-----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, W2hJyWNwMo0dS89eBwZ1BPR9xv2VARpeek1CRyVL5jc/GZrgK+EoE6ZrFY7LrqZS 1znvZSwtMgJTXWEK9YLoOw== 0000950134-99-009729.txt : 19991115 0000950134-99-009729.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950134-99-009729 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNET INC /DE CENTRAL INDEX KEY: 0001015577 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133696170 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20939 FILM NUMBER: 99746556 BUSINESS ADDRESS: STREET 1: 150 CHESTNUT ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153957800 MAIL ADDRESS: STREET 1: 150 CHESTNUT ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-K/A 1 AMENDMENT NO. 3 TO FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 3 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-20939 CNET, INC. (Exact Name of registrant as specified in its charter) Delaware 13-3696170 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 150 Chestnut Street San Francisco, CA 94111 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 395-7800 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None None
Securities registered under Section 12(g) of the Exchange Act: Title of class Common Stock, $0.0001 par value Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of common stock held by non-affiliates, based on the closing price at which the stock was sold, at March 12, 1999 approximated $1.8 billion. The total number of shares outstanding of the issuer's common stock (its only class of equity securities), as of March 12, 1999, was 34,767,270. Information is incorporated by reference into Part III of this Form 10-K from the registrant's definitive proxy statement for its 1998 annual meeting of stockholders, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934. ================================================================================ 2 PART I ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors Report The Board of Directors, CNET, Inc. We have audited the accompanying consolidated balance sheets of CNET, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CNET, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP San Francisco, California February 9, 1999, except as to paragraph 5 of footnote 5 and footnote 10, which are as of March 22, 1999 2 3 CNET, INC. CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------------- 1998 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents .................................. $ 51,533,655 $ 22,553,988 Accounts receivable, net of allowance for doubtful accounts of $1,721,625 and $461,000 in 1998 and 1997, respectively ........................ 15,074,639 9,149,762 Accounts receivable, related party ......................... 1,710,745 -- Other current assets ....................................... 1,704,765 1,134,957 Restricted cash ............................................ 945,330 1,599,113 ------------- ------------- Total current assets .................................. 70,969,134 34,437,820 Property and equipment, net ................................ 15,325,512 19,553,537 Other assets ............................................... 2,059,806 4,270,321 ------------- ------------- Total assets .......................................... $ 88,354,452 $ 58,261,678 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................... $ 3,476,654 $ 3,567,783 Accrued liabilities ........................................ 6,592,819 10,080,504 Current portion of long-term debt .......................... 1,112,512 1,358,772 ------------- ------------- Total current liabilities ............................. 11,181,985 15,007,059 Long-term debt ............................................. 569,245 2,611,815 ------------- ------------- Total liabilities ..................................... 11,751,230 17,618,874 Commitments and contingencies Stockholders' equity: Common stock; $0.0001 par value; 50,000,000 shares authorized; 34,119,948 and 29,324,370 shares issued and outstanding in 1998 and 1997, respectively .......................................... 3,412 2,936 Additional Paid-in capital ................................. 127,770,245 94,696,127 Accumulated deficit ........................................ (51,170,435) (54,056,259) ------------- ------------- Total stockholders' equity ............................ 76,603,222 40,642,804 ------------- ------------- Total liabilities and stockholders' equity ............ $ 88,354,452 $ 58,261,678 ============= =============
See accompanying notes to consolidated financial statements. 3 4 CNET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Revenues: Internet ............................. $ 49,374,195 $ 26,717,280 $ 10,133,684 Television ........................... 7,057,885 6,922,309 4,696,664 ------------ ------------ ------------ Total revenues .................... 56,432,080 33,639,589 14,830,348 ------------ ------------ ------------ Cost of revenues: Internet ............................. 23,291,215 19,812,604 9,120,545 Television ........................... 6,741,133 6,904,471 6,212,959 ------------ ------------ ------------ Total cost of revenues ............ 30,032,348 26,717,075 15,333,504 ------------ ------------ ------------ Gross profit (deficit) ............ 26,399,732 6,922,514 (503,156) ------------ ------------ ------------ Operating expenses: Sales and marketing .................. 14,530,355 11,602,746 7,821,454 Development .......................... 3,454,387 13,608,846 3,438,333 General and administrative ........... 6,806,886 6,848,793 3,772,368 Unusual items ........................ (921,839) 9,000,000 -- ------------ ------------ ------------ Total operating expenses .......... 23,869,789 41,060,385 15,032,155 ------------ ------------ ------------ Operating income (loss) ........... 2,529,943 (34,137,871) (15,535,311) Other income (expense): Equity losses ........................ (11,795,944) (2,228,430) (1,865,299) Gain on sale of equity investments ... 10,450,342 11,026,736 -- Interest income (expense), net ....... 1,415,616 611,473 451,948 ------------ ------------ ------------ Total other income (expense) ...... 70,014 9,409,779 (1,413,351) ------------ ------------ ------------ Net income (loss) ................. $ 2,599,957 $(24,728,092) $(16,948,662) ============ ============ ============ Basic net income (loss) per share ...... $ 0.08 $ (0.91) $ (1.06) ============ ============ ============ Diluted net income (loss) per share .... $ 0.07 $ (0.91) $ (1.06) ============ ============ ============ Shares used in calculating basic per share data .................... 31,932,530 27,223,642 15,927,794 ============ ============ ============ Shares used in calculating diluted per share data .................... 34,852,938 27,223,642 15,927,794 ============ ============ ============
See accompanying notes to consolidated financial statements. 4 5 CNET, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Stock Common Stock Additional Total -------------------- --------------------- Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity --------- ------ --------- ------ ---------- ----------- ------------- Balances as of December 31, 1995 ......... 3,439,202 34,392 5,400,000 540 15,143,363 (12,379,505) 2,798,790 Issuance of Series B convertible preferred stock ..................... 366,144 3,661 -- -- 362,483 -- 366,144 Issuance of Series D convertible preferred stock ..................... 2,588 26 -- -- 33,307 -- 33,333 Issuance of Series E convertible preferred stock ..................... 453,169 4,532 -- -- 8,364,102 -- 8,368,634 Issuance of warrants ......... -- -- -- -- 164,000 -- 164,000 Public stock offering, net of $3,151,406 issuance .... -- costs ..................... -- -- 5,200,000 520 37,776,074 -- 37,776,594 Conversion of preferred stock into common stock ... (4,261,103) (42,611) 15,633,346 1564 41,047 -- -- Exercise of stock options .... -- -- 306,000 30 369,530 -- 369,560 Employee stock purchase plan ...................... -- -- 23,578 2 169,759 -- 169,761 Net loss ..................... -- -- -- -- -- (16,948,662) (16,948,662) ---------- ------- ---------- ----- ----------- ----------- ----------- Balances as of December 31, 1996 ......... -- -- 26,562,924 2,656 62,423,665 (29,328,167) 33,098,154 Exercise of stock options .... -- -- 822,914 86 1,175,494 -- 1,175,580 Employee stock purchase plan ...................... -- -- 70,026 8 705,403 -- 705,411 Issuances of common stock .... -- -- 1,868,506 186 23,391,565 -- 23,391,751 Warrant compensation ......... -- -- -- -- 7,000,000 -- 7,000,000 Net loss ..................... -- -- -- -- -- (24,728,092) (24,728,092) ---------- ------- ---------- ----- ----------- ----------- ----------- Balances as of December 31, 1997 ......... -- -- 29,324,370 2,936 94,696,127 (54,056,259) 40,642,804 Exercise of stock options and warrants .............. -- -- 2,027,662 202 6,246,092 -- 6,246,294 Employee stock purchase plan ...................... -- -- 56,386 4 723,553 -- 723,557 Issuances of common stock .... -- -- 1,625,600 162 26,212,556 -- 26,212,718 Issuance of common stock in relation to the Uvision acquisition ... -- -- 1,089,930 108 (108,083) 285,867 177,892 Net income ................... -- -- -- -- -- 2,599,957 2,599,957 ---------- ------- ---------- ----- ----------- ----------- ----------- Balances as of December 31, 1998 ......... -- -- 34,119,948 3,412 127,770,245 (51,170,435) 76,603,222 ========== ======= ========== ===== =========== =========== ===========
See accompanying notes to consolidated financial statements. 5 6 CNET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income(loss) ........................................ $ 2,599,957 ($24,728,092) ($16,948,662) Adjustments to reconcile net loss to net cash provided (used) in operating activities: Depreciation and amortization ....................... 6,341,217 5,054,980 1,928,496 Amortization of program costs ....................... 5,802,074 6,548,937 4,673,201 Interest expense converted into preferred stock ..... -- -- 222,141 Allowance for doubtful accounts ..................... 1,260,625 361,214 75,000 Reserve for joint venture ........................... -- (1,248,799) 1,865,299 Warrant compensation expense ........................ -- 7,000,000 -- Changes in operating assets and liabilities: Accounts receivable ............................... (9,730,143) (4,218,799) (4,165,939) Other current assets .............................. 455,340 (916,690) 29,750 Other assets ...................................... 4,933,084 (1,515,407) (1,237,499) Accounts payable .................................. 328,540 228,931 2,807,549 Accrued liabilities ............................... (2,833,799) 7,534,213 1,839,558 ------------ ------------ ------------ Net cash provided (used) in operating activities ................................... 9,156,895 (5,899,512) (8,911,106) ------------ ------------ ------------ Cash flows from investing activities: Purchases of equipment, excluding capital leases ........ (4,879,353) (12,213,050) (10,739,354) Purchases of programming assets ......................... (6,083,639) (5,826,476) (5,438,092) Loan to joint venture ................................... -- (1,639,139) (1,776,588) Investment in Vignette Corporation ...................... -- -- (511,500) ------------ ------------ ------------ Net cash used in investing activities .............. (10,962,992) (19,678,665) (18,465,534) ------------ ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of convertible preferred stock ................................................. -- -- 4,543,826 Net proceeds from initial public offering ............... -- -- 37,776,594 Net proceeds from issuance of common stock .............. 26,212,718 23,391,751 --
6 7
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Net proceeds from the issuance of common stock in relation to the UVision acquisition ................... (107,975) Allocated proceeds from issuance warrants ............... -- -- 164,000 Proceeds from stockholder receivable .................... -- -- 594,654 Proceeds from employee stock purchase plan .............. 723,557 705,411 169,761 Proceeds from debt ...................................... -- 3,280,806 3,636,000 Proceeds from exercise of stock and warrants ............ 6,246,294 1,175,580 141,050 Principal payments on capital leases .................... (416,377) (238,688) (104,542) Principal payments on equipment note .................... (1,872,453) (338,630) (91,851) ------------ ------------ ------------ Net cash provided by financing activities ....... 30,785,764 27,976,230 46,829,492 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....... 28,979,667 2,398,053 19,452,852 Cash and cash equivalents at beginning of period ........... 22,553,988 20,155,935 703,083 ------------ ------------ ------------ Cash and cash equivalents at end of period ................. $ 51,533,655 $ 22,553,988 $ 20,155,935 ============ ============ ============ Supplemental disclosure of cash flow information: Interest paid ........................................... $ 324,762 $ 254,790 $ 88,792 Supplemental disclosure of noncash transactions: Non cash portion of Investment .......................... $ 3,066,449 -- $ 105,000 Capital lease obligations incurred ...................... -- $ 408,408 $ 297,436 Note issued in exchange for equipment ................... -- -- $ 137,551 Exercise of stock options through issuance of note receivable from stockholder ........................... -- -- $ 594,654 Conversion of preferred stock into common stock ......... -- -- $ 42,611 Conversion of debt and interest into 0,0, and 208,548 shares of convertible preferred stock, respectively ... -- -- $ 3,858,141
See accompanying notes to consolidated financial statements. 7 8 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) CNET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS CNET, Inc. (the "Company") was incorporated in the state of Delaware in December 1992 and is a media company integrating television programming with a network of channels on the World Wide Web. The Company produces five television programs and operates an Internet network focused on computers and technologies. Revenues for television are derived primarily from licensing fees for the distribution of the television programming. Internet revenues are primarily derived from the sale of advertising. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CNET, Inc., and its majority owned controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Property and equipment recorded under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or their estimated useful lives. CONCENTRATION OF CREDIT RISK Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of periodic investments of excess cash and trade accounts receivable. Substantially all of the Company's accounts receivable are derived from domestic sales. Historically, the Company has not incurred material credit related losses. The Company invests 8 9 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) excess cash in low risk, liquid instruments. No losses have been experienced on such investments. DEVELOPMENT Development expenses include expenses which were incurred in the development of new Internet channels and in research and development of new or improved technologies that enhance the performance of the Company's Internet channels. Costs for development are expensed as incurred. Costs are no longer recognized as development expenses when a new Internet channel is launched and is generating revenue. INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. REVENUE RECOGNITION Through June 30, 1996, television revenues were principally derived from the sale of advertising during the Company's CNET CENTRAL television program and were recognized upon broadcast based on the number of viewers of the program. Effective July 1, 1996, and subsequently renewed through June 30, 1999, the Company licensed a two hour programming block it produces for broadcast on a cable network for a license fee limited to the costs of production of the programming block and further limited to certain maximum amounts per the contract. In September 1996, the Company began producing TV.com which was exclusively distributed by Golden Gate Productions, L.P., ("GGP"). The revenue from this program was used first to offset costs of distribution and production and thereafter was shared equally by the Company and GGP. In August 1997, the assets of GGP were acquired by a third party who agreed to distribute the program through Trans World International, ("TWI"), under the same terms. Beginning March 1, 1998, the Company assumed responsibility for the sale of advertisements on TV.com and pays a distribution fee to the third party. Internet revenues consist primarily of revenues derived from the sale of advertisements on pages delivered to users of our Internet network. Advertising programs are generally delivered on either an "impression" based program or a "performance" based program. An impression based program earns revenues when an advertisement is delivered to a user of our 9 10 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) Internet network. A performance based program earns revenues when a user of our Internet network responds to an advertisement by linking to an advertisers Internet network. Advertising revenues are recognized in the period in which the advertisements are delivered. In the fourth quarter of 1998, the Company began generating revenue from lead-based compensation from its shopping services. NET INCOME (LOSS) PER SHARE Basic net income per share is computed using the weighted average number of outstanding shares of common stock and diluted net income per share is computed using the weighted average number of outstanding shares of common stock and common stock equivalents. Basic and diluted net loss per share are computed using the weighted average number of outstanding shares of common stock. Net loss per share for the years ended December 31, 1997 and 1996, does not include the effect of approximately 5,077,844 and 3,128,932 stock options, with weighted average exercise prices of $12.37 and $3.55, respectively, because their effects are anti-dilutive. The following table sets forth the computation of net income (loss) per share (in thousands, except per share data):
Year Ended December 31, ----------------------------------- 1998 1997 1996 -------- -------- -------- Net income (loss) per share: Basic net income (loss) per share $ 0.08 ($ 0.91) ($ 1.06) ======== ======== ======== Diluted net income (loss) per share $ 0.07 ($ 0.91) ($ 1.06) ======== ======== ======== Net income (loss) $ 2,600 ($24,728) ($16,949) ======== ======== ======== Basic and diluted shares: Weighted average common shares outstanding used in computing basic net income(loss) per share 31,933 27,224 15,928 ======== ======== ======== Common stock equivalents: Stock options and awards 2,920 -- -- ======== ======== ======== Weighted average common shares and common stock equivalents outstanding used in computing diluted net income (loss) per share 34,853 27,224 15,928 ======== ======== ========
10 11 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plans using the intrinsic value method. As such, compensation expense is recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price. COMPREHENSIVE INCOME (LOSS) The Company has no significant comprehensive income (loss) and, accordingly, the comprehensive income(loss) is the same as net income (loss) for all periods. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. Such costs are included in selling and marketing expense and totaled approximately $5,081,308, $2,267,154 and $3,697,314 during the years ended December 31, 1998, 1997 and 1996, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate their respective fair values. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. USE OF ESTIMATES The Company's management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 11 12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) BARTER TRANSACTIONS The Company trades advertisements on its Internet sites in exchange for advertisements on the Internet channels of other companies. These revenues and marketing expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Internet channels and expense from barter transactions is recognized when advertisements are delivered on the other companies' Internet sites. Barter revenues were approximately $3,369,000, $905,000, and $760,000 for the years ended December 31, 1998, 1997 and 1996, respectively. RECENT ACCOUNTING PRONOUNCEMENTS The FASB recently issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. The Company must adopt SFAS No. 133 by July 1, 1999. Management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position or operations of the Company. (2) BALANCE SHEET COMPONENTS CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents consisted of:
December 31, --------------------------------- 1998 1997 ----------- ---------- Commercial paper $21,452,792 $2,004,131 Money market mutual funds 23,447,941 17,034,006 Cash 6,632,922 3,515,851 ----------- ---------- $51,533,655 $22,553,988 =========== ===========
All cash equivalents have been classified as available for sale securities as of December 31, 1998 and 1997. 12 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) RESTRICTED CASH Restricted cash balance relates to certain deposits in escrow for leasehold improvements and as collateral for letters of credit relating to security deposits. PROPERTY AND EQUIPMENT A summary of property and equipment follows:
December 31, --------------------------- 1998 1997 ----------- ----------- Computer equipment $12,270,491 $11,769,291 Production equipment 2,552,420 2,241,597 Office equipment, furniture & fixtures 3,131,737 2,230,267 Software 1,845,777 1,745,660 Leasehold improvements 7,644,246 7,193,769 Assets in progress 620,165 1,533,198 ----------- ----------- 28,064,836 26,713,782 Less accumulated depreciation and amortization 12,739,324 7,160,245 ----------- ----------- $15,325,512 $19,553,537 =========== ===========
As of December 31, 1998 and 1997, the Company had equipment under capital lease agreements of $1,168,134, and accumulated amortization of $1,084,125 and $694,747, respectively. As of December 31, 1998, the Company had purchased equipment pursuant to loan agreements in the amount of $948,982. As of December 31, 1998 and 1997, the equipment had accumulated amortization of $702,408 and $512,612, respectively. 13 14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) ACCRUED LIABILITIES A summary of accrued liabilities follows:
December 31, --------------------------- 1998 1997 ----------- ----------- Compensation and related benefits $ 4,007,614 $ 2,594,386 Marketing and advertising 577,872 619,101 Deferred Revenue 594,212 3,233,681 Lease Abandonment -- 1,300,000 Other 1,413,121 2,333,336 ----------- ----------- $ 6,592,819 $10,080,504 =========== ===========
DEBT During 1997, the Company secured a $10.0 million line of credit from a bank. The line of credit consisted of a $5.0 million operating line of credit at an interest rate of prime (8.5%) plus 0.5%, secured by all of the Company's tangible assets and a $5.0 million equipment line at an interest rate of prime (8.5%) plus 1%, for up to 65% of capital equipment purchases. The Company did not renew the $10.0 million line of credit upon its expiration in July 1998. As of December 31, 1997, the Company had not yet drawn any of the operating line of credit and had drawn $768,000 on the capital equipment line which was paid off in July, 1998. In addition, the Company had proceeds of $2.5 million from an asset based loan bearing interest equal to the treasury rate plus 5.56% secured by certain capital equipment. The $2.5 million asset based loan is subject to certain financial covenants. At December 31, 1998 the Company was in compliance with those covenants. During 1996 and 1995, the Company financed certain production equipment in the amounts of $189,256 and $759,726, respectively, through notes at an interest rate of 12.25%. The notes are secured by the equipment financed. The current and long-term portion of the notes are included in current portion of long-term debt and long-term debt, respectively, in the accompanying balance sheet (along with capital lease obligations, Note 4). The aggregate annual principal payments for notes payable outstanding as of December 31, 1998, are summarized as follows:
Year Ending December 31, ------------------------------ 1999 994,177 2000 535,728 2001 33,517 ---------- $1,563,422 ==========
14 15 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (3) INCOME TAXES The Company's effective tax rate differs from the statutory federal income tax rate of 34% as shown in the following schedule:
Year Ended December 31, ------------------------------- 1998 1997 1996 ----- ----- ----- Income tax benefit at statutory rate 34.0% 34.0% 34.0% Operating losses with no current tax benefit (34.0%) (34.0%) (34.0%) ----- ----- ----- Effective tax rate -- -- -- ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of deferred tax assets are presented below:
Year Ended December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Capitalized "start-up" expenses $ 457,000 $ 818,000 $ 1,217,000 Net operating losses 22,184,000 16,268,000 9,596,000 Accruals, reserves and other 3,275,000 6,289,000 1,027,000 ----------- ----------- ----------- 25,916,000 23,375,000 11,840,000 Less valuation allowance 25,916,000 23,375,000 11,840,000 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
The Company has a valuation allowance as of December 31, 1998, which fully offsets its gross deferred tax assets due to the Company's historical losses and the fact that there is no guarantee the Company will generate sufficient taxable income in the future to be able to realize any or all of the deferred tax assets. The net change in the total valuation allowance for the year ended December 31, 1998, was $2,541,000. As of December 31, 1998, the Company has approximately $61,000,000 of net operating losses for federal income tax purposes, which expire between 2008 and 2018. The Company also has approximately $24,000,000 of net operating loss carryforwards for state income tax purposes, which expire between 1999 and 2003. Included in the deferred tax assets above is approximately $5,500,000 related to stock option compensation for which the benefit, when realized, will be an adjustment to equity. The Company may have experienced an "ownership change" as defined by section 382 of the Internal Revenue Code. If an ownership change has occurred, the Company's ability to utilize its net operating losses may be limited. 15 16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (4) LEASES The Company has several non-cancelable leases primarily for general office, facilities, and equipment that expire over the next ten years. Future minimum lease payments under these leases are as follows:
YEAR ENDING DECEMBER 31, Capital Leases Operating Leases -------------------------------------------- -------------- ---------------- 1999 $129,140 $ 4,548,163 2000 -- 3,519,185 2001 -- 2,396,254 2002 -- 1,421,819 2003 -- 981,674 Thereafter -- 598,910 -------- ----------- Total minimum lease payments 129,140 $13,466,005 =========== Less amount representing interest 10,805 -------- Capital lease obligation, all current $118,335 ========
Rental expense from operating leases amounted to $3,226,310, $2,242,186, and $789,678 for the years ended December 31, 1998, 1997 and 1996, respectively. (5) STOCKHOLDERS' EQUITY ISSUANCE OF COMMON STOCK On July 2, 1996, the Company effected an initial public offering (IPO) of 4,000,000 shares of its common stock for $8 per share. Simultaneously with the IPO, the Company sold 1,200,000 shares of common stock to Intel Corporation at 93% of the IPO price. The net proceeds from these two offerings (after deducting underwriting discounts and commissions and offering expenses) were $37.8 million, and were received on July 8, 1996. On July 21, 1997, the Company sold 402,506 shares of common stock in a private placement to Intel for aggregate proceeds of approximately $5.3 million. On December 18, 1997, the Company sold 1,466,000 shares of common stock in a private placement to three "accredited investors" (as defined in Rule 501(a) under the Securities Act of 1933) for aggregate net proceeds of approximately $18.1 million. On May 12, 1998, the Company completed the acquisition of U.Vision, Inc., a California corporation ("U.Vision"), through a merger between U.Vision and a wholly-owned acquisition subsidiary of the Company (the "merger"), in which the Company issued 1,089,930 shares of 16 17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) common stock in exchange for all of the outstanding shares of U.Vision. U.Vision owned and operated ComputerEsp, a pricing and availability engine for buying computer products on the Internet. Subsequent to the merger, the Company relaunched the service as Shopper.com. The Company recorded this transaction using the pooling-of-interests accounting method and recorded the financial results of U.Vision in its financial statements effective April, 1, 1998. The financial statements of the Company prior to April 1, 1998 have not been adjusted for the financial results of U.Vision as the impact was not material. The shares used in calculating the basic and diluted net loss per share data have been adjusted in prior periods to reflect the U.Vision transaction as outstanding for all periods. In June of 1998, the Company completed the sale of 1,625,600 shares of common stock to National Broadcasting Company, Inc., ("NBC"). The aggregate purchase price for the shares sold was $26.2 million. STOCK SPLIT On March 8, 1999, the Company effected a two-for-one split of its common stock. The accompanying consolidated financial statements have been retroactively adjusted to reflect the stock split. In May 1996, the Company effected a three-for-two split of its common stock in connection with the IPO. The accompanying consolidated financial statements have been retroactively adjusted to reflect the stock split. STOCK OPTION PLANS In 1994, the Board of Directors adopted a Stock Option Plan (the "1994 Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The 1994 Plan authorizes grants of options to purchase up to 5,500,000 shares of authorized but unissued common stock. In 1997, the stockholders approved the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes grants of options to purchase up to 5,000,000 shares of authorized but unissued common stock. Stock options for both the 1994 Plan and the 1997 Plan are granted with an exercise price equal to the fair market value at the date of grant. All stock options have 10-year terms and generally vest and become fully exercisable between three and four years from the date of grant. 17 18 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) A summary of the status of the 1994 Plan and the 1997 Plan as of December 31, 1998, 1997 and 1996, and changes during each of the years then ended:
Weighted Average Number of Shares Exercise Prices ---------------- ---------------- Balance as of December 31, 1995 2,952,500 0.80 Granted 1,728,400 5.72 Exercised (1,393,934) 0.52 Cancelled (158,034) 2.73 ---------- ------ Balance as of December 31, 1996 3,128,932 3.55 Granted 2,647,046 11.87 Exercised (889,392) 1.44 Cancelled (243,504) 7.04 ---------- ------ Balance as of December 31, 1997 4,643,082 8.42 Granted 2,472,900 16.74 Exercised (920,638) 5.12 Cancelled (1,117,460) 11.60 ---------- ------ Balance as of December 31, 1998 5,077,884 $12.37 ========== ======
As of December 31, 1998, 1997 and 1996, the number of options exercisable was 1,050,016, 858,888 and 804,794, respectively, and the weighted average of the exercise price of those options was $7.01, $3.06, and $1.11, respectively. As of December 31, 1998, there were 2,218,152 additional shares available for grant under the Plans. The Company applies APB Opinion No. 25 in accounting for the Plans and, accordingly, no compensation cost has been recognized for the Plans in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income (loss) and net income (loss) per share would have been increased to the pro forma amounts indicated below:
Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 -------------- -------------- -------------- Net income (loss) As reported $ 2,599,957 ($ 24,728,092) ($ 16,948,662) Pro forma ($ 13,130,574) ($ 29,872,164) ($ 18,259,031) Basic net income (loss) per share As reported $ 0.08 ($ 0.91) ($ 1.06) Pro forma ($ 0.41) ($ 1.10) ($ 0.81) Diluted net income (loss) per share As reported $ 0.07 ($ 0.91) ($ 1.06) Pro forma ($ 0.38) ($ 1.10) ($ 0.81)
18 19 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) The effects of applying SFAS 123 in this pro forma disclosure is not indicative of the effects on reported results for future years. SFAS No. 123 does not apply to awards prior to 1995. The weighted-average fair value of options granted in 1998, 1997 and 1996, was $16.74, $11.87 and $5.72, respectively. The fair value of each option grant is estimated on the date of grant using Black Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: no dividend yield, expected volatility of 75%, risk-free interest rate of 6%, and an expected life of five years, five years and one year. The following table summarizes information about stock options outstanding as of December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of As of Contractual Exercise As of Exercise Exercise Prices 12/31/98 Life Price 12/31/98 Price --------------------------- ----------- ----------- -------- ----------- -------- $ 0.6000 $ 4.2950 543,544 6.86 $ 2.5307 376,086 $ 1.9915 $ 6.0000 $ 7.3150 551,624 7.56 $ 6.5059 253,860 $ 6.4988 $ 7.7500 $10.0650 80,250 8.10 $ 8.9125 18,626 $ 8.4692 $10.3750 $10.3750 638,298 8.92 $ 6.9167 154,700 $10.3750 $10.6900 $12.0650 805,124 8.63 $11.7106 168,184 $11.6537 $12.1250 $13.7500 173,736 8.53 $13.3392 36,138 $13.3415 $13.9400 $13.9400 921,574 9.24 $13.9400 3,876 $13.9400 $14.0000 $14.7500 121,086 8.65 $14.2317 20,320 $14.0931 $16.1250 $16.1250 664,000 9.42 $16.1250 -- -- $16.4400 $34.2500 578,648 9.63 $23.3122 18,226 $22.6535 $ 0.6000 $34.2500 5,077,884 8.68 $12.3702 1,050,016 $ 7.0065
19 20 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 401(k) PROFIT SHARING PLAN In 1996, the Company adopted a 401(k) Profit Sharing Plan (the "401(k) Plan") that is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all of the Company's employees. Participants may elect to contribute a percentage of their compensation to this plan, up to the statutory maximum amount. The Company may make discretionary contributions to the 401(k) Plan, but has not done so to date. EMPLOYEE STOCK PURCHASE PLAN In July 1996, the Company adopted an Employee Stock Purchase Plan that covers substantially all employees. Participants may elect to purchase the Company's stock at a 10% discount of the lower of the closing price at the beginning or end of the quarter by contributing a percentage of their compensation. The maximum percentage allowed is 10%. (6) MAJOR CUSTOMERS AND CONTRACTS CUSTOMERS For the year ended December 31, 1998, one customer, USA Networks, accounted for approximately 10% of the Company's revenues. For the years ended December 31, 1997 and 1996, two customers accounted for over 10% of the Company's revenues with USA Networks accounting for approximately 16% and 19%, and Microsoft Corporation accounting for approximately 10% and 12% of total revenues, respectively. CONTRACTS In February 1995, the Company entered into an agreement with USA Networks to carry its television program, CNET CENTRAL. The contract allowed the Company to sell the available advertising on the program. In connection with this agreement, the Company issued 1,033,500 common stock warrants at an exercise price of $1.21 per share to USA Networks. As of December 31, 1998, all such warrants were exercised. Effective July 1, 1996, the agreement with USA Networks was amended to license to USA Networks the right to carry a two hour programming block produced by the Company, called "Digital Domain" for broadcast on the USA Network and The SciFi Channel for an initial term of one year. Under the amended agreement, USA Networks licensed the rights to Digital Domain for a fee equal to the cost of production of the programs up to a maximum of $5,250,000 for the first year with an option to extend the term for an additional year. In January 1997, USA Networks exercised this option. 20 21 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) In addition, pursuant to the amended agreement, the Company agreed to pay USA Networks a fee of $1.0 million for the right to cross-market the Company's Internet channels on the television programs produced by the Company for USA Networks. During the second year extension the Company paid a fee of $750,000 for the right to continue such cross-marketing activities. These fees are reported by the Company as marketing expenses. In January 1997, USA Networks exercised its option to extend its agreement with the Company to carry Digital Domain through June 30, 1998. In connection with this extension to the agreement, the Company agreed that the warrants held by USA Networks would vest in full on December 31, 2006, to the extent they had not previously vested. As a result of this change, the Company incurred a one-time charge to earnings of approximately $7.0 million during the first quarter of 1997. In July 1998, the Company entered into an agreement with USA Networks to again license to USA Networks the right to carry Digital Domain for broadcast on the USA Network and The SciFi Channel for a one year period. The Company agreed to pay USA Networks a fee of $750,000 for the right to cross-market the Company's Internet channels on the television programs produced by the Company for USA Networks. In January 1996, the Company entered into a joint venture agreement with E! Entertainment Television, Inc. ("E! Entertainment") that launched an Internet site in August 1996, called E! ONLINE, focusing on entertainment, news, gossip, movies and television. The Company agreed to provide $3,000,000 in debt financing to the joint venture during its first two years of operations, which amount was advanced pursuant to a seven year note, bearing interest at 9% per annum. In addition, the Company agreed to provide up to an additional $3,000,000 in equity capital to the joint venture through January 1999. The Company accounted for its financing and investments under the modified equity method. Accordingly, the Company recorded all of the losses incurred by the joint venture through June 30, 1997, in its consolidated statement of operations. The joint venture, E! Online LLC, was owned 50% by the Company and 50% by E! Entertainment. In June 1997, the Company sold its 50% equity position and certain technology licenses and marketing and consulting services to its joint venture partner for $10.0 million in cash and a $3.2 million note receivable, which was included in other assets in the balance sheet and certain additional payments for up to three years. The note receivable was paid in full in November, 1998. In August 1996, the Company entered into an agreement with GGP whereby the Company produced a television program, TV.com, which was exclusively distributed by GGP. Any revenues from the distribution of TV.com were first used to offset costs of distribution and 21 22 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) production and thereafter were shared equally by CNET and GGP. In August 1997, the assets of GGP were acquired by a third party who has agreed to distribute the program through TWI under the same terms and conditions. Beginning March 1, 1998, the Company assumed responsibility for the sale of advertisements on TV.com and pays a distribution fee to TWI. (7) UNUSUAL ITEMS In the fourth quarter of 1997, the Company recognized an expense of $1.3 million related to lease abandonment costs and recognized an expense of $700,000 relating to a write off of Internet domain names that the Company had determined that it would no longer use. Through the fourth quarter of 1998, the Company had incurred expenses of $379,000 related to the abandonment of excess real estate and during the fourth quarter the Company determined that it had completed the abandonment of excess real estate. Accordingly, the Company reversed approximately $922,000 of this expense in the fourth quarter of 1998. In the first quarter of 1997, the Company incurred a one-time, non-cash expense of $7.0 million related to an amendment to the warrant agreement with USA Networks whereby the Company agreed that the warrants held by USA Networks would vest in full on December 31, 2006, to the extent that they had not previously vested. (8) RELATED PARTY TRANSACTIONS Included in other assets on the accompanying balance sheets is an advance to an officer of the Company for $26,250. An affiliate of an officer and stockholder of the Company loaned the Company $800,000 in 1996 at an interest rate of 8% and was granted 9,800 warrants to purchase Series D Convertible preferred stock at an exercise price of $12.88 per share. This loan was subsequently converted to Series E convertible preferred stock, which were subsequently converted to 29,400 warrants to purchase common stock at an exercise price of $4.29 per share. As of December 31, 1997, all of these warrants were outstanding and exercisable and expire in January 2001. Such warrants were valued at estimated fair market value at the date of issuance. A stockholder loaned the Company $3,000,000 in 1996 at an interest rate of 8%. Interest expense related to the loan was $34,000 in 1996. This loan was subsequently converted to Series E convertible preferred stock. In connection with this loan agreement, the Company granted the lender 36,750 warrants to purchase Series D convertible preferred stock at an exercise price of $12.88 per share, which were subsequently converted to 110,250 warrants to purchase common stock at an exercise price of $4.29 per share. As of December 31, 1998, all of these warrants were outstanding and exercisable and expire on dates from May 2000 to February 2001. Such warrants were valued at estimated fair market value at the date of issuance. 22 23 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) In April 1996, a stockholder exercised options to purchase 366,144 shares of Series B preferred stock and 273,000 shares of common stock for an aggregate of $694,654. The consideration was paid by $100,000 in cash and the issuance of a note for $594,654, which was repaid in July 1996. Such shares of Series B preferred stock were converted into 1,098,432 shares of common stock at the IPO. In December 1997, an officer of the Company purchased 16,000 shares of common stock for $198,000 as a participant in a private placement. Buydirect.com (BuyDirect) was a wholly owned division of the Company that distributed electronic software. On March 31, 1998, the Company contributed its ownership in BuyDirect, and net assets related to BuyDirect of approximately $744,000, to a new venture that is separately owned and operated by BuyDirect's existing management group. As part of the transaction, the Company received a 19% ownership interest in the new venture. The Company uses the cost method of accounting for its BuyDirect investment thus recorded an investment of approximately $744,000 on its balance sheet. Initially, the Company also entered into a multi-year arrangement with the new venture to provide marketing and promotion through April 30, 2000. Effective October 31, 1998, the Company terminated the initial contract and entered into a new agreement in exchange for approximately $7.5 million for marketing and promotion through September 30, 2000. In conjunction with the new agreement, the Company received a promissory note maturing on October 31, 2002 in the amount of $5.6 million. For the year ended December 31, 1998, the Company recognized $2,510,422 in revenues related to advertising purchased by BuyDirect and to the licensing of technology. As of December 31, 1998, the Company had a $1.7 million receivable balance from BuyDirect related to advertising purchased, licensing of technology and payments made by CNET on behalf of the venture. The balance is included on the balance sheet as a related party accounts receivable. Pursuant to an agreement dated June 4, 1998 among the Company, NBC Multimedia, Inc., a Delaware corporation ("NBC Multimedia"), and Snap LLC, a Delaware limited liability company, the Company and NBC Multimedia agreed to form snap to operate the Snap Internet portal service, which was previously operated as a division of the Company. In connection with the formation and initial capitalization of snap, which was completed on June 30, 1998, the Company contributed to snap substantially all of its assets used exclusively in the operation of the snap service. Initially, snap will be owned 81% by the Company and 19% by NBC Multimedia, however, NBC Multimedia has an option to increase its ownership stake in snap to 60%. Under the agreement, CNET has the right to appoint two members to snap's Board of Managers (the "Board"), while NBC has the right to appoint five members. The seven member Board has general supervision, direction and control of the business and has the general powers and duties typically vested in the board of directors of a corporation. Through the June 1998 23 24 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) transaction with NBC, snap's losses were funded by CNET. Subsequent to the June 1998 transaction, snap's losses were funded through equity contributions by NBC or affiliates and through debt incurred by snap which has been guaranteed by affiliates of NBC. There is no requirement for CNET to provide any direct or indirect funding for snap and the anticipated future losses are expected to be funded by either additional debt financing or equity contributions by NBC. Based on the structure of the Board and considering the current and expected funding of snap, CNET does not control snap and accordingly has not consolidated its results. The accompanying financial statements present snap's financial results using the equity method of accounting effective January 1, 1998. Included in equity losses on the accompanying 1998 statement of operations are losses of $11,796,344 related to snap. As of December 31, 1998 the Company's investment in snap has been reduced to zero. (9) SEGMENT INFORMATION The Company has adopted the provisions of SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenue and cost of revenue by operating segment for purposes of making operating decisions and assessing financial performance. The consolidated information reviewed by the CEO is identical to the information presented in the accompanying financial statement of operations. The Company operates in two segments, television and CNET Online, the Company's Internet operation. Asset information regarding television and CNET Online operations is as follows:
1998 1997 ---------- ---------- Television 3,166,809 3,304,110 CNET Online 85,187,643 54,957,568 ---------- ---------- Consolidated Total 88,354,452 58,261,678 ========== ==========
24 25 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (10) SUBSEQUENT EVENTS On February 9, 1999, the Company announced an agreement with America Online, Inc., ("AOL"), whereby the Company will become the exclusive provider of computer hardware and software buying guides on the AOL service and on AOL.com, as well as the primary provider of computer buying guides on CompuServe, Digital City, AOL Hometown and certain AOL international properties. Under the terms of the agreement, AOL will receive guaranteed payments from the Company in the amount of $14.5 million over approximately 27 months. On February 16, 1999, the Company acquired NetVentures, Inc., in a stock ("NetVentures"), in a stock-for-stock exchange valued at approximately $12.5 million. NetVentures owns and operates ShopBuilder, an online store-creation system. On February 19, 1999, the Company acquired AuctionGate Interactive, Inc., ("AuctionGate"),in a stock-for-stock exchange valued at approximately $6.5 million. AuctionGate owns and operates AuctionGate.com, an auction site specializing in computer products. On February 26, 1999, the Company acquired the assets of Winfiles.com, a leading downloading service, from Jenesys, LLC, for a total purchase price of $11.5 million, payable in cash in two installments of $5.75 million. On March 8, 1999, the Company completed a private placement with gross proceeds of $172,915,0000 of 5% convertible subordinated notes. The placement will be subject to certain fees and expenses. The notes are convertible, at the option of the noteholder, into shares of common stock. On March 22, 1999, the Company acquired KillerApp Corporation in a stock-for-stock exchange valued at approximately $46 million. KillerApp owns and operates KillerApp.com, an online comparison shopping service for computer and consumer related products. In March 1999, BuyDirect entered into a merger agreement with beyond.com. This merger will result in our owning approximately 800,000 shares of beyond.com as a result of our ownership interest in BuyDirect. 25 26 SCHEDULE II CNET, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Numbers presented in thousands) Additions
Additions -------------------------- Balance at Charged to Charged to Balance Beginning of Costs and Other Deductions at End Period Expenses Accounts Describe of Period ------------ ---------- ---------- ---------- --------- 1998 Allowance for $ 743(1) doubtful accounts $ 461 $1,443 $621(3) $ 60(2) $ 1,722 1997 Allowance for doubtful accounts $ 100 $ 578 -- $ 217(1) $ 461 1996 Allowance for doubtful accounts $ 25 $ 75 -- -- $ 100
(1) Accounts written off. (2) Part of sale of Buy Direct, Inc. (3) Amounts charged to revenue to cover underdelivery of guaranteed impressions. 26 27 S-2 Independent Auditors' Report on Schedule The Board of Directors CNET, Inc. Under date of February 9, 1999, except as to paragraph 5 of footnote 5 and footnote 10, which are as of March 22, 1999, we reported on the consolidated balance sheets of CNET, Inc., and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statements schedule in the annual report on Form 10-K for the year 1998. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. KPMG LLP San Francisco, California March 22, 1999 27 28 FINANCIAL STATEMENTS OF SNAP! LLC The audited financial statements of Snap! LLC for the years ended December 31, 1998 and December 31, 1997 are incorporated by reference to pages F-34 to F-50 of the Registration Statement on Form S-4 of NBC Internet, Inc. (Registration No. 333-82639) filed November 1, 1999. 28 29 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) EXHIBITS: (1) Financial Statements. The following consolidated financial statements are filed as a part of this report under Item 8, "Financial Statements and Supplementary Data": Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Independent Auditors' Report of KPMG LLP SNAP! LLC Balance Sheet as of December 31, 1998 and 1997 and as of March 31, 1999 SNAP! LLC Statements of Operations for the years ended December 31, 1998 and 1997 and for the three months ended March 31, 1999 and 1998 SNAP! LLC Statements of Members' Equity (Deficit) for the years ended December 31, 1998 and 1997 and for the three months ended March 31, 1999 and 1998 SNAP! LLC Statements of Cash Flows for the years ended December 31, 1998 and 1997 and for the three months ended March 31, 1999 and 1998 Notes to Financial Statements Independent Auditors' Report of KPMG LLP (2) Financial Statement Schedules. The following financial statement schedules are filed as part of this report: Schedule II Valuation and Qualifying Accounts for CNET, Inc. Independent auditors report on schedule for CNET, Inc. Schedule II Valuation and Qualifying Accounts for SNAP! LLC Independent auditors report on schedule for SNAP! LLC 29 30 (3) Exhibits INDEX TO EXHIBITS
Exhibit No. 3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into CNET, Inc. 3.2(2) -- Certificate of Amendment of Certificate of Incorporation of the Company 3.3(3) -- Certificate of Ownership and Merger of Gamecenter.com, Inc., Finder.com, Inc., Buyer.com, Inc. and Virtual Software Library, Inc. into CNET, Inc. 3.4(1) -- Amended and Restated Bylaws of the Company 4.1(1) -- Specimen of Common Stock Certificate 10.1(1) -- CNET, Inc. Amended and Restated Stock Option Plan 10.2(1) -- Employment Agreement, dated as of October 19, 1994, between the Company and Halsey M. Minor 10.3(3) -- Employment Agreement, dated as of October 19, 1994, between the Company and Shelby W. Bonnie 10.4(1) -- Employment Agreement, dated to be effective as of December 1, 1993 and amended as of August 1, 1995 and as of April 1, 1996, between the Company and Kevin Wendle 10.5(1) -- Employment Agreement, dated to be effective as of February 20, 1995 and amended as of September 19, 1995, between the Company and Jonathan Rosenberg 10.6(1) -- Option Exercise Agreement, dated as of April 9, 1996, between the Company and Kevin Wendle 10.7(1) -- Promissory Note of Kevin Wendle, payable to the Company, dated as of April 9, 1996 10.8(1) -- Lease Agreement, dated as of January 28, 1994, between the Company and Montgomery/North Associates and amended as of January 31, 1995 and as of October 19, 1995 10.9(1) -- Lease, dated as of October 19, 1995, between the Company and The Ronald and Barbara Kaufman Revocable Trust, et al. 10.10(1) -- Agreement, dated as of February 1, 1995, between the Company to USA Networks 10.11(1) -- Warrant to Purchase Common Stock, dated February 9 1995, issued by the Company to USA Networks 10.12(1) -- Series C Convertible Preferred Stock Purchase Warrant, dated as of May 25, 1995, issued by the Company to Vulcan Ventures Incorporated
30 31 10.13(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as of January 23, 1996. issued by the Company to the Bonnie Family Partnership 10.14(1) -- Operating Agreement of E! Online, LLC, dated as of January 30, 1996, between the Company and E! Entertainment Television, Inc. 10.15(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as of February 20, 1996 issued by the Company to Vulcan Ventures Incorporated 10.16(1) -- Amended and Restated Agreement , dated as of July 1, 1996, between the Company and USA Networks 10.17(1) -- Subscription Agreement, dated as of April 26, 1996, between the Company and the Series E Purchasers identified therein 10.18(1) -- 1996 Employee Stock Purchase Plan of the Company 10.19(1) -- Stock Purchase Agreement between Intel Corporation and the Company dated July 1, 1996 10.20(4) -- Stock Purchase Agreement between Vignette Corporation and the Company 10.21(5) -- Letter Agreement, dated February 20, 1997, between the Company and Kevin Wendle 10.22(2) -- CNET, Inc. 1997 Stock Option Plan 10.23(6) -- Stock Purchase Agreement, dated as of June 4, 1997, between Intel Corporation and the Company 10.24(7) -- Master Agreement, dated as of June 30, 1997, among the Company, E! Entertainment Television, Inc. and E! Online, LLC 10.25(8) -- Security and Loan Agreement between Imperial Bank and the Company, dated July 24, 1997 10.26(8) -- Note from the Company to Imperial Bank dated July 24, 1997 10.27(8) -- Loan and Security Agreement between The CIT Group and the Company dated September 5, 1997 10.28(8) -- Office Lease between One Beach Street, LLC and the Company dated September 24, 1997 10.29(9) -- Stock Purchase Agreement, dated as of December 18, 1997, among the Company and the Purchasers identified therein 10.30(10) -- Agreement and Plan of Merger, dated as of May 7, 1998 by and among CNET, Inc., and CNET Acquisition Corp., U. Vision Inc. and the stockholders of U. Vision Inc. 10.31(11) -- Contribution Agreement, dated as of June 4, 1998, by and among the Company, NBC and Snap! LLC. 10.32(11) -- Amended and Restated Limited Liability Company Agreement of Snap! LLC, dated as of June 30, by and among the Company and NBC Multimedia, Inc.
31 32 10.33(11) -- Stock Purchase Agreement, dated as of June 4, 1998, by and between the Company and NBC 10.34(2) -- Agreement, dated as of July 1, 1998, between USA Networks and the Company 10.35(12) -- Agreement and Plan of Merger, dated as of February 2, 1999, by and among CNET, Inc., NetVentures, Inc. and the stockholders of NetVentures, Inc. 10.36(12) -- Purchase Agreement, dated as of December 18, 1998, by and among Jenesys LLC and Steve Jenkins 10.37(12) -- Amendment No. 1 to Purchase Agreement, dated as of January 22, 1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins 10.38(12) -- Amendment No. 2 to Purchase Agreement, dated as of February 11, 1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins 10.39(12) -- Agreement and Plan of Merger, dated as of February 19, 1999, by and among CNET, Inc., AuctionGate Interactive, Inc. and the stockholders of AuctionGate, Inc. 10.40(13) -- Indenture dated March 8, 1999 between the Company and The Bank of New York, as trustee 10.41(13) -- Form of 5% Convertible Subordinated Note due 2006 10.42(13) -- Registration Agreement dated March 8, 1999 between the Company and Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc. and Volpe Brown & Company, LLP, as Representatives of the Initial Purchasers 21.1(1) -- List of Subsidiary Corporations 23.1* -- Consent of Independent Auditors 23.2* -- Consent of Independent Auditors 99.1* -- Snap! LLC Financial Statements
- ------------------ * Filed herewith. (1) Incorporated by reference from a previously filed exhibit to the Company's Registration Statement on Form SB-2, registration no. 333-4752-LA. (2) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (3) Incorporated by reference from a previously filed exhibit to the Company's Registration Statement on Form S-8, registration no. 333-34491. 32 33 (4) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996. (5) Incorporated by reference from an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (6) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997. (7) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K dated July 11, 1997. (8) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997. (9) Incorporated by reference from a previously filed exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (10) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed May 22, 1998. (11) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed July 15, 1998. (12) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed March 1, 1999. (13) Incorporated by reference from a previously filed exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 33 34 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By /s/ HALSEY M. MINOR ------------------------------------- Halsey M. Minor Chairman of the Board and Chief Executive Officer Date: November 10, 1999 ------------------------------------ By /s/ DOUGLAS N. WOODRUM ------------------------------------- Douglas N. Woodrum Executive Vice President and Chief Financial Officer Date: November 10, 1999 ------------------------------------ In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ HALSEY M. MINOR ------------------------------------- Halsey M. Minor Chairman of the Board and Chief Executive Officer Date: November 10, 1999 ------------------------------------ By /s/ SHELBY W. BONNIE ------------------------------------- Shelby W. Bonnie Vice Chairman of the Board Date: November 10, 1999 ------------------------------------ 35 By /s/ DOUGLAS N. WOODRUM ------------------------------------- Douglas N. Woodrum Director, Executive Vice President and Chief Financial Officer Date: November 10, 1999 ------------------------------------ By ------------------------------------- John C. "Bud" Colligan Director Date: ------------------------------------ By ------------------------------------- Mitchell Kertzman Director Date: November , 1999 ------------------------------------ By ------------------------------------- Eric Robison Director Date: November , 1999 ------------------------------------ By /s/ DAVID P. OVERMYER ------------------------------------- David P. Overmyer Vice President, Finance and Administration (Principal Accounting Officer) Date: November 10, 1999 ------------------------------------ 36 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 3.1(1) -- Finder.com, Inc. and Virtual Software Library, Inc. into CNET, Inc. 3.2(2) -- Certificate of Amendment of Certificate of Incorporation of the Company 3.3(3) -- Certificate of Ownership and Merger of Gamecenter.com, Inc., Finder.com, Inc., Buyer.com, Inc. and Virtual Software Library, Inc. into CNET, Inc. 3.4(1) -- Amended and Restated Bylaws of the Company 4.1(1) -- Specimen of Common Stock Certificate 10.1(1) -- CNET, Inc. Amended and Restated Stock Option Plan 10.2(1) -- Employment Agreement, dated as of October 19, 1994, between the Company and Halsey M. Minor 10.3(3) -- Employment Agreement, dated as of October 19, 1994, between the Company and Shelby W. Bonnie 10.4(1) -- Employment Agreement, dated to be effective as of December 1, 1993 and amended as of August 1, 1995 and as of April 1, 1996, between the Company and Kevin Wendle 10.5(1) -- Employment Agreement, dated to be effective as of February 20, 1995 and amended as of September 19, 1995, between the Company and Jonathan Rosenberg 10.6(1) -- Option Exercise Agreement, dated as of April 9, 1996, between the Company and Kevin Wendle 10.7(1) -- Promissory Note of Kevin Wendle, payable to the Company, dated as of April 9, 1996 10.8(1) -- Lease Agreement, dated as of January 28, 1994, between the Company and Montgomery/North Associates and amended as of January 31, 1995 and as of October 19, 1995 10.9(1) -- Lease, dated as of October 19, 1995, between the Company and The Ronald and Barbara Kaufman Revocable Trust, et al. 10.10(1) -- Agreement, dated as of February 1, 1995, between the Company to USA Networks 10.11(1) -- Warrant to Purchase Common Stock, dated February 9 1995, issued by the Company to USA Networks 10.12(1) -- Series C Convertible Preferred Stock Purchase Warrant, dated as of May 25, 1995, issued by the Company to Vulcan Ventures Incorporated
37 10.13(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as of January 23, 1996. issued by the Company to the Bonnie Family Partnership 10.14(1) -- Operating Agreement of E! Online, LLC, dated as of January 30, 1996, between the Company and E! Entertainment Television, Inc. 10.15(1) -- Series D Convertible Preferred Stock Purchase Warrant, dated as of February 20, 1996 issued by the Company to Vulcan Ventures Incorporated 10.16(1) -- Amended and Restated Agreement , dated as of July 1, 1996, between the Company and USA Networks 10.17(1) -- Subscription Agreement, dated as of April 26, 1996, between the Company and the Series E Purchasers identified therein 10.18(1) -- 1996 Employee Stock Purchase Plan of the Company 10.19(1) -- Stock Purchase Agreement between Intel Corporation and the Company dated July 1, 1996 10.20(4) -- Stock Purchase Agreement between Vignette Corporation and the Company 10.21(5) -- Letter Agreement, dated February 20, 1997, between the Company and Kevin Wendle 10.22(2) -- CNET, Inc. 1997 Stock Option Plan 10.23(6) -- Stock Purchase Agreement, dated as of June 4, 1997, between Intel Corporation and the Company 10.24(7) -- Master Agreement, dated as of June 30, 1997, among the Company, E! Entertainment Television, Inc. and E! Online, LLC 10.25(8) -- Security and Loan Agreement between Imperial Bank and the Company, dated July 24, 1997 10.26(8) -- Note from the Company to Imperial Bank dated July 24, 1997 10.27(8) -- Loan and Security Agreement between The CIT Group and the Company dated September 5, 1997 10.28(8) -- Office Lease between One Beach Street, LLC and the Company dated September 24, 1997 10.29(9) -- Stock Purchase Agreement, dated as of December 18, 1997, among the Company and the Purchasers identified therein 10.30(10) -- Agreement and Plan of Merger, dated as of May 7, 1998 by and among CNET, Inc., and CNET Acquisition Corp., U. Vision Inc. and the stockholders of U. Vision Inc. 10.31(11) -- Contribution Agreement, dated as of June 4, 1998, by and among the Company, NBC and Snap! LLC. 10.32(11) -- Amended and Restated Limited Liability Company Agreement of Snap! LLC, dated as of June 30, by and among the Company and NBC Multimedia, Inc.
38 10.33(11) -- Stock Purchase Agreement, dated as of June 4, 1998, by and between the Company and NBC 10.34(2) -- Agreement, dated as of July 1, 1998, between USA Networks and the Company 10.35(12) -- Agreement and Plan of Merger, dated as of February 2, 1999, by and among CNET, Inc., NetVentures, Inc. and the stockholders of NetVentures, Inc. 10.36(12) -- Purchase Agreement, dated as of December 18, 1998, by and among Jenesys LLC and Steve Jenkins 10.37(12) -- Amendment No. 1 to Purchase Agreement, dated as of January 22, 1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins 10.38(12) -- Amendment No. 2 to Purchase Agreement, dated as of February 11, 1999, by and among CNET, Inc. and Jenesys LLC and Steve Jenkins 10.39(12) -- Agreement and Plan of Merger, dated as of February 19, 1999, by and among CNET, Inc., AuctionGate Interactive, Inc. and the stockholders of AuctionGate, Inc. 10.40 (13) -- Indenture dated March 8, 1999 between the Company and The Bank of New York, as trustee 10.41 (13) -- Form of 5% Convertible Subordinated Note due 2006 10.42 (13) -- Registration Agreement dated March 8, 1999 between the Company and Salomon Smith Barney Inc. BancBoston Robertson Stephens Inc. and Volpe Brown & Company, LLP, as Representatives of the Initial Purchasers 21.1(1) -- List of Subsidiary Corporations 23.1* -- Consent of Independent Auditors 23.2* -- Consent of Independent Auditors 99.1* -- Snap! LLC Financial Statements
- ------------------ * Filed herewith. (1) Incorporated by reference from a previously filed exhibit to the Company's Registration Statement on Form SB-2, registration no. 333-4752-LA. (2) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (3) Incorporated by reference from a previously filed exhibit to the Company's Registration Statement on Form S-8, registration no. 333-34491. 39 (4) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996. (5) Incorporated by reference from an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (6) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997. (7) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K dated July 11, 1997. (8) Incorporated by reference from a previously filed exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997. (9) Incorporated by reference from a previously filed exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (10) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed May 22, 1998. (11) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed July 15, 1998. (12) Incorporated by reference from a previously filed exhibit to the Company's Current Report on Form 8-K filed March 1, 1999. (13) Incorporated by reference from a previously filed exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 Consent of Independent Auditors The Board of Directors CNET, Inc: We consent to incorporation by reference in the registration statement on Forms S-8 (File Nos. 333-07667, 333-34491 and 333-67325) and Forms S-3 (File Nos. 333-46203, 333-56633 and 333-73023) of CNET, Inc. of our of our report dated February 9, 1999, except as to paragraph 5 of footnote 5 and footnote 10 which are as of March 22, 1999, and our report on Schedule dated March 22, 1999, relating to consolidated balance sheets of CNET, Inc. and subsidiaries as of December 31,1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K/A of CNET, Inc. /s/ KPMG LLP San Francisco, California November 10, 1999 EX-23.2 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.2 Consent of Independent Auditors The Board of Directors SNAP! LLC We consent to incorporation by reference in the registration statement on Forms S-8 (File Nos. 333-07667, 333-34491 and 333-67325) and Forms S-3 (File Nos. 333-46203, 333-56633 and 333-73023) of our report dated June 18, 1999, relating to the balance sheets of SNAP!LLC as of December 31, 1997 and 1998, and the related statements of operations, members' deficit, and cash flows for each of the years in the two-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K/A of CNET, Inc. /s/ KPMG LLP San Francisco, California November 10, 1999 EX-99.1 4 SNAP! LLC FINANCIAL STATEMENTS 1 EXHIBIT 99.1 INDEPENDENT AUDITORS' REPORT The Board of Managers Snap! LLC: We have audited the accompanying balance sheets of Snap! LLC as of December 31, 1997 and 1998, and the related statements of operations, members' deficit, and cash flows for each of the years in the two-year period ended December 31, 1998. These financial statements are the responsibility of Snap! LLC's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Snap! LLC as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP San Francisco, California June 18, 1999 2 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, ---------------------- JUNE 30, 1997 1998 1999 ---------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................................. $ -- 865 37 Accounts receivable, net of allowance for doubtful accounts of $0 at December 31 1997, $469 at December 31, 1998, and $807 at June 30, 1999... 367 3,015 4,415 Due from CNET.............................................................. -- 655 -- Prepaid expenses and other current assets.................................. -- 1,778 2,075 ---------- ---------- ---------- Total current assets..................................................... 367 6,313 6,527 Property and equipment, net.................................................. 1,127 4,674 8,277 Investments.................................................................. -- 605 18,382 Deposits and other assets.................................................... 36 42 2,194 ---------- ---------- ---------- Total assets............................................................. $ 1,530 11,634 35,380 ========== ========== ========== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................................................... $ 312 2,721 3,011 Accrued and other liabilities.............................................. 216 2,846 6,357 Deferred revenue........................................................... 400 553 3,741 Due to CNET................................................................ -- -- 2,611 Due to NBC................................................................. -- -- 1,373 ---------- ---------- ---------- Total current liabilities................................................ 928 6,120 17,093 Line of credit............................................................... -- 13,500 30,100 ---------- ---------- ---------- Total liabilities........................................................ 928 19,620 47,193 ---------- ---------- ---------- Commitments Members' equity: Members' equity............................................................ 16,170 48,972 86,808 Deferred compensation...................................................... -- (2,102) (9,146) Other accumulated comprehensive income..................................... -- -- 11,635 Accumulated deficit........................................................ (15,568) (54,856) (101,110) ---------- ---------- ---------- Total members' equity (deficit).......................................... 602 (7,986) (11,813) ---------- ---------- ---------- Total liabilities and members' equity (deficit).......................... $ 1,530 11,634 35,380 ========== ========== ==========
See accompanying notes to financial statements. 3 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------- ------------------------ 1997 1998 1998 1999 ---------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net revenues..................................................... $ 817 7,317 1,958 13,368 Cost of net revenues............................................. 1,520 7,626 3,934 5,858 ---------- --------- ----------- ---------- Gross profit (deficit)....................................... (703) (309) (1,976) 7,510 Operating expenses: Product development............................................ 9,403 6,263 2,303 5,009 Sales and marketing............................................ 4,090 12,482 3,368 14,613 General and administrative..................................... 1,372 5,939 1,407 5,744 Amortization of deferred compensation.......................... -- 160 -- 1,766 Promotion and advertising provided by NBC...................... -- 14,060 -- 26,037 ---------- --------- ----------- ---------- Total operating expenses..................................... 14,865 38,904 7,078 53,169 ---------- --------- ----------- ---------- Operating loss............................................... (15,568) (39,213) (9,054) (45,659) Other expense, net............................................... -- (75) -- (595) ---------- --------- ----------- ---------- Net loss..................................................... $ (15,568) (39,288) (9,054) (46,254) ========== ========= ========== ========== Other comprehensive income: Unrealized gains on available-for-sale securities............ $ -- -- -- 11,635 ---------- --------- ----------- ---------- Comprehensive net loss........................................... $ (15,568) (39,288) (9,054) (34,619) ========== ========= ========== ========== Basic and diluted net loss per unit.............................. $ (1.33) (2.95) (0.77) (3.19) ========== ========= ========== ========== Units used in per unit calculation............................... 11,700 13,301 11,700 14,481 ========== ========= ========== ==========
See accompanying notes to financial statements. 4 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) STATEMENTS OF MEMBERS' EQUITY (DEFICIT) (IN THOUSANDS)
OTHER TOTAL MEMBER UNITS DEFERRED ACCUMULATED MEMBERS' -------------------- COMPENSATION COMPREHENSIVE ACCUMULATED EQUITY UNITS AMOUNT EXPENSE INCOME DEFICIT (DEFICIT) --------- --------- ------------- --------------- ------------ ----------- Contributed capital from CNET, Inc........ 11,700 16,170 -- -- -- 16,170 Net loss.................................. -- -- -- -- (15,568) (15,568) --------- --------- ------ ------ ------------ ----------- Balances as of December 31, 1997.......... 11,700 16,170 -- -- (15,568) 602 Contributed capital from CNET, Inc........ -- 10,616 -- -- -- 10,616 Cash contribution from NBC................ 2,744 5,864 -- -- -- 5,864 Promotion and advertising provided by NBC..................................... -- 14,060 -- -- -- 14,060 Grant of compensatory stock options....... -- 2,262 (2,262) -- -- -- Amortization of deferred compensation..... -- -- 160 -- -- 160 Net loss.................................. -- -- -- -- (39,288) (39,288) --------- --------- ------ ------ ------------ ----------- Balances as of December 31, 1998.......... 14,444 $ 48,972 (2,102) -- (54,856) (7,986) Promotion and advertising provided by NBC (unaudited)............................. -- 26,037 -- -- -- 26,037 Grant of compensatory stock options (unaudited)............................. -- 8,810 (8,810) -- -- -- Issuance of units in connection with GlobalBrain transaction (unaudited)..... 75 2,989 -- -- -- 2,989 Unrealized gain on available-for-sale securities (unaudited).................. -- -- -- 11,635 -- 11,635 Amortization of deferred compensation (unaudited)............................. -- -- 1,766 -- -- 1,766 Net loss (unaudited)...................... -- -- -- -- (46,254) (46,254) --------- --------- ------ ------ ------------ ----------- Balances as of June 30, 1999 (unaudited)............................. 14,519 $ 86,808 (9,146) 11,635 (101,110) (11,813) ========= ========= ====== ====== =========== ===========
See accompanying notes to financial statements. 5 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------- ------------------------ 1997 1998 1998 1999 ---------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss....................................................... $ (15,568) (39,288) (9,054) (46,254) Adjustments to reconcile net loss to net cash used in operating activities: Receipt of stock in exchange for services provided........... -- (605) -- (4,139) Depreciation and amortization................................ 329 929 182 1,489 Amortization of deferred compensation expense................ -- 160 -- 1,766 Promotion and advertising provided by NBC.................... -- 14,060 -- 26,037 Changes in operating assets and liabilities: Accounts receivable.......................................... (367) (2,648) (356) (1,400) Prepaid expenses, deposits and other assets................ (36) (1,784) (8) 632 Accounts payable........................................... 312 2,409 (80) 290 Accrued and other liabilities.............................. 216 2,630 325 3,511 Deferred revenue........................................... 400 153 (400) 3,188 Due to/from CNET........................................... -- (655) -- 3,266 Due to NBC................................................. -- -- -- 1,373 ---------- --------- ----------- ---------- Net cash used in operating activities.................... (14,714) (24,639) (9,391) (10,241) ---------- --------- ----------- ---------- Cash flows used in investing activities: Cash paid in connection with Global Brain transaction.......... -- -- -- (1,100) Investment in Net2Phone........................................ -- -- -- (1,000) Purchases of fixed assets...................................... (1,456) (4,476) (1,136) (5,087) ---------- --------- ----------- ---------- Net cash used in investing activities.................... (1,456) (4,476) (1,136) (7,187) ---------- --------- ----------- ---------- Cash flows from financing activities: Proceeds from line of credit................................... -- 13,500 -- 16,600 Capital contribution........................................... 16,170 10,616 10,527 -- Cash contribution from NBC..................................... -- 5,864 5,864 -- ---------- --------- ----------- ---------- Net cash provided by financing activities................ 16,170 29,980 16,391 16,600 ---------- --------- ----------- ---------- Net increase (decrease) in cash and cash equivalents............. -- 865 5,864 (828) Cash and cash equivalents at beginning of the period............. -- -- -- 865 ---------- --------- ----------- ---------- Cash and cash equivalents at end of the period................... $ -- 865 5,864 37 ========== ========= ========== ========== Supplemental non-cash transactions: Cash paid for interest......................................... $ -- 13 -- 324 ========== ========= ========== ========== Supplemental non-cash investing and financing activities: Promotion and advertising provided by NBC...................... $ -- 14,060 -- 26,037 ========== ========= ========== ========== Issuance of member units in connection with Global Brain transaction.................................................. $ -- -- -- 2,989 ========== ========= ========== ========== Grant of compensatory stock options............................ $ -- 2,262 -- 8,810 ========== ========= ========== ========== Unrealized gain on available-for-sale securities............... $ -- -- -- 11,635 ========== ========= ========== ========== Services rendered in exchange for equity investments........... $ -- 605 -- 4,139 ========== ========= ========== ==========
See accompanying notes to financial statements. 6 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (1) ORGANIZATION AND BASIS OF PRESENTATION (A) THE COMPANY Snap! LLC (Snap or the Company) commenced operations in December 1996 (the Company had no significant operating results during 1996) and was introduced as a service in September 1997. Snap is an Internet portal service company that offers a branded network of comprehensive information, media, ecommerce, communication, and navigation services to millions of users daily. The Company was incorporated on June 25, 1998 as a Delaware limited liability company (LLC). Prior to that date, the Company was operated as a wholly-owned and consolidated operation of CNET, Inc. (CNET). The accompanying financial statements retroactively reflect the incorporation of the Company as an LLC to the date of the inception of the Company's operations. On or about June 30, 1998, as part of a contribution agreement entered into between CNET and NBC, Inc. (NBC) (collectively, the Members), CNET contributed its assets and liabilities used exclusively in the operation of the Snap service to the LLC for an approximately 81% ownership interest, while NBC contributed approximately $5.9 million in cash to the LLC for an approximately 19% ownership interest (see Note 7). CNET's and NBC's contributions were recorded at their respective historical carrying amounts. The accompanying financial statements and related notes also reflect the historical results of operations and cash flows of Snap while it was operated by CNET. The statement of operations includes all revenues and costs directly attributable to Snap, including costs for facilities, functions and services used by the business and allocations of costs for certain administrative functions and services performed by centralized departments of CNET. Costs have been allocated to the Snap operation based on CNET management's estimate of costs attributable to the Snap operation. Such costs are not necessarily indicative of the costs that would have been incurred if Snap had been a separate entity. (B) LIQUIDITY The Company has sustained losses and negative cash flows from operations since inception and expects these conditions to continue into the foreseeable future. As of June 30, 1999, the Company had accumulated losses from inception of approximately $101 million. The implementation of the Company's business plan is dependent upon obtaining additional equity or debt financing through public or private financing, strategic partnerships or other arrangements. There can be no assurance that such additional financing will be available on terms attractive to the Company, or at all. Should additional external financing not be available, management would curtail the Company's current growth plans to enable the Company to continue operations through 1999. (C) XOOM/NBC/SNAP MERGER On May 9, 1999, the Company, Xoom.com, Inc., NBC, Inc. and certain of its affiliates (collectively, NBC), and CNET, Inc. entered into a series of definitive agreements, (the Agreements) relating to the formation of a new company to be named NBC Internet, Inc. (NBCi) upon consummation of all the transactions contemplated by the Agreements. NBCi is expected to include the businesses of the Company, 7 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (1) ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Xoom.com, Inc., and certain of NBC's Internet assets (including NBC.com, Videoseeker.com and NBC Interactive Neighborhood) and a 10% interest in CNBC.com. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) REVENUE RECOGNITION The Company's revenues are derived principally from the sale of banner advertisements and sponsorships. Advertising revenues are recognized in the period which the advertisement is displayed, provided that no significant obligations remain at the end of the period. Company obligations typically include the guarantee of a minimum number of "impressions" or times that an advertisement appears in pages viewed by users of the Company's online properties. To the extent the minimum guaranteed impressions are not delivered, the Company defers recognition of the corresponding revenue until the remaining guaranteed impression levels are achieved. The Company also earns revenue on sponsorship contracts from fees relating to the design, coordination, and integration of customers' content and links into Snap's online media properties. Such developmental fees are recognized as revenue once the related activities have been performed and the customers' Web links are available on Snap's online properties. Snap also derives revenues from development fees and electronic commerce which to date have each comprised less than 10% of revenues. Deferred revenue is primarily comprised of billings in excess of recognized revenue relating to advertising contracts and payments received pursuant to sponsorship agreements in advance of revenue recognition. (B) PRODUCT DEVELOPMENT Development expenses include expenses which were incurred in the development of new or improved technologies that enhance the performance of the Company's Internet service. Costs for development are expensed as incurred. Costs related to specific products or services are no longer recognized as development expenses when the specific product or service is launched and incorporated into the Company's internet service. (C) ADVERTISING COSTS All advertising costs are expensed when incurred. Advertising expense, including the value of advertising provided through barter transactions, totaled approximately $1,007,000, $18,559,000, $986,000 and $28,367,000 for the years ended December 31, 1997 and 1998, and the six months ended June 30, 1998 and 1999, respectively. These costs include the value of promotion and advertising provided by NBC (see Note 7). 8 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (D) CONCENTRATIONS OF CUSTOMERS AND CREDIT RISK One customer comprised 8% and 29% of net revenues for the year ended December 31, 1998 and the six-months ended June 30, 1999, respectively, in conjunction with non-monetary transactions in which the Company received equity as consideration for services sold by the Company. One separate customer accounted for 18% of net revenues for the year ended December 31, 1997. During the years ended December 31, 1997 and 1998, and the six months ended June 30, 1998 and 1999 no other customer accounted for greater than 10% of revenues. During the quarter ended June 30, 1999, the Company received stock in a private company currently valued at approximately $10 million in exchange for future services of equivalent value to be rendered by the Company. Subsequent to the fiscal quarter end, the Company and the private company issuer of the stock completed an escrow arrangement under which the Company would earn the release of the shares from escrow. The release of the shares from escrow would be based on the Company's actual monthly performance during a two-year term. As of June 30, 1999, the Company had earned the release of shares valued at approximately $200,000, which has been recorded as revenue in the quarter then ended. No other significant revenues were recorded on non-monetary transactions in which the Company received equity investments as consideration for services. Financial instruments which potentially expose the Company to a concentration of credit risk consists primarily of trade accounts receivable. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily in the United States. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. At December 31, 1998 and June 30, 1999, no one customer accounted for more than 10% of the accounts receivable balance. (E) CASH, CASH EQUIVALENTS, AND INVESTMENTS The Company considers investments in highly liquid instruments purchased with remaining maturities of 90 days or less to be cash equivalents. Cash equivalents are recorded at cost which approximates fair value. The Company maintains its cash in two depository accounts with high credit quality financial institutions. Equity investments in private companies are recorded initially at fair value when the Company's rights of ownership vest, and subsequently are carried at the lower of cost or net realizable value. Equity investments in publicly traded companies are initially recorded at market value when the Company's rights of ownership vest and are assumed to be available-for-sale securities which are carried at market value, with changes in market value recorded as unrealized gains and losses in total member's equity. (F) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three 9 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to seven years. Property and equipment recorded under leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or their estimated useful lives. (G) INCOME TAXES Prior to June 25, 1998 the Company's taxable losses were included in the consolidated tax returns of CNET, Inc. The Company did not receive any benefit from CNET Inc.'s receipt of such operating losses or research and development credits. Upon the incorporation as a Delaware limited liability company on June 26, 1998, the Company's net operating losses inured to the benefit of the Members. Accordingly, no provision for income taxes is recognized in the accompanying financial statements as the net loss generated from the Company's operations was "passed through" to the Members. (H) SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standard (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, governs accounting for software development costs. This statement provides for capitalization of certain software development costs once technological feasibility has been established. The costs capitalized are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenue to total projected product revenues, whichever is greater. No such costs have been capitalized to date. (I) STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation plans using the intrinsic value method. As such, compensation expense is recorded on the date of grant if the current market price of the underlying membership unit exceeded the exercise price. (J) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Actual results could differ from those estimates. (K) COMPREHENSIVE LOSS The Company has adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which established standards for reporting and disclosures of comprehensive results and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. During the second quarter of 1999 the Company reported unrealized holding gains arising from investments classified as available-for-sale. The Company has an investment in Mail.com, Inc. (Mail.com), which completed an initial public offering during the second quarter of 1999. The Company's investment in Mail.com was 10 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) recorded at market value based on the closing price of the stock on June 30, 1999, and the increase in value of the stock was recorded as an unrealized holding gain in comprehensive loss. (L) BARTER TRANSACTIONS The Company trades advertisements on its online properties in exchange for advertisements on the online properties of other companies. These revenues and marketing expenses are recorded at the fair value of services provided or the fair value of the services received, whichever is more reliably determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's online properties. Expense from barter transactions is recognized when advertisements are provided to the Company. Barter revenues and expenses were approximately $342,000, $636,000, $473,000 and $896,000 for the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999, respectively. (M) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, accounts receivable, equity investments, accounts payable and long-term debt approximate their respective fair values. (N) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews its long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (O) RECENT ACCOUNTING PRONOUNCEMENTS The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. The Company must adopt SFAS No. 133 by January 1, 2001. Management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position or operations of the Company. 11 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (P) NET LOSS PER UNIT Basic and diluted loss per unit is computed using the weighted average number of outstanding units at the end of each period. The following potentially dilutive units have been excluded from the determination of net loss per unit for all periods because the effect of such units would have been anti-dilutive:
DECEMBER 31, JUNE 30, 1998 1999 ------------ ------------ Units issuable under unit option plan............................ 986,662 1,528,267 Units issuable under option to NBC (see Note 7).................. 14,805,556 14,805,556 ------------ ------------ 15,792,218 16,333,823 =========== ============
As of December 31, 1998 and June 30, 1999, the weighted average exercise price of unit options was $2.47 and $14.78, respectively. (Q) INTERIM FINANCIAL DATA The accompanying financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999, are unaudited. In the opinion of management, these interim statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The financial data disclosed in these notes to the financial statements for these periods are also unaudited. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future periods. (3) GLOBALBRAIN INVESTMENT In April 1999, the Company entered into a series of agreements with GlobalBrain.net, Inc. (GlobalBrain). In aggregate, the Company committed to provide GlobalBrain with $2 million in cash and 75,000 membership units (valued at $3 million) in exchange for (i) a seven-year (with an option to extend an additional five years) exclusive right to utilize certain GlobalBrain technology (the Technology) within a portal service, (ii) non-exclusive rights to utilize the Technology in other Snap products and to sublicense the Technology, (iii) a commitment from GlobalBrain to provide a minimum of five dedicated GlobalBrain engineers working full time under the discretion of Snap on custom research and development work for three years, (iv) a 10% ownership interest in GlobalBrain, and (v) warrants to purchase an additional 41% of GlobalBrain in three separate tranches over a five year period. The Company accounted for this transaction as the acquisition of certain tangible and intangible assets, and allocations of the consideration surrendered by the Company were made to the following: purchased technology of approximately $2 million, prepaid development fees of approximately $2 million, and an equity investment in a private company of approximately $1 million. 12 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (4) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, -------------------- JUNE 30, 1997 1998 1999 --------- --------- ----------- Furniture, fixtures, leasehold improvements and equipment......... $ 102 1,763 1,948 Purchased software................................................ 159 242 662 Computer equipment................................................ 1,195 3,927 8,409 --------- --------- ----------- 1,456 5,932 11,019 Less accumulated depreciation and amortization.................... 329 1,258 2,742 --------- --------- ----------- $ 1,127 4,674 8,277 ========= ========= ==========
(5) CREDIT FACILITIES AND COMMITMENTS (A) LINE OF CREDIT As of December 31, 1998, the Company has a revolving line of credit for $27,000,000 which is secured by substantially all of the Company's assets, guaranteed by General Electric, parent company of the Company's principal shareholders, and bears interest at various rates which ranged from 5.40% to 6.86% during the year ended December 31, 1998. Extensions of credit are available until June 15, 2001. Advances made under the facility shall mature no later than July 15, 2001. At December 31, 1998, $13,500,000 was outstanding and $10,170,000 was available under the line of credit. The outstanding balance is comprised of multiple individual borrowings, which are due between April 6, 1999 and June 28, 1999. The borrowings are classified as long-term on the face of the balance sheet because the Company has the ability and intent to extend the due dates beyond December 31, 1999. On June 25, 1999, the Company's revolving line of credit, guaranteed by General Electric, was increased to $45,000,000. At June 30, 1999, $30,100,000 was outstanding and $11,220,000 was available under the line of credit. The outstanding balance is comprised of multiple individual borrowings, due between July 6, 1999, and December 7, 1999, and bear interest at various rates ranging from 5.22% to 8.25%. These borrowings are classified as long-term on the face of the balance sheet because the Company has the ability and intent to extend the due dates beyond twelve months. In both periods, a total of $3,330,000 of the line of credit was reserved in accordance with the requirements of the Company's facilities lease. (B) COMMITMENTS The Company is obligated under a noncancelable operating lease for office space, expiring in 2008. Rent expense was $200,000, $1,923,000, $500,000, and $1,456,000 for the years ended December 31, 1997 and 1998, and for the six months ended June 30, 1998 and 1999, respectively. The Company subleases portions of its facilities under noncancelable operating sublease agreements which expire over the next three years. Rental income from these subleases was $0, $360,000, $0, and $393,000 for the years ended 13 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (B) COMMITMENTS (CONTINUED) December 31, 1997 and 1998, and for the six months ended June 30, 1998 and 1999, respectively. The Company has no capital lease obligations. As of December 31, 1998, future minimum lease payments for the Company's operating leases are as follows (in thousands):
YEAR ENDING DECEMBER 31: - ------------------------------------------------------------------------------------- 1999............................................................................. $ 2,540 2000............................................................................. 2,540 2001............................................................................. 2,540 2002............................................................................. 2,540 2003............................................................................. 2,926 Thereafter....................................................................... 11,503 --------- $ 24,589 =========
The minimum operating lease payments have not been reduced by any future minimum sublease rentals totalling $1,614,000 due under noncancelable subleases over the next three years. (6) OPTION PLAN A summary of the Company's option activity and related information through June 30, 1999 follows:
NUMBER OF EXERCISE UNITS PRICES ---------- ----------- Options outstanding, December 31, 1997................................. -- $ -- Granted................................................................ 1,012,572 7.79 Canceled............................................................... (25,910) 7.79 ---------- Options outstanding, December 31, 1998................................. 986,662 7.79 Granted (unaudited).................................................... 578,249 26.49 Canceled (unaudited)................................................... (36,644) 11.18 ---------- ----- Options outstanding, June 30, 1999 (unaudited)......................... 1,528,267 14.78 ========== ----- Options exercisable, December 31, 1998 and June 30, 1999 (unaudited)... 31,107 7.79 ========== -----
14 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (6) OPTION PLAN (CONTINUED) The following summarizes information about options outstanding as of June 30, 1999:
WEIGHTED AVERAGE RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE EXERCISE PRICES UNITS LIFE (YRS.) EXERCISE PRICE - ------------------- ---------- ----------------------- ----------------- $ 7.79 - $ 7.79 1,103,613 9.17 $ 7.79 $ 31.25 - $31.25 370,353 9.78 $ 31.25 $ 42.00 - $48.50 54,301 9.94 $ 44.65 ---------- ---- --------- $ 7.79 - $48.50 1,528,267 9.35 $ 14.78 ========== ==== =========
As of December 31, 1998 and June 30, 1999, options available for grant under the Company's option plan totaled 618,276 and 1,721,733, respectively. For the year ended December 31, 1998 and the six months ended June 30, 1999, the Company recorded $2,262,000 and $8,810,000 respectively, of deferred compensation charges representing the difference between the deemed fair value of the membership unit on the date of grant and the option exercise price on the date of grant. Deferred compensation will be amortized over the four-year vesting period of the options using an accelerated method. During the year ended December 31, 1998 and the six months ended June 30, 1999, $160,000 and $1,766,000 of amortization of deferred compensation was recognized as expense. If compensation cost for the Company's option plan had been determined based on the fair value at the grant date for awards issued in the year ending December 31, 1998, consistent with the provisions of SFAS No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION, then the Company's net loss would have been increased to the pro forma amounts indicated below (in thousands): Net loss--as reported............................................. $ 39,288 Net loss--pro forma............................................... $ 39,646
The weighted average fair value at date of grant for options granted for the year ending December 31, 1998 was $3.88. The fair value of each option grant was estimated on the date of grant using the minimum value option pricing model with the following assumptions: Risk free interest rate............................................ 6% Weighted-average expected life of the options...................... 4 years Dividend rate...................................................... --
(7) RELATED PARTY TRANSACTIONS Prior to June 30, 1998, all of the expenditures of the Company were incurred by CNET and charged to the Company. These expenditures included allocations for accounting, legal, network operations, facilities, certain product development efforts, and other general expenses. Such allocations were generally allocated 15 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (7) RELATED PARTY TRANSACTIONS (CONTINUED) to the Company based on headcount, estimates on the percentage usage by the Company, or estimates of the time spent by CNET employees on the business of the company. The following table summarizes direct and indirect expenses of the Company prior to June 30, 1998 (in thousands):
PERIOD FROM JANUARY 1, 1998 1997 TO JUNE 30, 1998 --------- ----------------- COST OF NET REVENUES Direct expenses paid by CNET on behalf of the Company.............. $ 1,055 3,066 Expenses allocated by CNET to the Company.......................... 465 868 --------- ----- 1,520 3,934 ========= ===== PRODUCT DEVELOPMENT Direct expenses paid by CNET on behalf of the Company.............. $ 8,471 884 Expenses allocated by CNET to the Company.......................... 932 1,418 --------- ----- 9,403 2,302 ========= ===== SALES AND MARKETING Direct expenses paid by CNET on behalf of the Company.............. $ 1,806 1,862 Expenses allocated by CNET to the Company.......................... 2,284 1,507 --------- ----- 4,090 3,369 ========= ===== GENERAL AND ADMINISTRATIVE Direct expenses paid by CNET on behalf of the Company.............. $ 73 133 Expenses allocated by CNET to the Company.......................... 1,299 1,274 --------- ----- 1,372 1,407 ========= =====
Such allocations are not necessarily indicative of the costs that would have been incurred if the Company had been a separate entity. However, management believes the differences between the allocated costs and the cost to obtain such services from an outside third party would not be significant. Following June 30, 1998, the Company began direct procurement and payment of all of its expenses, with the exception of certain services it contracted with CNET to provide or maintain. Such services include creative services, human resources, accounting, facilities, technology support, bandwidth and hosting support, and sales and marketing, and the Company recorded expenses totaling $3.7 million and $3.9 million for the year ended December 31, 1998 and for the six months ended June 30, 1999, respectively, for amounts due to CNET for such services. NBC has provided certain promotional and other services to the Company since its investment date. NBC has provided advertising and promotion services to the Company which have been recorded as capital contributions at the time the services were provided based on the average CPM value for commercial air time during the period the services were provided. The Company has recorded advertising 16 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (7) RELATED PARTY TRANSACTIONS (CONTINUED) and promotion expenses of approximately $14.1 million and $26.0 million for the year ended December 31, 1998 and the six months ended June 30, 1999, respectively, at the average CPM value for commercial air time during the period the services were provided. NBC is not committed to provide such services to the Company. NBC has provided other services to the Company related to advertising production and legal support and the Company has recorded expenses totaling $0.2 million and $1.4 million for the year ended December 31, 1998 and for the six months ended June 30, 1999, respectively, for amounts due to NBC for such services. During the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999, the Company has recorded no significant revenues from CNET, General Electric, NBC or any of their affiliates. The Company's credit facility is guaranteed by General Electric, parent company of NBC (see Note 5). As defined in the contribution agreement, NBC has an option to purchase 14,805,556 membership units for an aggregate price of $31,365,802. The option expires in June, 2001. (8) DEFINED CONTRIBUTION PLAN The Company has a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code covering all eligible employees. Under the plan, participating employees may defer a portion of their pretax earnings up to the Internal Revenue Service annual contribution limit. For the year ended December 31, 1998, the Company did not contribute to the plan. (9) SEGMENT INFORMATION The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer ("CEO"). The information reviewed by the CEO for purposes of making operating decisions and assessing financial performance is identical to the information presented in the accompanying financial statement of operations. The Company operates in one segment, Internet operations. The Company has had no international revenues to date. (10) LEGAL PROCEEDINGS The Company was involved in a dispute with SNAP Technologies, Inc. (SNAP Tech) which claimed to own the SNAP trademark. SNAP Tech filed a lawsuit against CNET on November 19, 1998, alleging trademark infringement and related statutory violations, to which the Company filed an answer on November 24, 1998. On July 15, 1999, the lawsuit with SNAP Tech was settled. Pursuant to the settlement 17 SNAP! LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1998 (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) (10) LEGAL PROCEEDINGS (CONTINUED) agreement, the Company shall pay $200,000, grant an advertising credit of $1,000,000, and provide certain other promotions to SNAP Tech in exchange for all worldwide rights to all names, trademarks, and service marks previously used by SNAP Tech. NBC and CNET will indemnify the Company for this legal settlement. Accordingly, no amounts related to this settlement have been accrued in the accompanying financial statements. In March 1999 the Company filed a complaint against CityAuction, Inc. in connection with an agreement entered into between the Company and CityAuction to promote CityAuction's online auction site in exchange for monetary compensation and warrants to purchase shares of CityAuction. The Company is claiming that CityAuction breached the agreement by refusing to honor the Company's exercise in February 1999 of its CityAuction warrants, failing to make a $125,000 payment due to the Company and failing to provide the Company with notice of CityAuction's pending acquisition by Ticketmaster Online-CitySearch, Inc. The Company is also claiming that Ticketmaster induced CityAuction to breach it contractual obligations to the Company. This matter is in the discovery stage. An unfavorable outcome in this litigation would deny the Company the economic benefit of the claimed payments and stock ownership of CityAuction. No amounts contingent upon a favorable outcome in this litigation have been recorded in the Company's financial statements. -----END PRIVACY-ENHANCED MESSAGE-----