................................................ 8,801,067 17,277,168 Deferred revenues....................................................... 73,464,466 31,412,239 Current portion of long-term debt....................................... 1,393,039 171,783 ----------------- ----------------- Total current liabilities.......................................... 86,531,663 53,734,492 Deferred revenues............................................................ 74,565,989 26,159,754 Long-term debt, less current portion......................................... 1,030,767 140,749 Other liabilities............................................................ 21,667 36,667 ----------------- ----------------- 75,618,423 26,337,170 Commitments and contingencies -- -- Stockholders' equity: Common stock............................................................ 441,345 389,916 Additional paid-in capital.............................................. 443,602,800 278,126,582 Treasury stock, at cost................................................. (984,600) (984,593) Deferred compensation................................................... (81,437) (116,338) Accumulated deficit..................................................... (70,902,568) (40,251,893) Accumulated other comprehensive income.................................. 4,264,619 -- ----------------- ----------------- Total stockholders' equity......................................... 376,340,159 237,163,674 ----------------- ----------------- Total liabilities and stockholders' equity......................... $538,490,245 $317,235,336 ================= =================
See accompanying notes to condensed consolidated financial statements. 3 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended April 30, April 30, ------------------------------------- ------------------------------------ 1999 1998 1999 1998 ----------------- ----------------- ----------------- ----------------- Revenues: Advertising............................ $ 23,631,513 $ 11,686,820 $ 61,794,642 $ 27,671,120 Electronic commerce, license and other. 11,450,035 3,442,413 28,623,206 9,363,983 ----------------- ----------------- ----------------- ----------------- Total revenues..................... 35,081,548 15,129,233 90,417,848 37,035,103 Cost of revenues............................ 7,142,436 4,747,367 18,882,567 9,245,487 ----------------- ----------------- ----------------- ----------------- Gross profit....................... 27,939,112 10,381,866 71,535,281 27,789,616 Operating expenses: Research and development............... 6,473,341 2,704,426 17,832,265 5,873,027 In-process research and development.... -- 16,280,000 -- 16,280,000 Sales and marketing.................... 20,599,392 10,172,414 54,815,923 22,959,128 General and administrative............. 3,315,360 1,507,550 8,903,105 3,429,284 Amortization of intangible assets...... 12,274,020 2,293,829 35,687,017 2,520,670 ----------------- ----------------- ----------------- ----------------- Total operating expenses........... 42,662,113 32,958,219 117,238,310 51,062,109 ----------------- ----------------- ----------------- ----------------- Operating loss.............................. (14,723,001) (22,576,353) (45,703,029) (23,272,493) Interest income, net........................ 1,420,909 524,349 4,932,523 1,629,088 Gain on sale of investments................. -- -- 10,119,831 -- Income taxes................................ -- -- -- -- ----------------- ----------------- ----------------- ----------------- Net loss.................................... $(13,302,092) $(22,052,004) $(30,650,675) $(21,643,405) ================= ================= ================= ================= Basic and diluted net loss per share........ $ (0.31) $ (0.71) $ (0.72) $ (0.74) ================= ================= ================= ================= Shares used in computing basic and diluted net loss per share............. 43,282,836 31,015,906 42,710,173 29,276,530 ================= ================= ================= =================
See accompanying notes to condensed consolidated financial statements. 4 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended April 30, ------------------------------------ 1999 1998 ----------------- ----------------- Operating activities Net loss.............................................................. $ (30,650,675) $ (21,643,405) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation............................ 34,901 57,464 Depreciation..................................................... 2,572,551 978,317 Amortization of intangible assets................................ 35,687,017 2,520,670 Allowance for doubtful accounts.................................. 294,295 294,377 Gain on sale of investments...................................... (10,119,831) -- In-process research and development.............................. -- 16,280,000 Changes in operating assets and liabilities: Accounts receivable.............................................. (2,246,988) (3,427,800) License fees receivable.......................................... (96,110,078) (41,145,787) Prepaid expenses................................................. (6,949,934) 3,369,416 Other current assets............................................. (484,527) (326,292) Other assets..................................................... (1,570,600) (2,597) Accounts payable................................................. (3,588,920) (2,908,080) Accrued expenses................................................. (10,137,407) 1,801,504 Deferred revenues................................................ 89,918,190 39,444,719 Billings in excess of revenues................................... (1,405,410) (503,991) Other liabilities................................................ (15,000) (15,000) ----------------- ----------------- Net cash used in operating activities................................. (34,772,416) (5,226,485) ----------------- ----------------- Investing activities Purchase of property and equipment.................................... (1,105,700) (1,270,932) Acquisition costs paid................................................ (1,114,101) (1,253,217) Cash proceeds from sale of available-for-sale investment.............. 12,158,790 -- Cash acquired through acquisitions.................................... 1,906,467 4,215,056 Investment in affiliates.............................................. (3,551,996) (992,125) ----------------- ----------------- Net cash provided by investing activities............................. 8,293,460 698,782 ----------------- ----------------- Financing activities Proceeds from exercise of stock options............................... 7,335,387 3,351,362 Proceeds from issuance of common stock under ESPP..................... 247,491 -- Proceeds from notes receivable........................................ 623,438 -- Payments on notes payable............................................. (3,074,317) -- ----------------- ----------------- Net cash provided by financing activities............................. 5,131,999 3,351,362 ----------------- ----------------- Net decrease in cash and cash equivalents............................. (21,346,957) (1,176,341) ----------------- ----------------- Cash and cash equivalents at beginning of period...................... 153,728,200 40,766,258 ----------------- ----------------- Cash and cash equivalents at end of period............................ $ 132,381,243 $ 39,589,917 ================= =================
See accompanying notes to condensed consolidated financial statements. 5 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited)
Nine Months Ended April 30, ------------------------------------ 1999 1998 ----------------- ----------------- Schedule of non-cash financing and investing activities: Issuance of common stock upon acquisition of WhoWhere? Inc., WiseWire, Guestworld and Tripod............ $157,994,762 $102,118,571 Assets and liabilities recorded upon acquisition of WhoWhere? Inc., WiseWire, Guestworld and Tripod; Accounts receivable........................................... 2,345,834 209,236 Prepaids...................................................... 1,302,490 23,284 Property and equipment........................................ 2,914,397 1,945,630 Notes receivable.............................................. 623,438 -- Other assets.................................................. 25,351 11,007,632 Notes payable................................................. 5,185,591 353,466 Accounts payable.............................................. 1,588,709 809,757 Accrued expenses.............................................. 1,661,306 1,201,056 Deferred revenues............................................. 1,945,682 92,780
See accompanying notes to condensed consolidated financial statements. 6 LYCOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The Company and Basis of Presentation Lycos, Inc., ("Lycos" or the "Company") is a global Internet navigation and community network that offers globally branded media properties and aggregated content distributed primarily through the Web. Under the "Lycos Network" brand, Lycos provides guides to online content, aggregated third-party content, Web search and directory services and community and personalization features. Lycos seeks to draw a large number of viewers to its Websites by providing multiple destinations for identifying, selecting and accessing resources, services, content and information on the Web. The Company was formed in June 1995 by CMG@Ventures L.P., a wholly-owned subsidiary of CMGI, Inc. The Company operates in one industry segment, generating revenue from selling advertising, electronic commerce and licensing its products and services. The Company's fiscal year end is July 31. The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of these interim periods. Certain information and related footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended July 31, 1998, included in the Company's Amended Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 16, 1999. The results of operations for the interim periods shown are not necessarily indicative of the results for any future interim period or for the entire fiscal year. Restatement Related to Acquired In-Process Technology The accompanying unaudited consolidated financial statements reflect a change in the original accounting for the purchase price allocation related to the acquisitions of Tripod, WiseWire, Guestworld and WhoWhere?. The Company has modified the methods used to value purchased in-process research and development in connection with the Company's acquisitions. This resulted in a reduction in the amount of charges for in-process research and development from $106,639,000 to $17,280,000 and an increase in the amounts allocated to intangible assets from $156,121,336 to $245,480,391. The restatement did not effect previously reported net cash flows for any period. The Company filed an amended Form 10-K/A and amended Forms 10-Q/A on April 16, 1999 to reflect the changes. 2. Revenue Recognition The Company's advertising revenues are derived principally from short-term advertising contracts in which the Company guarantees a number of impressions for a fixed fee or on a per impression basis with an established minimum fee. Revenues from advertising are recognized as the services are performed. Electronic commerce revenues are derived principally from "slotting fees" paid for selective positioning and promotion within the Company's suite of products as well as from royalties from the sale of goods and services from the Company's Websites. The Company's license and product revenues are derived principally from product licensing fees and fees from maintenance and support of its products. Electronic commerce, license and product revenues are generally recognized upon delivery provided that no significant Company obligations remain and collection of the receivable is probable. In cases where there are significant remaining obligations, the Company defers such revenue until those obligations are satisfied. Fees from maintenance and support of the Company's products including revenues bundled with the initial licensing fees are deferred and recognized ratably over the service period. Deferred revenues are comprised of license and electronic commerce fees to be earned in the future on noncancelable agreements at the balance sheet date. 7 LYCOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Investments In March 1999, the Company established Lycos Korea, Inc. as the basis for a joint venture agreement with Mirae Corporation to create a localized version of the Lycos Network services to be offered in Korea. The joint venture is owned 50% by Lycos and 50% by Mirae, a Korean high technology company. 4. Comprehensive Income (Loss) The Company adopted Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income" during the quarter ended October 31, 1998. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustment and unrealized gains and losses on available-for-sale securities. Comprehensive loss was $11,526,461 and $26,386,056 for the three and nine month periods ended April 30, 1999, respectively. The difference between net loss and comprehensive loss for the three and nine months ended April 30, 1999 is due to $1,775,631 and $4,264,619, respectively of unrealized gains on the Company's remaining investment in Amazon.com, which is classified as an available-for-sale investment under SFAS 115. The Company had no "other comprehensive income" items in the three and nine month periods ended April 30, 1998. 5. Business Combinations Acquisition of WhoWhere? Inc. On August 7, 1998, the Company entered into an Agreement and Plan of Merger with WhoWhere? Inc., a California corporation ("WhoWhere?"), and certain shareholders of WhoWhere?. On August 13, 1998, the Company completed the closing of the merger and WhoWhere? became a wholly-owned subsidiary of the Company. As a result of a subsequent modification in the Company's original methods used to value purchased in-process research and development in connection with the Company's acquisitions, the total purchase price of approximately $160 million was entirely allocated to developed technology, goodwill and other intangible assets which are amortized over a period of five years. Pro forma financial information for the nine months ended April 30, 1999 is not materially different than the Company's actual consolidated results as reported, which do not include the operations of WhoWhere for the twelve days from August 1, 1998 to August 12, 1998. Unaudited combined pro forma financial information for the three months ended April 30, 1998, assuming the WhoWhere? acquisition had occurred on August 1, 1997, would have resulted in net revenues of $17.2 million, net loss of $23.9 million, and basic and diluted net loss per share of $0.68. Unaudited combined pro forma financial information for the nine months ended April 30, 1998, assuming the WhoWhere? acquisition had occurred on August 1, 1997, would have resulted in net revenues of $41.1 million, net loss of $26.9 million, and basic and diluted net loss per share of $0.81. The pro forma net loss includes amortization of developed technology, goodwill and other intangible assets of $10.3 million and $26.6 million for the three and nine months ended April 30, 1998, respectively. The unaudited pro forma information is for illustrative purposes only and is not necessarily indicative of the actual results of operations had the acquisition occurred on August 1, 1997, nor the results of any future period. Acquisition of Wired Ventures, Inc. On October 5, 1998, the Company entered into a definitive merger agreement to acquire Wired Ventures Inc. ("Wired") in a stock-for-stock transaction. The transaction will be accounted for under the purchase method of accounting, and accordingly, the purchase price will be allocated to assets acquired and liabilities assumed based on their respective fair values. Intangible assets will be amortized over a period of five years. The merger is subject to several conditions, including Wired's shareholder approval and customary regulatory approvals. The Company has filed a Registration Statement on Form S-4, which is pending the approval of the Securities and Exchange Commission, with respect to the registration of the shares of Lycos Common Stock to be issued in the merger. 8 LYCOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Business Combinations (continued) Additional information with respect to the proposed transaction is available on Form S-4 filed with the Securities and Exchange Commission on November 25, 1998 as amended on February 2, 1999, April 16, 1999 and May 20, 1999. 6. Reclassifications Certain amounts in the three and nine months ended April 30, 1998 have been reclassified to permit comparison to the current periods presented. 7. Litigation The Company is subject to several purported class action lawsuits. The complaints allege, among other claims, violations of the United States federal securities law through alleged misrepresentations relating to the Company's agreement to enter into an announced transaction with USA Networks, Inc. and certain affiliated companies. Each complaint seeks an unspecified award of damages. The Company believes that the allegations in the complaints are without merit and intends to contest them vigorously. 8. Subsequent Events On May 12, 1999, Lycos, Inc. and USA Networks, Inc. jointly announced a mutual consent to terminate the merger agreement between Lycos, USA Networks and Ticketmaster Online-CitySearch. The option agreement between USA Networks and Lycos that was part of the merger agreement was also terminated. The termination agreement requires Lycos to pay USAi (Home Shopping Network, Ticketmaster and First Auction) and TMCS (Ticketmaster Online-CitySearch, Inc.) an aggregate of $35 million under certain circumstances if prior to July 15, 1999 Lycos enters into an agreement with respect to, or becomes subject to, certain acquisition proposals. In addition, subject to certain exceptions, USAi and TMCS each has agreed that until July 15, 1999, it will not acquire Lycos stock or make any proposals to acquire Lycos. The Company expects to write-off acquisition costs paid by Lycos relating to this transaction in the fourth quarter of 1999. On May 18, 1999, the Board of Directors of the Company approved a 2-for-1 common stock split. The split is subject to shareholder approval of an amendment to the Company's Certificate of Incorporation to increase the Company's authorized common stock. The Company anticipates the split to become effective in late July 1999. On June 8, the Company announced the relocation of all Lycos Pittsburgh functions and responsibilities to corporate headquarters in Waltham. This relocation is expected to be completed in the second quarter of 2000. The cost of this relocation will be recorded in the fourth quarter of 1999. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed in this report contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and elsewhere in this Report, and the risks discussed in the "Factors Affecting the Company's Business, Operating Results and Financial Condition" section included in the Company's Amended 1998 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 16, 1999. Results of Operations Restatement Related to Acquired In-Process Technology The accompanying unaudited consolidated financial statements reflect a change in the original accounting for the purchase price allocation related to the acquisitions of Tripod, WiseWire, Guestworld and WhoWhere?. The Company has modified the methods used to value purchased in-process research and development in connection with the Company's acquisitions. This resulted in a reduction in the amount of charges for in-process research and development from $106,639,000 to $17,280,000 and an increase in the amounts allocated to intangible assets from $156,121,336 to $245,480,391. The restatement did not effect previously reported net cash flows for any period. The Company filed an amended Form 10-K/A and amended Forms 10-Q/A on April 16, 1999 to reflect the changes. Total Revenues Total revenues for the three and nine months ended April 30, 1999 were $35.1 million and $90.4 million versus $15.1 million and $37.1 million for the three and nine months ended April 30, 1998, as a result of growth in the number of advertisers and electronic commerce partners. As of April 30, 1999, deferred revenues, including billings in excess of revenues, increased to $148.0 million, compared to $57.6 million at July 31, 1998, attributable to increases in advertising contracts and guaranteed commitments under electronic commerce agreements for which there are significant obligations of the Company remaining. Advertising Revenues Advertising revenues were $23.6 million and $61.8 million for the three and nine months ending April 30, 1999, representing 67% and 68% of total revenues, as compared to advertising revenues of $11.7 million and $27.7 million for the three and nine months ended April 30, 1998, which represented 77% and 75% of total revenues. The top ten customers accounted for 16% of advertising revenues in the quarter ended April 30, 1999 as compared to 20% of advertising revenues in the quarter ended April 30, 1998. The Company currently derives a substantial portion of its revenues from the sale of advertisements on its Websites, primarily through banner advertisements and sponsorships. Advertising contracts are primarily sold as: (1) a "run of site" contract under which a customer is guaranteed a number of impressions; (2) a "key word" contract in which a customer purchases the right to advertise in connection with specified word searches; or (3) a "targeted" contract where the customer purchases a specified number of impressions in one of the targeted categories or on a specified page or service. Electronic Commerce, Licensing and Other Revenues Electronic commerce, licensing and other revenues were $11.5 million and $28.6 million for the three and nine months ending April 30, 1999, representing 33% and 32% of total revenues, as compared to electronic commerce, licensing and other revenues of $3.4 million and $9.4 million for the three and nine months ended April 30, 1998, which represented 23% and 25% of total revenues. The increase in electronic commerce, licensing and other revenues is attributable primarily to the addition of several new partners including, among others, WebMD, Audio Book Club, AutoConnect, AT&T and Preview Travel. 10 Electronic commerce revenues are derived principally from "slotting fees" paid for selective positioning and promotion within the Company's suite of products as well as from royalties from the sale of goods and services from the Company's websites. The Company's license and product revenues are derived principally from product licensing fees and fees from maintenance and support of its products. Electronic commerce, license and product revenues are generally recognized upon delivery provided that no significant Company obligations remain and collection of the receivable is probable. In cases where there are significant remaining obligations, the Company defers such revenue until those obligations are satisfied. Fees from maintenance and support of the Company's products including revenues bundled with the initial licensing fees are deferred and recognized ratably over the service period. Cost of Revenues Cost of revenues were $7.1 million and $18.9 million for the three and nine months ending April 30, 1999, representing 20% and 21% of total revenues, as compared to cost of revenues of $4.7 million and $9.2 million for the three and nine months ended April 30, 1998, which represented 31% and 25% of total revenues. Cost of revenues consist primarily of expenses associated with the ongoing maintenance and support of the Company's products and services, including compensation, consulting fees, equipment costs, networking and other related indirect costs. Operating expenses Research and Development Research and development expenses were $6.5 million and $17.8 million for the three and nine months ending April 30, 1999, representing 19% and 20% of total revenues, as compared to research and development expenses of $2.7 million and $5.9 million for the three and nine months ended April 30, 1998, which represented 18% and 16% of total revenues. Research and development expenses consist primarily of equipment and salary costs. The overall increase in research and development expenses was primarily due to increased engineering staffing to continue to develop and enhance the Company's expanded product offerings. With the exception of acquired technology, all research and development costs have been expensed as incurred. The Company believes that significant investments in research and development are required to remain competitive. As a consequence, the Company expects to continue to commit substantial resources to research and development in the future. Sales and Marketing Sales and marketing expenses were $20.6 million and $54.8 million for the three and nine months ending April 30, 1999, representing 59% and 61% of total revenues, as compared to sales and marketing expenses of $10.2 million and $23.0 million for the three and nine months ended April 30, 1998, which represented 67% and 62% of total revenues. Sales and marketing expenses consist primarily of compensation, advertising, public relations, trade shows, travel and costs of marketing literature. The spending increases were due to the addition of sales and marketing personnel, increased commissions associated with higher sales, and expenses pertaining to the Company's expanded advertising, marketing and public relations campaign. Sales and marketing expense also includes the cost of the Company's "Premier Provider" Agreements, as further described below. The Company expects continued increases in sales and marketing expenses in future periods. During the nine months ended April 30, 1999, the Company paid approximately $19 million under Premier Provider Agreements to provide search and navigation services between June 1998 and September 1999. The Company recognizes the cost of the Premier Provider Agreements over the one year terms, with the cost included in sales and marketing expense. General and Administrative General and administrative expenses were $3.3 million and $8.9 million for the three and nine months ending April 30, 1999, representing 10% and 10% of total revenues, as compared to general and administrative expenses of $1.5 million and $3.4 million for the three and nine months ended April 30, 1998, which represented 10% and 9% of total revenues. General and administrative expenses consist primarily of compensation, rent expenses and fees for professional services. The increases in spending were primarily due to the expansion of the Company's corporate infrastructure, including the addition of finance and administrative personnel, installation of information systems and increased costs for professional services. 11 Amortization of Intangible Assets Amortization of intangible assets was $12.3 million and $35.7 million for the three and nine months ended April 30, 1999 versus $2.3 million and $2.5 million for the three and nine months ended April 30, 1998. The increase is attributable to increased amortization related to developed technology and goodwill and other intangible assets recorded upon the acquisitions of WhoWhere?, Tripod, WiseWire and GuestWorld. Interest Income, net Interest income was $1.4 million and $4.9 million for the three and nine months ending April 30, 1999, as compared to interest income of $524,000 and $1.6 million for the three and nine months ended April 30, 1998. Interest income is generated from investment of the Company's cash equivalents. The increase in interest income reflects the investment of the net proceeds of the Company's secondary stock offering in June 1998. Interest expense was not significant for any of the periods presented. Gain on sale of Investments In August 1998, pursuant to an Agreement and Plan of Merger, Amazon.com acquired all of the outstanding capital stock of PlanetAll for approximately 2.4 million shares of Amazon.com common stock valued at approximately $87 million. Of the total 2.4 million shares issued by Amazon.com, the Company received 322,128 shares valued at approximately $12.8 million at the time of acquisition in exchange for its shares of PlanetAll, resulting in a gain of $10.1 million in the quarter ended October 31, 1998. The Company has 32,211 shares of Amazon.com remaining at April 30, 1999, which are subject to escrow restrictions that expire in August 1999. Factors which may affect future operations There are a number of business factors which singularly or combined may affect the Company's future operating results. These factors include, without limitation, the level of usage of the Internet and traffic to the Company's Internet site, continued acceptance of the Company's products, demand for Internet advertising, seasonal trends in advertising sales, the advertising budgeting cycles of individual advertisers, capital expenditures and other costs relating to the expansion of operations, the introduction of new products or services by the Company or its competitors, the mix of the services sold and the channels through which those services are sold, pricing changes, general economic conditions and specific economic conditions in the Internet industry and other risks detailed in the Company's filings with the Securities and Exchange Commission. In addition, other risks and uncertainties that could impact the proposed business combinations with Wired Ventures, Inc. include, but are not limited to, the satisfaction of conditions to consummation of the proposed transaction, the risk that the anticipated strategic and financial benefits of the proposed transaction may not be achieved, or may not be achieved within the time frame envisioned, general economic conditions and specific economic conditions in the Internet and media industries, including the volatility of capital markets in respect to the securities of Internet and media companies, and other risks detailed in the filings of the Company with the Securities and Exchange Commission. Liquidity and Capital Resources At April 30, 1999, the Company had cash and cash equivalents of approximately $132.4 million. The Company regularly invests excess funds in short-term money market funds, government securities and commercial paper. The Company used cash from operations of approximately $34.8 million during the nine months ended April 30, 1999, due primarily to increases in license fees receivable and prepaid expenses, and decreases in accrued expenses. The increase in prepaid expenses reflects approximately $19 million in payments made under the Company's Premier Provider Agreements, which provide search and navigation services through September 1999. The Company generated cash from investing activities of approximately $8.3 million during the nine months ended April 30, 1999, due primarily to cash proceeds from the sale of Amazon.com stock in October 1999, net of approximately $3.5 million of investments, primarily the Company's $2 million investment in Valent Software Corporation in December 1998. The Company generated cash from financing activities of approximately $5.1 million during the nine months ended April 30, 1999, due primarily to proceeds of $7.3 million received by the Company from the exercise of employee stock options, net of $3.1 million of payments on notes payable assumed upon the acquisition of WhoWhere?. 12 As of April 30, 1999, the Company had deferred revenues of $148.0 million representing primarily license fees to be earned in the future on noncancelable license agreements. On June 8, the Company announced the relocation of all Lycos Pittsburgh functions and responsibilities to corporate headquarters in Waltham. This relocation is expected to be completed in the second quarter of 2000. The cost of this relocation will be recorded in the fourth quarter of 1999. The Company currently believes that available funds and cash flows expected to be generated by operations, if any, will be sufficient to fund its working capital and capital expenditures requirements for at least the next twelve months. Thereafter, the Company may need to raise additional funds. The Company may need to raise additional funds sooner in order to fund more rapid expansion, to develop new or enhanced products and services, to respond to competitive pressures or to acquire complementary businesses or technologies. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution, and such equity securities may have rights, preferences or privileges senior to those of the Company's Common Stock. There can be no assurance that additional financing will be available when needed on terms favorable to the Company or at all. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to develop or enhance products or services, take advantage of future opportunities or respond to competitive pressures, which could have a material adverse effect on the Company's business, results of operations or financial condition. Proposed Business Combinations On October 5, 1998, the Company entered into a definitive merger agreement to acquire Wired Ventures Inc. ("Wired") in a stock-for-stock transaction. The transaction will be accounted for under the purchase method of accounting, and accordingly, the purchase price will be allocated to assets acquired and liabilities assumed based on their respective fair values. Intangible assets will be amortized over a period of five years. The merger is subject to several conditions, including Wired shareholder approval and customary regulatory approvals. The Company has filed a Registration Statement on Form S-4, which is pending the approval of the Securities and Exchange Commission, with respect to the registration of the shares of Lycos Common Stock to be issued in the merger. Additional information with respect to this proposed transaction is available on Form S-4 filed with the Securities and Exchange Commission on November 25, 1998, and amended on February 2, 1999, April 16,1999 and May 20, 1999. On February 9, 1999, the Company announced the proposed formation of USA/Lycos Interactive Networks, Inc.("USA/Lycos"), a three way merger between Lycos, Ticketmaster Online-CitySearch, Inc. ("TMCS") and certain USA Networks, Inc. ("USAi") properties - Home Shopping Network, Ticketmaster and First Auction. On May 12, 1999, Lycos, Inc. and USA Networks, Inc. jointly announced a mutual consent to terminate the merger agreement. The option agreement between USA Networks and Lycos that was part of the merger was also terminated. The termination agreement requires Lycos to pay USAi and TMCS an aggregate of $35 million under certain circumstances if prior to July 15, 1999 Lycos enters into an agreement with respect to, or becomes subject to, certain acquisition proposals. In addition, subject to certain exceptions, USAi and TMCS each has agreed that until July 15, 1999, it will not acquire Lycos stock or make any proposals to acquire Lycos. Expenses incurred in connection with this transaction will be recorded in the fourth quarter of 1999. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. These date code fields will need to distinguish 21st century dates from 20th century dates and, as a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. State of Readiness The Company has evaluated the year 2000 readiness of the hardware and software products sold by the Company ("Products"), the information technology systems used in its operations ("IT Systems"), and its non-IT Systems, such as building security, voice mail and other systems. The Company's evaluation covered the following phases: (i) identification of all Products, IT Systems, and non-IT Systems; (ii) assessment of repair or replacement requirements; (iii) repair or replacement; (iv) testing; (v) implementation; and (vi) creation of contingency plans in the event of year 2000 failures. The evaluation was completed in 1998. Based on this evaluation, the Company believes it is year 2000 compliant. 13 However, the assessment of whether a complete system or device in which a product is embedded will operate correctly for an end-user depends in large part on the year 2000 compliance of the product or system's other components, many of which are supplied by parties other than the Company. The supplier of the Company's current financial and accounting software has informed the Company that such software is year 2000 compliant. Further, the Company relies, both domestically and internationally, upon various vendors, governmental agencies, utility companies, telecommunications service companies, delivery service companies and other service providers who are outside of the Company's control. There is no assurance that such parties will not suffer a year 2000 business disruption, which could have a material adverse effect on the Company's financial condition and results of operations. Costs To date, the Company has not incurred any material expenditures in connection with identifying or evaluating year 2000 compliance issues. Most of its expenses have related to the opportunity cost of time spent by employees of the Company evaluating its software, the current versions of its products, and year 2000 compliance matters generally. Contingency Plan The Company has not developed a year 2000-specific contingency plan. If year 2000 compliance issues are discovered, the Company then will evaluate the need for contingency plans relating to such issues. 14 PART II ITEM 1. Legal Proceedings On November 5, 1998, Labrador Software, Inc. filed a lawsuit in the United States District Court for the District of Massachusetts against Lycos alleging Lycos violated several of Labrador's rights under 15 U.S.C. 1125, and Massachusetts statutory and common law. More specifically, Labrador alleges that Lycos' current advertising campaign featuring a black labrador retriever retrieving information on the Internet constitutes: (1) both unfair competition and trademark infringement under both federal and common law; (2) injury to Labrador's business reputation and trademark dilution under Massachusetts statutory and common law; and (3) unfair and deceptive trade practices under Massachusetts statutory law. Labrador requested that the court issue a temporary restraining order restraining Lycos from selling or advertising the Lycos products and services under the current advertising campaign, which request the court denied. Labrador has appealed the order denying the motion. Lycos is vigorously defending against the lawsuit and does not believe the outcome would have a material adverse effect on its business, financial condition, results of operations or cash flows. In January 1999, CIVIX-DDI brought a suit for patent infringement in the United States District Court for the District of Colorado (Case No. 99-B-172) against Lycos, Inc.; Microsoft Corporation; The Denver Post Corporation; Rand-McNally & Company, Inc.; Delorme Publishing Company, Inc.; InfoUSA, Inc.; Geosystems Global Corporation; Vicinity Corporation; Etak, Inc.; America Online, Inc.; Yahoo!, Inc.; Ticketmaster Online-CitySearch, Inc.; Zip2 Corporation; Infoseek Corporation; Alpine Electronics of America, Inc.; Magellan Corporation; Garmin International, Inc.; Excite, Inc.; Infospace.com, Inc.; and BellSouth Corporation. CIVIX-DDI asserts that Lycos, among others, infringes two patents that generally relate to electronic mapping systems. CIVIX-DDI is seeking unspecified damages, including attorneys' fees, as well as an injunction. Lycos' answer to the complaint is due on March 29, 1999. Discovery has not yet begun in this litigation, and as such, it is too early to determine any possible effect on the Company's business, financial condition, results of operations or cash flows. Eight purported class action lawsuits were filed in the Court of Chancery for the State of Delaware in and for New Castle County, by shareholders of the Company allegedly on behalf of all common stockholders of the Company (except defendants and their affiliates), entitled Jacob Horowitz v. David S. Wetherell et al., Civil Action No. ------------------------------------------- 16933-NC (filed Feb. 9, 1999); Robert Johnson v. Robert J. Davis et ------------------------------------ al., Civil Action No. 16937-NC (filed Feb. 9, 1999); Debra Mayer v. --- -------------- David S. Wetherell et al., Civil Action No. 16947-NC (filed Feb. 11, ------------------------- 1999); Ellis Investment Co., Ltd v. David S. Wetherell et al.., Civil ------------------------------------------------------- Action No.. 16951-NC (filed Feb. 11, 1999); Frederick Sheehan v. David -------------------------- S. Wetherell et al., Civil Action No. 16952-NC (filed Feb. 11, 1999); ------------------- Yorkshire Group, Inc. v. David S. Wetherell et al., Civil Action No. -------------------------------------------------- 16955-NC (filed Feb. 12, 1999); Warren Ciafardini v. David S. ----------------------------- Wetherell et al., Civil Action No. 16956-NC (filed Feb. 12, 1999); ---------------- Martin Lewkowicz, on behalf of himself and all others similarly --------------------------------------------------------------- situated v. Lycos, Inc. et al., Civil Action No. 16976-NC (filed Feb. ------------------------------ 23, 1999). The complaints name as defendants the directors of the Company individually, as well as the Company and, in the Horowitz, --------- Mayer, Ellis Investment, Sheehan, Yorkshire Group and Ciafardini ------------------------------------------------- ---------- complaints, USA Networks, Inc. The complaints allege that the directors of the Company violated their state law fiduciary duties owed to plaintiffs and the purported class by agreeing to enter into the announced transaction with USA Networks, Inc. The complaints request that the Court declare them to be proper class actions, enjoin the announced transaction, rescind the announced transaction if it is consummated prior to a final judgment or award rescissionary damages to the purported class, direct the Company to make an accounting to plaintiffs and the purported class for all damages and for all profits or special benefits obtained by the defendants, and award to plaintiffs all costs and fees, including attorneys' fees. The Company believes that the allegations in the complaints are without merit and intends to contest them vigorously. 15 Between February 22, 1999 and March 10, 1999, a series of purported securities class action lawsuits were filed in the United States District Court for the District of Massachusetts, entitled Kenneth R. Levine v. Lycos, Inc., et al., CA No. 99-10394(EFH), ---------------------------------------- Thomas Lynch v. Lycos, Inc., et al., CA No. 99-10426(EFH), Mary Jane ----------------------------------- --------- Crescente v. Lycos, Inc., et al., CA No. 99-10467(EFH), Arnold -------------------------------- ------ Silverstein v. Lycos, Inc., et al., CA No. 99-10476(EFH), Warren ---------------------------------- ------ Ciafardini v. Lycos, Inc., et al., CA No. 99-10494(EFH), Michelle --------------------------------- -------- Penfold v. Lycos, Inc., et al., CA No. 99-10495(EFH), Carol Lewkowicz ------------------------------ --------------- v. Lycos, Inc., et al., CA No. 99-10501(EFH), Joel Kofsky v. Lycos, ---------------------- --------------------- Inc., et al., CA No. 99-10502(EFH), Mark Zito v. Lycos, Inc., et al., ------------ -------------------------------- CA No. 99-10518(EFH), Marc Berger v. Lycos, Inc., et al., CA No. ---------------------------------- 99-10519(EFH) and Salvatore Bendetto v. Lycos, Inc., et al., CA No. ----------------------------------------- 99-10524(EFH). Each suit names as defendants the Company and Robert J. Davis, the Company's Chief Executive Officer and President. The Lewkowicz complaint also names as a defendant Edward M. Philip, the --------- Company's Chief Operating Officer and Chief Financial Officer. The complaints allege, among other claims, violations of United States federal securities law through alleged misrepresentations and omissions relating to the Company's agreement to enter into an announced transaction with USA Networks, Inc. and certain affiliated companies. Each complaint seeks an unspecified award of damages. The plaintiffs in the Levine, Lynch, Silverstein, and Berger actions ------ ----- ----------- ------ purport to represent a class of all persons who purchased the Company's common stock between January 25, 1999 and February 9, 1999. The plaintiff in the Zito action purports to represent a class of all persons who purchased the Company's common stock between January 21, 1999 and February 9, 1999. The plaintiffs in the Crescente, --------- Ciafardini, Penfold, Kofsky and Bendetto actions purport to represent ---------- ------- ------ -------- a class of all persons who purchased the Company's common stock between January 8, 1999 and February 9, 1999. The plaintiff in the Lewkowicz action purports to represent a class of all persons who --------- purchased the Company's common stock between January 7, 1999 and February 9, 1999. The Company believes that the allegations in the complaints are without merit and intends to contest them vigorously. ITEM 2. Changes in Securities None. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Securities Holders None. ITEM 5. Other Information Mr. David Wetherell resigned from the Lycos Board of Directors effective March 9, 1999. On May 18, 1999, the Board of Directors of the Company approved a 2-for-1 common stock split. The split is subject to shareholder approval of an amendment to the Company's Certificate of Incorporation to increase the Company's authorized common stock. The Company anticipates the split to become effective in late July 1999. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 11.1: Statement of Computation of Basic and Diluted Net Loss Per Share herein included on page 17. Exhibit 27.1: Financial Data Schedule (b) The Company filed Forms 8-K with the Securities and Exchange Commission on February 11, 1999 and February 26, 1999 with respect to the proposed transaction with USA Networks, Inc. and Ticketmaster Online-CitySearch, Inc. On May 14, 1999 the Company filed Form 8-K with the Securities and Exchange Commission with respect to the termination of the proposed transaction with USA Networks, Inc. and Ticketmaster Online-CitySearch, Inc. 16 SIGNATURE 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. LYCOS, INC. Date: June 11, 1999 By: /s/ Edward M. Philip -------------------- Edward M. Philip Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer, Authorized Officer) 17 EX-11.1 2 STATEMENT OF COMPUTATION OF BASIC & DILUTED EXHIBIT 11.1 LYCOS, INC. Computation of Shares Used in Computing Basic and Diluted Net Loss Per Share (Unaudited)
Three Months Ended Nine Months Ended April 30, April 30, ------------------------------------- --------------------------------------- 1999 1998 1999 1998 ----------------- ---------------- ------------------ ----------------- Common stock, beginning of period..... 42,956,406 28,509,500 38,282,762 27,593,240 Weighted average common shares issued during the period, net....... 326,430 2,506,405 4,427,411 1,683,290 Common stock options and warrants using the treasury stock method..... -- -- -- -- ----------------- ---------------- ------------------ ----------------- 43,282,836 31,015,905 42,710,173 29,276,530 ================= ================ ================== ================= Net loss.............................. $ (13,302,092) $ (22,052,004) $ (30,650,518) $ (21,643,405) ================= ================ ================== ================= Basic and diluted net loss per share........................... $ (0.31) $ (0.71) $ (0.72) $ (0.74) ================= ================ ================== =================
EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS 9-MOS JUL-31-1999 JUL-31-1998 AUG-01-1998 AUG-01-1997 APR-30-1999 APR-30-1998 132,381,243 153,728,200 0 0 16,982,383 11,955,274 1,725,386 996,804 0 0 244,700,693 200,796,790 10,616,714 6,039,992 5,209,108 2,079,933 538,490,245 317,235,336 86,531,663 53,734,492 0 0 0 0 0 0 441,345 389,916 375,898,814 236,773,758 538,490,245 317,235,336 90,417,848 37,035,103 90,417,848 37,035,103 18,882,567 9,245,487 136,120,877 60,307,596 0 0 0 0 0 0 (30,650,675) (21,643,405) 0 0 (30,650,675) (21,643,405) 0 0 0 0 0 0 (30,650,675) (21,643,405) $ (0.72) $ (0.74) $ (0.72) $ (0.74)
-----END PRIVACY-ENHANCED MESSAGE-----