-----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, HeFTlTEm4Lzd4eF14IarC2qqIRAfBHU2tU5LZelCL1tmXZi6iIBt2gvIegVspmLC RN4HkDu5IvMAvkhBiOAbVA== 0000927016-99-003959.txt : 19991216 0000927016-99-003959.hdr.sgml : 19991216 ACCESSION NUMBER: 0000927016-99-003959 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYCOS INC CENTRAL INDEX KEY: 0001007992 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] 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: 99775427 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 October 31, 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 Identification No.) incorporation or organization) 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 December 6, 1999 was 101,588,307. LYCOS, INC. TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION ITEM 1 Unaudited Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets October 31, 1999 and July 31, 1999....................................... 3 Condensed Consolidated Statements of Operations Three months ended October 31, 1999 and 1998............................. 4 Condensed Consolidated Statements of Cash Flows Three months ended October 31, 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 Changes in Securities..................................................... 15 ITEM 3 Defaults Upon Senior Securities........................................... 15 ITEM 4 Submission of Matters to a Vote of Securities Holders..................... 15 ITEM 5 Other Information......................................................... 15 ITEM 6 Exhibits and Reports on Form 8-K.......................................... 15 Signature................................................................. 16
LYCOS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31, 1999 1999 -------------- ------------- (UNAUDITED) Assets Current assets: Cash and cash equivalents................................................ $ 163,039,067 $152,970,244 Accounts receivable, net................................................. 30,183,953 24,639,514 License fees receivable.................................................. 83,101,473 71,843,202 Prepaid expenses and other current assets................................ 6,655,510 8,680,831 -------------- ------------- Total current assets.................................................. 282,980,003 258,133,791 -------------- ------------- Property and equipment, less accumulated depreciation...................... 6,634,600 7,471,230 Long-term license fees receivable.......................................... 44,537,500 48,029,100 Investments................................................................ 43,340,401 48,000,570 Intangible assets, net..................................................... 477,445,508 505,682,024 Other assets............................................................... 4,419,580 7,325,353 -------------- ------------- Total assets.......................................................... $ 859,357,592 $874,642,068 ============== ============= Liabilities and Stockholders' Equity Current liabilities: Notes payable - current.................................................. $ 887,837 $ 2,589,271 Accounts payable......................................................... 3,983,660 1,381,721 Accrued expenses......................................................... 25,894,868 22,438,326 Deferred revenues........................................................ 79,329,241 64,016,249 -------------- ------------- Total current liabilities............................................. 110,095,606 90,425,567 Notes payable.............................................................. 2,060,493 2,599,729 Deferred revenues.......................................................... 42,544,375 55,934,152 -------------- ------------- 44,604,868 58,533,881 Commitments and contingencies -- -- Stockholders' equity: Common stock............................................................. 980,808 967,071 Additional paid-in capital............................................... 811,426,773 801,494,011 Deferred compensation.................................................... (58,169) (69,802) Accumulated deficit...................................................... (119,817,822) (92,295,457) Treasury stock, at cost.................................................. (3,286,293) (3,286,293) Accumulated other comprehensive income................................... 15,411,821 18,873,090 -------------- ------------- Total stockholders' equity............................................ 704,657,118 725,682,620 -------------- ------------- Total liabilities and stockholders' equity............................ $ 859,357,592 $874,642,068 ============== =============
See accompanying notes to condensed consolidated financial statements. 3 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1999 1998 ------------- ------------- Revenues: Advertising....................................................... $ 39,014,806 $ 17,274,840 Electronic commerce, license and other............................ 17,019,096 7,509,279 ------------- ------------- Total revenues................................................. 56,033,902 24,784,119 Cost of revenues.................................................... 11,671,154 5,300,325 ------------- ------------- Gross profit................................................... 44,362,748 19,483,794 Operating expenses: Research and development.......................................... 9,276,672 5,303,566 Sales and marketing............................................... 30,156,272 16,170,301 General and administrative........................................ 5,435,334 2,486,226 Amortization of intangible assets................................. 28,236,516 11,135,885 ------------- ------------- Total operating expenses....................................... 73,104,794 35,095,978 ------------- ------------- Operating loss...................................................... (28,742,046) (15,612,184) Interest income, net................................................ 1,699,681 1,896,420 Gain on sale of investments......................................... -- 10,119,831 ------------- ------------- Loss before income taxes............................................ (27,042,365) (3,595,933) Provision for income taxes.......................................... 480,000 -- ------------- ------------- Net loss............................................................ $(27,522,365) $ (3,595,933) ============= ============= Basic and diluted net loss per share................................ $(0.29) $(0.04) ============= ============= Shares used in computing basic and diluted net loss per share 95,569,318 83,819,899 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1999 1998 ------------- ------------- Operating activities Net loss............................................................ $(27,522,365) $ (3,595,933) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation............................. 11,633 11,634 Depreciation...................................................... 1,205,688 885,683 Amortization of intangible assets................................. 28,236,516 11,135,885 Allowance for doubtful accounts................................... 1,672,157 (107,018) Gain on sale of investments....................................... -- (10,119,831) Changes in operating assets and liabilities: Accounts receivable............................................... (7,216,596) (2,495,311) License fees receivable........................................... (7,766,671) (962,810) Prepaid expenses and other current assets......................... 2,025,321 (12,075,451) Other assets...................................................... 2,905,773 (1,505,584) Accounts payable.................................................. 2,601,939 (3,447,969) Accrued expenses.................................................. 3,456,542 (3,480,814) Deferred revenues................................................. 1,923,215 2,557,124 ------------- ------------- Net cash provided by (used in) operating activities................. 1,533,152 (23,200,395) ------------- ------------- Investing activities Purchase of property and equipment.................................. (369,058) (166,423) Acquisition costs paid.............................................. -- (1,114,101) Cash proceeds from sale of investment............................... -- 12,158,790 Cash acquired through acquisitions.................................. -- 1,906,467 Investment in affiliates............................................ (1,101,099) (1,511,951) ------------- ------------- Net cash provided by (used in) investing activities................. (1,470,157) 11,272,782 ------------- ------------- Financing activities Proceeds from exercise of stock options............................. 11,831,894 778,953 Proceeds from issuance of common stock under ESPP................... 414,604 82,522 Proceeds from note receivable....................................... -- 623,438 Payments on notes payable........................................... (2,240,670) (2,514,331) ------------- ------------- Cash provided by (used in) financing activities..................... 10,005,828 (1,029,418) ------------- ------------- Net increase (decrease) in cash and cash equivalents................ 10,068,823 (12,957,031) ------------- ------------- Cash and cash equivalents at beginning of period.................... 152,970,244 153,728,200 ------------- ------------- Cash and cash equivalents at end of period.......................... $163,039,067 $140,771,169 ============= =============
See accompanying notes to condensed consolidated financial statements. 5 LYCOS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED OCTOBER 31, OCTOBER 31, 1999 1998 ----------------- ------------------- Schedule of non-cash financing and investing activities: Issuance of common stock upon acquisition of WhoWhere? Inc.......................................... -- $157,994,762 Assets and liabilities recorded upon acquisition Of WhoWhere? Inc.; Accounts receivable....................................... -- 2,345,834 Prepaids.................................................. -- 1,302,490 Property and equipment.................................... -- 2,914,397 Notes receivable.......................................... -- 623,438 Other assets.............................................. -- 25,351 Notes payable............................................. -- 5,185,591 Accounts payable.......................................... -- 1,588,709 Accrued expenses.......................................... -- 1,661,306 Deferred revenues......................................... -- 1,945,682
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, 1999, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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. 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 September 1999, the Company established Lycos Asia as the basis for a joint venture agreement with Singapore Telecommunications Limited (SingTel) to create a localized version of the Lycos Network services to be offered in Singapore, Hong Kong, China, Taiwan, India and certain other countries in Southeast Asia. The joint venture is owned 50% by Lycos and 50% by SingTel, a telecommunications provider in Singapore. The investment will be accounted for under the equity method and accordingly, the Company will recognize 50% of the net losses and profits of Lycos Asia when realized. The Company is committed to provide a total of $25 million of capital funding to the joint venture. During November 1999 the Company contributed $5 million of cash to joint venture. 4. COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income" 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 $30,983,634 and $3,516,077 for the quarters ended October 31, 1999 and 1998, respectively. The difference between net loss and comprehensive loss is due to $(3,461,269) and $79,856 of unrealized (losses) gains on marketable securities classified as available-for-sale in the quarters ended October 31, 1999 and 1998, respectively. The $3.4 million unrealized loss on marketable securities for the quarter ended October 31, 1999 is net of an approximate $2.3 million tax benefit from stock option exercises, which is accounted for as a credit to additional paid-in capital rather than a reduction of income tax. 5. INCOME TAXES The Company's effective income tax rate has been established at 40% of operating loss after adjustment for amortization of intangible assets which are not deductible for tax purposes. This effective income tax rate may change during the remainder of the year if operating results differ significantly from the current operating projections. 6. RECLASSIFICATIONs Certain amounts in the quarter ended October 31, 1998 have been reclassified to permit comparison to the current period presentation. 7. SUBSEQUENT EVENTS Acquisition of Quote.com, Inc. On September 2, 1999, the Company entered into an Agreement and Plan of Merger (the Agreement) with Quote.com, Inc., a California corporation ("Quote.com") in a stock-for-stock transaction. On December 6, 1999 the Company completed the closing of the Merger and Quote.com became a wholly-owned subsidiary of the Company. As a result, all outstanding shares of Common Stock and Preferred Stock of Quote.com were converted into an aggregate 1,346,630 shares of Common Stock of the Company. Additionally, the Company converted all outstanding Quote.com stock options and warrants into approximately 239,000 Lycos options and warrants. 8 LYCOS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. SUBSEQUENT EVENTS (CONTINUED) The acquisition of Quote.com will be accounted for as a purchase. The purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Intangible assets will be amortized over a period of five years. Results of operations for Quote.com will be included with those of the Company for periods subsequent to the date of acquisition.
The purchase price is expected to be allocated as follows: Developed technology, goodwill and other intangible assets $108,300,000 Other assets, principally cash 7,126,000 Liabilities assumed (14,426,000) --------------- $101,000,000 ===============
Acquisition of Gamesville, Inc. On December 3, 1999 the Company completed the closing of the Gamesville, Inc. ("Gamesville") merger in a stock-for-stock transaction and Gamesville became a wholly-owned subsidiary of the Company. Under the terms of the acquisition, which will be accounted for as a pooling of interests, the Company exchanged 3,605,044 shares of Lycos Common Stock for all outstanding shares of Common Stock and Preferred Stock of Gamesville. Additionally, the Company converted all outstanding Gamesville stock options and warrants into approximately 423,085 Lycos options and warrants. Investment in Lycos Japan Joint Venture During November 1999 the Company and Sumitomo Corporation each invested an additional $14.5 million in Lycos Japan. A new partner, Kadokawa Publishing Co., Ltd. also joined the joint venture via an investment of approximately $7.3 million, representing an approximate 12% ownership interest. As a result of the additional investments and new partner, the Company's ownership of the joint venture changed to approximately 35%, while Sumitomo's ownership changed to approximately 44%. The Company accounts for this investment under the equity method of accounting. For the three months ended October 31, 1999 the Company did not record any losses in the joint venture as the Company's carrying value of the Lycos Japan joint venture was zero. As a result of the additional investment, the Company has increased its carrying value and may realize additional equity losses in the joint venture in periods subsequent to the additional investment. Investment in Lycos Asia Joint Venture During November 1999 the Company invested approximately $5.0 million in Lycos Asia, a joint venture owned 50% by Lycos. Under the joint venture agreement, the Company is committed to providing aggregate capital investments of $25 million to Lycos Asia. The Company accounts for this investment under the equity method of accounting. For the three months ended October 31, 1999 the Company did not record any losses in the joint venture as the Company's carrying value of the Lycos Asia joint venture was zero. As a result of the investment, the Company has increased its carrying value and may realize equity losses in the joint venture in periods subsequent to the additional investment. Investment in ICOMS On November 23, 1999, the Company entered into an agreement with iCOMS, Inc. pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C Preferred Stock representing approximately 14% ownership in iCOMS. At the same time, the Company entered into a Services Agreement with iCOMS pursuant to which iCOMS will provide certain operational, engineering and merchant support services to the Company in connection with the Company's LYCOShop e-commerce initiative. The Company issued 166,080 unregistered shares of Common Stock in exchange for iCOMS' Series C Preferred Stock and for the services to be rendered by iCOMS under the Services Agreement. The Company accounts for its investment in iCOMS on the cost method. 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 1999 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 29, 1999. RESULTS OF OPERATIONS Total Revenues Total revenues for the three months ended October 31, 1999 increased 126% to $56.0 million from $24.8 million for the three months ended October 31, 1998, as a result of the growth in the number of advertisers. As of October 31, 1999, deferred revenues increased to $121.9 million, compared to $120.0 million at July 31, 1999, attributable to advertising contracts and guaranteed commitments under license and electronic commerce agreements for which there are significant obligations of the Company remaining. Advertising Revenues Advertising revenues increased 126% to $39.0 million for the three months ended October 31, 1999, representing 70% of total revenues, as compared to advertising revenues of $17.3 million for the three months ended October 31, 1998, which represented 70% of total revenues. The increase in advertising revenue was attributable primarily to an increase in the number of advertisers. 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 increased 127% to $17.0 million for the three months ended October 31, 1999, representing 30% of total revenues as compared to $7.5 million for the three months ended October 31, 1998, representing 30% of total revenues. The increase in electronic commerce, licensing and other revenue is attributable primarily to the addition of several new partners including, among others, WebMD, FirstUSA, Lifeminders and Fidelity. 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 totaled $11.7 million for the quarter ended October 31, 1999, representing 21% of total revenues, as compared to $5.3 million in the quarter ended October 31, 1998, which represented 21% 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. 10 OPERATING EXPENSES Research and Development Research and development expenses totaled $9.3 million for the three months ended October 31, 1999, representing 17% of total revenues as compared to $5.3 million for the three months ended October 31, 1998, or 21% 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, while the percentage decrease is attributable to operational synergies achieved through the integration of the Company's various acquisitions. 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 totaled $30.2 million for the three months ended October 31, 1999, representing 54% of total revenues, as compared to $16.2 million for the three months ended October 31, 1998, representing 65% 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 advertising, marketing and public relations campaign. The percentage decrease is attributable to economies of scale achieved through the integration of the Company's various acquisitions. The Company expects continued increases in sales and marketing expenses in future periods. General and Administrative General and administrative expenses totaled $5.4 million for the three months ended October 31, 1999, representing 10% of total revenues, as compared to $2.5 million for the three months ended October 31, 1998, representing 10% 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 and increased costs for professional services. Amortization of Intangible Assets Amortization of intangible assets was approximately $28.2 million for the three months ended October 31, 1999 versus $11.1 million for the three months ended October 31, 1998. The increase is attributable to increased amortization related to developed technology and goodwill and other intangible assets recorded upon the acquisitions of Wired Ventures and Internet Music Distribution, Inc. Interest Income, Net Net interest income was approximately $1.7 million for the three months ended October 31, 1999 versus $1.9 million for the three months ended October 31, 1998. Interest income is generated from investment of the Company's cash equivalents. Interest expense was not significant in either period. 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. The Company received 322,128 shares of Amazon.com valued at approximately $12.8 million at the time of acquisition in exchange for its shares of PlanetAll. The Company sold 289,917 shares of Amazon.com resulting in a gain of $10.1 million in the quarter ended October 31, 1998. Income Taxes The Company's effective income tax rate has been established at 40% of operating loss after adjustment for amortization of intangible assets which are not deductible for tax purposes. This effective income tax rate may change during the remainder of the year if operating results differ significantly from the current operating projections. 11 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. LIQUIDITY AND CAPITAL RESOURCES At October 31, 1999, the Company had cash and cash equivalents of approximately $163.0 million. The Company regularly invests excess funds in short-term money market funds, government securities and commercial paper. The Company generated cash from operations of approximately $1.5 million during the three months ended October 31, 1999. The Company generated cash from financing activities of approximately $7.7 million during the nine months ended October 31, 1999, due primarily to proceeds received by the Company from the exercise of employee stock options. At October 31, 1999, the Company had deferred revenues of $121.9 million representing primarily fees to be earned in the future on noncancelable electronic commerce agreements. 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. BUSINESS COMBINATIONS Acquisition of Quote.com, Inc. On September 2, 1999, the Company entered into an Agreement and Plan of Merger (the Agreement) with Quote.com, Inc., a California corporation ("Quote.com") in a stock-for-stock transaction. On December 6, 1999 the Company completed the closing of the Merger and Quote.com became a wholly-owned subsidiary of the Company. As a result, all outstanding shares of Common Stock and Preferred Stock of Quote.com were converted into an aggregate 1,346,630 shares of Common Stock of the Company. Additionally, the Company converted all outstanding Quote.com stock options and warrants into approximately 239,000 Lycos options and warrants. The acquisition will be accounted for as a purchase. The purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Intangible assets will be amortized over a period of five years. Results of operations for Quote.com will be included with those of the Company for periods subsequent to the date of acquisition. 12 Acquisition of Gamesville, Inc. On December 3, 1999 the Company completed the closing of the Gamesville, Inc. ("Gamesville") merger in a stock-for-stock transaction and Gamesville became a wholly-owned subsidiary of the Company. Under the terms of the acquisition, which will be accounted for as a pooling of interests, the Company exchanged 3,605,044 shares of Lycos Common Stock for all outstanding shares of Common Stock and Preferred Stock of Gamesville. Additionally, the Company converted all outstanding Gamesville stock options and warrants into approximately 423,085 Lycos options and warrants. INVESTMENTS Investment in Lycos Japan Joint Venture During November 1999 the Company and Sumitomo Corporation each invested an additional $14.5 million in Lycos Japan. A new partner, Kadokawa Publishing Co., Ltd. also joined the joint venture via an investment of approximately $7.3 million, representing an approximate 12% ownership interest. As a result of the additional investments and new partner, the Company's ownership of the joint venture changed to approximately 35%, while Sumitomo's ownership changed to approximately 44%. The Company accounts for this investment under the equity method of accounting. For the three months ended October 31, 1999 the Company did not record any losses in the joint venture as the Company's carrying value of the Lycos Japan joint venture was zero. As a result of the additional investment, the Company has increased its carrying value and may realize additional equity losses in the joint venture in periods subsequent to the additional investment. Investment in Lycos Asia Joint Venture During November 1999 the Company invested approximately $5.0 million in Lycos Asia, a joint venture owned 50% by Lycos. Under the joint venture agreement, the Company is committed to providing aggregate capital investments of $25 million to Lycos Asia. The Company accounts for this investment under the equity method of accounting. For the three months ended October 31, 1999 the Company did not record any losses in the joint venture as the Company's carrying value of the Lycos Asia joint venture was zero. As a result of the investment, the Company has increased its carrying value and may realize equity losses in the joint venture in periods subsequent to the additional investment. Investment in ICOMS On November 23, 1999, the Company entered into an agreement with iCOMS, Inc. pursuant to which the Company purchased 3,032,698 shares of iCOMS' Series C Preferred Stock representing approximately 14% ownership in iCOMS. At the same time, the Company entered into a Services Agreement with iCOMS pursuant to which iCOMS will provide certain operational, engineering and merchant support services to the Company in connection with the Company's LYCOShop e-commerce initiative. The Company issued 166,080 unregistered shares of Common Stock in exchange for iCOMS' Series C Preferred Stock and for the services to be rendered by iCOMS under the Services Agreement. The Company accounts for its investment in iCOMS on the cost method. 13 YEAR 2000 COMPLIANCE LYCOS' SYSTEM MAY EXPERIENCE DIFFICULTIES RELATED TO YEAR 2000 COMPUTER PROBLEMS. The codes of many currently installed computer systems and software products accept only two-digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. Many companies' software and computer systems, including those of Lycos and the companies on which Lycos depends, may need to be upgraded or replaced so that they will be able to distinguish 21st century dates from 20th century dates in order to comply with year 2000 requirements and therefore be year 2000 compliant. Lycos' State Of Year 2000 Readiness. Lycos is currently evaluating the Year 2000 readiness of the hardware and software products it sells, the information technology systems it uses and its non-information technology systems, like building security, voice mail and other systems. This evaluation includes the following phases: identification of all hardware and software products it sells and information technology systems and non-information technology systems it uses; assessment of repair or replacement requirements; repair or replacement; testing; implementation; and creation of contingency plans in the event of Year 2000 failures. Lycos has completed its assessment of all current versions of these hardware and software products and believes that they are Year 2000 compliant. Lycos is currently completing its testing of these systems. There can be no assurance that these tests will be successful. Whether a complete system or device that uses hardware or software used by Lycos will process 21st century dates depends on other components that are supplied by parties other than Lycos. The suppliers of Lycos' critical information systems have informed Lycos that their software is Year 2000 compliant. Lycos relies, both domestically and internationally, upon various service providers that are outside of its control including: various vendors; governmental agencies; utility companies; telecommunications service companies; delivery service companies; and other service providers. These third parties may suffer a Year 2000 business disruption caused by the inability of various systems to process 21st century dates that could hinder Lycos' ability to conduct its business. To the extent that Lycos fails to identify and remedy any non-compliant internal or external Year 2000 problems, or the Year 2000 phenomenon creates a systemic failure beyond Lycos' control, like a prolonged telecommunications or electrical failure or a prolonged failure of third-party software on which Lycos relies, Lycos could be prevented from operating its business and permitting users access to its web sites. Costs Of Year 2000 Compliance To Lycos. To date, Lycos has not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. Most of its expenses thus far relate to retaining third party consultants to assist Lycos in its compliance efforts and to the opportunity cost of time spent by Lycos employees evaluating its software, the current versions of the hardware and software sold by Lycos and Year 2000 compliance matters generally. Status Of Lycos' Contingency Plan. Lycos has not yet developed a Year 2000- specific contingency plan. If Lycos discovers Year 2000 compliance issues, it will evaluate the need for contingency plans relating to these issues. 14 PART II ITEM 1. LEGAL PROCEEDINGS In February 1999, the Company announced its intention to enter into a transaction with USA Networks, Inc. and certain affiliated companies pursuant to which, among other things, Lycos would have been merged into a subsidiary of USA Networks. In May 1999, the parties to the proposed transaction terminated the merger by mutual agreement. Prior to such termination, 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. The complaints request, among other things, that the proposed transaction be enjoined or that rescissionary damages be awarded to the purported class and that plaintiffs be awarded all costs and fees, including attorneys' fees. Although the proposed merger has since been terminated, the suits have not been dismissed. The Company believes that the allegations in the complaints are without merit and intends to contest them vigorously. Also prior to the termination of the proposed merger, a series of purported securities class action lawsuits were filed in the United States District Court for the District of Massachusetts. The suits, which have since been consolidated, allege, among other claims, violations of United States Federal securities law through alleged misrepresentations and omissions relating to the announced transaction with USA Networks. The consolidated complaint seeks an unspecified award of damages. The Company believes that the allegations in the consolidated complaint 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 None. 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 following reports on Form 8-K were filed during the quarter ended October 31, 1999: On August 8, 1999 the Company filed a current report on Form 8-K reporting the Agreement and Plan of Merger with Internet Music Distribution, Inc. On October 7, 1999 the Company filed a Form 8-K/A which amended the Company's current report on Form 8-K originally filed on August 8, 1999. On September 16, 1999 the Company filed a current report on Form 8-K reporting the Agreement and Plan of Merger with Quote.com. 15 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: December 15, 1999 By: /s/ Edward M. Philip ---------------------- Edward M. Philip Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer, Authorized Officer) 16 EX-11.1 2 STATEMENT OF COMPUTATION EXHIBIT 11.1 LYCOS, INC. COMPUTATION OF SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED OCTOBER 31, 1999 OCTOBER 31, 1998 ---------------- ---------------- Common stock, beginning of period......................... 94,891,910 71,982,903 Weighted average common shares issued during the period, net........................... 677,408 11,836,996 Common stock options and warrants using the modified treasury method.................... ---------------- ---------------- 95,569,318 83,819,899 =============== =============== Net loss.................................................... $(27,522,365) $(3,595,933) =============== =============== Basic and diluted net loss per share (1).................... $ (0.29) $ (0.04) =============== ===============
(1) Diluted net loss per share was not materially different from basic net loss per share. EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS JUL-31-2000 JUL-31-1999 AUG-01-1999 AUG-01-1998 OCT-31-1999 OCT-01-1998 163,039,067 152,970,244 0 0 34,233,110 27,016,514 4,049,157 2,377,000 0 0 282,980,003 258,133,791 13,092,348 19,933,487 6,634,600 12,462,257 859,357,592 874,642,068 110,095,606 90,425,567 0 0 0 0 0 0 980,808 967,071 703,676,310 724,715,549 859,357,592 874,642,068 56,033,902 24,784,119 56,033,902 24,784,119 11,671,154 5,300,325 84,775,948 40,396,303 0 0 0 0 0 0 (27,042,365) (3,595,933) 480,000 0 (27,522,365) (3,595,933) 0 0 0 0 0 0 (27,522,365) (27,522,365) (0.29) (0.04) (0.29) (0.04)
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