(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
CNET Networks, Inc.
(Exact name of
Registrant as specified in its Charter)
Delaware
13-3696170
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
235 Second Street, San Francisco, CA 94105
(Address of Principal Executive Offices including Zip Code)
Telephone Number (415) 344-2000
(Registrant’s
telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of April 30, 2004 there were 143,110,017 shares of the registrant’s common stock outstanding.
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Revenues | ||||||||
| Interactive | $ | 55,505 | $ | 42,049 | ||||
| Publishing | 7,892 | 14,539 | ||||||
| Total revenues | 63,397 | 56,588 | ||||||
| Operating expenses: | ||||||||
| Cost of revenues | 33,850 | 36,201 | ||||||
| Sales and marketing | 18,234 | 17,717 | ||||||
| General and administrative | 8,903 | 10,046 | ||||||
| Depreciation | 7,171 | 5,612 | ||||||
| Amortization of intangible assets | 900 | 1,604 | ||||||
| Total operating expenses | 69,058 | 71,180 | ||||||
| Operating loss | (5,661 | ) | (14,592 | ) | ||||
| Non-operating income (expense): | ||||||||
| Realized gains (losses) on sale of investments, net | 8,032 | -- | ||||||
| Interest income | 482 | 673 | ||||||
| Interest expense | (1,678 | ) | (1,769 | ) | ||||
| Other | 1,832 | 5 | ||||||
| Total non-operating income (expense) | 8,668 | (1,091 | ) | |||||
| Income (loss) before income taxes | 3,007 | (15,683 | ) | |||||
| Income tax expense | 79 | 146 | ||||||
| Net income (loss) | $ | 2,928 | $ | (15,829 | ) | |||
| Basic net income (loss) per share | $ | 0.02 | $ | (0.11 | ) | |||
| Diluted net income (loss) per share | $ | 0.02 | $ | (0.11 | ) | |||
| Shares used in calculating basic net income (loss) per share | 142,627,445 | 139,256,081 | ||||||
| Shares used in calculating diluted net income (loss) per share | 150,074,641 | 139,256,081 | ||||||
See accompanying notes to the condensed consolidated financial statements.
| March 31, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 77,925 | $ | 65,913 | ||||
| Investments in marketable debt securities | 11,466 | 12,556 | ||||||
| Accounts receivable, net | 46,625 | 54,387 | ||||||
| Other current assets | 15,918 | 8,823 | ||||||
| Total current assets | 151,934 | 141,679 | ||||||
| Restricted cash | 19,650 | 19,159 | ||||||
| Investments in marketable debt securities | 40,180 | 38,711 | ||||||
| Property and equipment, net | 50,499 | 56,384 | ||||||
| Other assets | 21,955 | 23,092 | ||||||
| Intangible assets, net | 12,579 | 11,263 | ||||||
| Goodwill | 63,087 | 61,555 | ||||||
| Total assets | $ | 359,884 | $ | 351,843 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 8,861 | 8,767 | |||||
| Accrued liabilities | 51,987 | 53,151 | ||||||
| Current portion of long-term debt | 3,773 | 99 | ||||||
| Total current liabilities | 64,621 | 62,017 | ||||||
| Non-current liabilities: | ||||||||
| Long-term debt | 114,338 | 118,029 | ||||||
| Other liabilities | 2,154 | 1,835 | ||||||
| Total liabilities | 181,113 | 181,881 | ||||||
| Stockholders' equity: | ||||||||
| Common stock; $0.0001 par value; 400,000,000 shares | ||||||||
| authorized; 143,038,613 outstanding at | ||||||||
| March 31, 2004 and 139,251,879 outstanding | ||||||||
| at December 31, 2002 | 14 | 14 | ||||||
| Notes receivable from stockholders | -- | (137 | ) | |||||
| Additional paid-in-capital | 2,712,947 | 2,709,178 | ||||||
| Accumulated other comprehensive income | (12,099 | ) | (14,074 | ) | ||||
| Treasury stock, at cost | (30,428 | ) | (30,428 | ) | ||||
| Accumulated deficit | (2,491,663 | ) | (2,494,591 | ) | ||||
| Total stockholders' equity | 178,771 | 169,962 | ||||||
| Total liabilities and stockholders' equity | $ | 359,884 | 351,843 | |||||
See accompanying notes to the condensed consolidated financial statements.
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income (loss) | $ | 2,928 | $ | (15,829 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 8,071 | 7,216 | ||||||
| Asset disposals | -- | 83 | ||||||
| Noncash interest | 216 | 195 | ||||||
| Allowance for doubtful accounts | 686 | 880 | ||||||
| Gain on sale of marketable securities and privately | ||||||||
| held investments | (8,032 | ) | -- | |||||
| Changes in operating assets and liabilities, | ||||||||
| net of acquisitions | ||||||||
| Accounts receivable | 7,126 | 11,723 | ||||||
| Other assets | (2,397 | ) | (848 | ) | ||||
| Accounts payable | 94 | 762 | ||||||
| Accrued liabilities | (2,499 | ) | (4,288 | ) | ||||
| Other long-term liabilities | 319 | (718 | ) | |||||
| Net provided by (cash used) in operating activities | 6,512 | (824 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of marketable debt securities | (9,717 | ) | (4,995 | ) | ||||
| Proceeds from sale of marketable debt securities | 9,640 | 16,982 | ||||||
| Proceeds from sale of investments in privately held companies | 9,095 | -- | ||||||
| Net cash paid for acquisitions | (1,673 | ) | -- | |||||
| Capital expenditures | (3,277 | ) | (2,496 | ) | ||||
| Net cash provided by investing activities | 4,068 | 9,491 | ||||||
| Cash flows from financing activities: | ||||||||
| Payments received on stockholders' notes | 137 | -- | ||||||
| Net proceeds from employee stock purchase plan | 227 | 174 | ||||||
| Net proceeds from exercise of options and warrants | 3,042 | -- | ||||||
| Principal payments on borrowings | (77 | ) | (107 | ) | ||||
| Net cash provided by financing activities | 3,329 | 67 | ||||||
| Net increase in cash and cash equivalents | 13,909 | 8,734 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,897 | ) | 124 | |||||
| Cash and cash equivalents at the beginning of the period | 65,913 | 47,199 | ||||||
| Cash and cash equivalents at the end of the period | $ | 77,925 | $ | 56,057 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | 2,843 | $ | 2,843 | ||||
See accompanying notes to the condensed consolidated financial statements.
BUSINESS AND BASIS OF PRESENTATION
CNET Networks, Inc. (CNET) is a leading global interactive media company informing and connecting buyers, users and sellers of personal technology, games and entertainment, and business technology products.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods presented. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in CNET’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, which contains additional financial and operating information and information concerning the significant accounting policies followed by CNET.
The condensed consolidated results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the current year or any other future period.
CONCENTRATION OF CREDIT RISK
Revenues from one customer, Google, Inc., approximated 12% of total revenues for the three months ended March 31, 2004. In the fourth quarter of 2003, CNET selected Google as its primary provider of paid search, thereby consolidating paid search opportunities that were previously spread among several providers. Approximately 5% of CNET’s accounts receivable balance at March 31, 2004 related to Google, Inc.
Revenues from Gateway Inc. approximated 16% of total revenues for the three months ended March 31, 2003. Approximately 74% of the first quarter 2003 revenues from Gateway, Inc. were generated from a custom publishing contract.
BARTER
CNET trades advertising on its Internet sites in exchange for marketing services of other companies, referred to as “barter revenue”. These revenues and marketing expenses are recognized in the period in which the advertisements are delivered based on the fair market value of the services delivered. CNET determines the fair market value of the service delivered based on upon amounts charged for similar services in non-barter deals within the previous six-month period. For both of the three-month periods ended March 31, 2004 and 2003, approximately $2.9 million of our revenues were derived from barter transactions.
INCOME TAXES
Income tax expense has been recorded based on an estimated effective tax rate for the year ended December 31, 2004. The estimated effective tax rate has taken into account any change in the valuation allowance for deferred tax assets where the realization of various deferred tax assets is subject to uncertainty. Management believes that sufficient uncertainty exists regarding the future realization of deferred tax assets and, accordingly, a full valuation allowance has been provided against the gross deferred tax assets.
IMPAIRMENT OF LONG-LIVED ASSETS
CNET reviews its long-lived assets if 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 the estimated undiscounted (and without interest charges) future 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 asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
During the three months ended March 31, 2004, CNET recorded a charge of $3.5 million in depreciation expense related to buildings and fixed assets in Switzerland, which were written down to their estimated fair value. The operations in Switzerland, which were the headquarters of our Channel operations, will be transitioned into our U.S. Media operations in the second quarter of 2004. As part of that transition, CNET will no longer require the land and building owned in Switzerland and will attempt to sell them. The land and building with a fair value of $5.8 million have been reclassified to assets held for sale and are included in other current assets.
GOODWILL AND INTANGIBLE ASSETS
Under Statement of Financial Accounting Standard (SFAS) 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are to be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives.
Goodwill and intangible assets of a reporting unit are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of its goodwill or intangible assets may not be recoverable. Impairment of reporting unit goodwill is evaluated based on a comparison of the reporting unit’s carrying value to the implied fair value of the reporting unit. Conditions that indicate that impairment of goodwill should be evaluated include a sustained decrease in our market value or an adverse change in business climate. CNET reviews goodwill for impairment on at least an annual basis. CNET has established August 31 as the valuation date on which this annual review takes place.
STOCK-BASED COMPENSATION
CNET 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 exceeds the exercise price. The compensation expense is recorded over the vesting period of the grant.
As allowed under SFAS 123, “Accounting for Stock Based Compensation”, CNET applies APB Opinion No. 25 in accounting for its stock-based compensation plans and, accordingly, no compensation cost has been recognized for the plans in the financial statements because options are granted at the current market price. Had CNET determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, CNET’s net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below:
| (in thousands, except per share data) | Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Net income (loss): | ||||||||
| As reported | $ | 2,928 | $ | (15,829 | ) | |||
| Fair value based method | ||||||||
| compensation expense | (5,409 | ) | (5,941 | ) | ||||
| Proforma | $ | (2,481 | ) | $ | (21,770 | ) | ||
| Basic and diluted net income (loss) per share: | ||||||||
| As reported | $ | 0.02 | $ | (0.11 | ) | |||
| Proforma | $ | (0.02 | ) | $ | (0.16 | ) | ||
SFAS No. 123 does not apply to awards prior to 1995. The weighted-average fair value of options granted in the three months ended March 31, 2004 and 2003 was $10.01 and $2.53, respectively. The fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months ended March 31, 2004 and 2003:
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected volatility | 98 | % | 105 | % | ||||
| Risk-free interest rate | 2.2 | 5% | 2.9 | 9% | ||||
| Expected life (in years) | 3 | 5 | ||||||
Beginning with the third quarter of fiscal 2003, CNET decreased the estimate of the expected life of new options granted to employees from five years to three years. CNET based its expected life assumption on historical experience as well as the terms and vesting periods of the options granted. The reduction in the estimated expected life was a result of an analysis of CNET’s historical experience.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation (FIN) 46 (revised December 2003), “Consolidation of Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. FIN 46R is required to be applied to variable interests in variable interest entities (VIEs) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. On January 1, 2004, CNET implemented FIN 46R. The application of FIN 46R did not have a material impact on our consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the financial statements and notes thereto have been reclassified to conform to the current year classification.
In January 2004, CNET entered into an agreement to acquire the rights to distribute and circulate TV Game magazine in China. On March 19, 2004, CNET acquired EDventure Forum, Ltd. and EDventure Holdings, Inc., a provider of information services focusing on the technology and Internet industry. The aggregate purchase price for these transactions was $3.2 million consisting of $500,000 in stock, $2.5 million in cash and a $100,000 payable upon the satisfaction of certain conditions. The total purchase price has been allocated to the tangible and intangible assets based on estimates of their respective fair values. The purchase price of $3.2 million was allocated, on a preliminary basis, to intangible assets of approximately $2.0 million that are being amortized over a three-year period, goodwill of approximately $1.5 million, current assets of $1.0 million and current liabilities of $1.3 million.
The following table sets forth the amount of intangible assets that are subject to amortization, including the related accumulated amortization:
| (in thousands) | March 31, 2004 |
December 31, 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Net Carrying Amount | |||||||||||
| Amortized intangible assets: | ||||||||||||||
| Tradename/trademarks | $ | 29,031 | $ | (18,787 | ) | $ | 10,244 | $ | 10,121 | |||||
| Registered Users | 2,100 | (2,077 | ) | 23 | 45 | |||||||||
| Subscriptions | 4,086 | (4,054 | ||||||||||||