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FILE PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-68057
[LOGO OF MODEM MEDIA . POPPE TYSON APPEARS HERE]
2,600,000 Shares
Class A Common Stock
We are offering 2,600,000 shares of our Class A common stock. This is our
initial public offering, and no public market currently exists for our shares.
The shares have been approved for quotation on the Nasdaq National Market under
the symbol "MMPT."
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Investing in the Class A common stock involves risks.
See "Risk Factors" beginning on page 8.
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Per Share Total
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Public Offering Price.................................... $16.00 $41,600,000
Underwriting Discounts and Commissions................... $ 1.12 $ 2,912,000
Proceeds to Company...................................... $14.88 $38,688,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 390,000 shares of Class A common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of Class A
common stock to purchasers on February 10, 1999.
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BancBoston Robertson Stephens
NationsBanc Montgomery Securities LLC
Bear, Stearns & Co. Inc.
The date of this Prospectus is February 4, 1999
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[INSERT ARTWORK]
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A common stock only in jurisdictions where offers and
sales are permitted.
Until March 1, 1999, all dealers that buy, sell or trade our Class A common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Company Background....................................................... 16
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 36
Management............................................................... 52
Relationship with True North and Certain Transactions.................... 59
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Class A common stock being sold in
this offering and our financial statements and notes thereto appearing
elsewhere in this prospectus.
Overview
We provide marketing programs delivered over the Internet and other
electronic media that facilitate two-way communication between our clients and
their customers. We refer to these programs as digital interactive marketing
solutions. By developing marketing programs that incorporate advanced
communication technologies, we enable our clients to establish, retain and
manage one-to-one customer relationships. Our marketing programs include the
design and implementation of electronic business programs that utilize the
Internet to enable our clients to better locate, communicate with and service
customers in an effort to increase the value of their globally-recognized
brands. We combine our substantial expertise in marketing, creative design and
digital technology to deliver on a worldwide basis a complete range of digital
interactive marketing services, including consulting and research related to
our clients' marketing strategies, which we refer to as strategic consulting,
website design, electronic commerce and electronic customer communication
services, interactive advertising and promotions, and data collection and
analysis. Our marketing programs are delivered primarily through the Internet
and are designed to enable our clients to target narrowly-defined market
segments, provide their customers with detailed product and service
information, sell products and services, and provide post-sale customer support
electronically. For visual examples of our interactive marketing services, see
the screen shots on the inside front cover of this prospectus.
We focus on making our digital interactive marketing solutions an integral
part of our clients' marketing strategies in order to promote long-term client
relationships. We combine our strategic interactive marketing knowledge and
technical expertise to provide high-impact, cost-effective digital interactive
marketing and customer management solutions. We use dedicated client service
teams with interactive marketing experience in strategic consulting, creative,
media, technology and production disciplines, led by experienced account
directors, to provide our digital marketing communication services consistently
over the Internet and other electronic media. Our proven processes and
methodologies for executing client work, developed over a decade, enable us to
undertake interactive projects, monitor progress and measure the return on our
clients' investment in interactive marketing programs. We incorporate client
feedback into successive strategic marketing campaigns and programs to further
improve and build upon online customer relationships.
We focus on devising programs that can be integrally linked to our clients'
business functions. We work primarily with a select group of established
Fortune 500 clients committed to interactive marketing, as well as companies
with new online business models. For the nine months ended September 30, 1998,
our ten largest clients measured by revenues with whom we have a continuing
relationship were: AT&T; BancBoston Robertson Stephens; Citibank; Delta Air
Lines; Intel; JC Penney; John Hancock; Kraft; Sony and Unilever. We have
received numerous industry awards for our interactive marketing campaigns,
websites, banner advertisements and CD-ROMs, including the Zima.com campaign
and website, the AT&T Olympic Games Connection Website, the AT&T "Intermercial"
Campaign, the AT&T Worldnet CD-ROM, , the iVillage.com "About Work" campaign,
the Sony PlayStation campaign and the Diet Pepsi "Convert a Million" campaign.
In 1998, we won the "Interactive Agency Of The Year" award from the Internet
Advertising Bureau, a trade association, and we are the only company to win two
consecutive "CASIE" awards for interactive marketing.
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The Internet is an important medium for advertisers due to its interactive
nature, global reach and rapidly growing audience, as well as the expected
increase in online commerce. Unlike advertising on traditional mass media, the
Internet gives marketers the potential to target advertisements to both broad
audiences and selected groups of users with specific interests and
characteristics. These features enable the development and delivery of
customized and targeted marketing programs and communications services that
incorporate advanced interactive features to inform, engage, entertain and
facilitate commerce with the target audience. The Internet also allows
advertisers and direct marketers to measure the effectiveness and response
rates of advertisements and to track the demographic characteristics of
Internet users in real time. The interactive nature of the Internet enables
marketers to better understand potential customers, and to change messages
rapidly and cost-effectively in response to customer interests and behavior.
The unique capabilities of online advertising, the growth in use of electronic
media and the favorable demographics of Internet users have led to a
significant increase in online advertising. Jupiter Communications estimates
that total spending on the placement of advertisements online in the United
States in 1997 was $940 million, and expects this amount to grow to $4.4
billion in 2000.
Our objective is to be the leading provider of digital interactive marketing
solutions. Key elements of our strategy include:
. developing and maintaining long-term client relationships with a core
group of clients;
. maintaining an innovative approach to digital interactive marketing
through the continuing development of new service offerings and the rapid
adoption of emerging technologies;
. continuing to attract and retain superior professional talent; and
. continuing to expand our global office network in order to provide our
clients with comprehensive global marketing solutions.
We currently serve more than 30 clients through our global network of seven
offices in North America, Europe and Asia. We had pro forma revenues in 1997
and for the nine months ended September 30, 1998 of $29.4 million and $30.4
million, respectively.
Modem Media . Poppe Tyson
Our company is the result of the combination of three separate businesses,
Modem Media Advertising Limited Partnership (the "Modem Partnership"), the
Northern Lights Interactive division of True North Communications Inc., and the
interactive marketing operations of Poppe Tyson, Inc. ("Poppe Tyson") focused
on providing long-term strategic advice to clients. True North, the sixth
largest advertising holding company in the world, formed us in October 1996 to
acquire the Modem Partnership and to combine the Modem Partnership with its
digital interactive marketing operations. We acquired the strategic interactive
marketing operations of Poppe Tyson, including client relationships and related
accounts receivable in the United States and interactive agencies in the United
Kingdom and Hong Kong, effective October 1998 as part of True North's decision
to reorganize its interactive marketing operations. True North had acquired
Poppe Tyson in December 1997. The Modem Partnership has been a provider of
digital interactive marketing services since 1988. Poppe Tyson has provided
digital interactive marketing services to domestic and international clients
since 1985. When we present financial information on a pro forma basis in this
prospectus, we are giving effect to the combination of the three businesses.
After the offering, True North will own all of the outstanding shares of our
Class B common stock and will control 84.9% of our voting power.
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The Offering
The calculation of the shares of common stock outstanding after the offering
in the table below is based on the number of shares outstanding as of September
30, 1998. The shares of common stock outstanding excludes (a) 3,040,000 shares
of Class A common stock that have been reserved for issuance under our stock
option plan and (b) 950,000 shares of Class A common stock that have been
reserved for purchase by employees under our employee stock purchase plan.
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Class A common stock offered....................... 2,600,000 shares
Common stock to be outstanding after this offering:
Class A common stock............................ 5,023,831 shares
Class B common stock............................ 5,648,624 shares
Total...................................... 10,672,455 shares
Over-allotment option.............................. 390,000 shares
Voting rights:
Class A common stock............................ One vote per share
Class B common stock............................ Five votes per share
Use of proceeds.................................... We will receive net
proceeds from this
offering of approximately
$36.2 million. We will use
approximately $6.0 million
of the net proceeds to
repay indebtedness owed to
True North, our parent
company. We intend to use
the remaining net proceeds
for working capital and
capital expenditures.
Dividend policy.................................... We do not intend to pay
dividends on our common
stock. We plan to retain
any earnings for use in
the operation of our
business and to fund
future growth.
Nasdaq National Market symbol...................... MMPT
</TABLE>
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Our principal executive office is located at 228 Saugatuck Avenue, Westport,
Connecticut 06880, and our telephone number at that address is (203) 341-5200.
We maintain Web sites at www.modemmedia.poppetyson.com, www.modemmedia.com, and
www.poppe.com. Information contained on our websites should not be considered
to be a part of this prospectus.
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SUMMARY FINANCIAL DATA
(in thousands, except per share data)
The following summary financial data should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. Our pro forma statements of operations
data in the table below are based on the assumptions and contain the
adjustments described in "Selected Financial Data."
<TABLE>
<CAPTION>
Actual Pro Forma
---------------------------------------------------- ------------------------------
Nine Months Ended
Year Ended December 31, September 30, Year Ended Nine Months Ended
-------------------------------- ------------------ December 31, September 30,
1994 1995 1996 1997 1997 1998 1997 1998
----- ------- ------- ------- -------- -------- ------------ -----------------
(unaudited) (unaudited)
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Statements of Operations
Data:
Revenues................ $ -- $ 438 $ 2,093 $25,497 $ 18,025 $ 30,397 $29,422 $30,397
Salaries and benefits
expense................ -- 308 1,322 15,894 11,187 20,793 19,244 20,793
Office and general
expense................ -- 215 712 9,038 6,162 10,309 12,217 10,309
Amortization of goodwill
expense................ -- -- -- 1,666 1,249 1,308 1,666 1,308
Operating losses of True
North units held for
transfer............... (326) 1,766 1,309 2,180 1,600 13 -- --
----- ------- ------- ------- -------- -------- ------- -------
Operating income
(loss)................. 326 (1,851) (1,250) (3,281) (2,173) (2,026) (3,705) (2,013)
Interest income
(expense), net......... -- -- -- (76) (62) (5) (121) (5)
----- ------- ------- ------- -------- -------- ------- -------
Income (loss) before
income taxes........... 326 (1,851) (1,250) (3,357) (2,235) (2,031) (3,826) (2,018)
Provision (benefit) for
income taxes........... 70 (873) (548) (248) (246) 57 66 (59)
----- ------- ------- ------- -------- -------- ------- -------
Net income (loss)....... $ 256 $ (978) $ (702) $(3,109) $ (1,989) $ (2,088) $(3,892) $(1,959)
===== ======= ======= ======= ======== ======== ======= =======
Basic and diluted net
income (loss) per
share.................. $ -- $ -- $(35.10) $ (0.43) $ (0.27) $ (0.29) $ (0.48) $ (0.24)
===== ======= ======= ======= ======== ======== ======= =======
</TABLE>
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September 30, 1998
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Actual Pro Forma
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(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash........................................................ $ 4,349 $ 34,597
Working capital............................................. 1,891 32,139
Total assets................................................ 68,182 108,197
Capital lease obligations, less current portion............. 507 507
Related party obligations, less current portion............. 11,275 --
Other long-term obligations................................. 24 24
Total stockholders' equity.................................. 36,802 88,092
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Our business, financial condition or results of
operations could be materially adversely affected by any of the following
risks. The trading price of our Class A common stock could decline due to any
of the following risks, and you might lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
We have a history of operating losses, and there can be no assurance that we
will be profitable
We have experienced operating losses as well as net losses, on a pro forma
basis, in seven of the eleven quarters during the period from January 1, 1996
to September 30, 1998. Although we have experienced revenue growth in recent
periods, these growth rates may not be sustainable or indicative of future
operating results. In addition, we have incurred substantial costs to expand
and integrate our operations and we intend to continue to invest heavily in
ongoing expansion. Our ongoing integration costs will include the combination
of the financial, information and communications systems of the various
companies that were combined to form our company. Our ongoing expansion costs
will include the leasing of additional office space and the purchase of new
computer and communications equipment. As a result of these and other costs, we
expect to continue to incur operating losses through 1999 or beyond, and there
can be no assurance that we will achieve or sustain profitability.
Our operating results depend on our relationship with a limited number of
clients
Our results of operations and our business depend on our relationship with a
limited number of large clients. Set forth below is the percentage of revenues
on a pro forma basis during the fiscal year ended December 31, 1997 and the
nine months ended September 30, 1998 for each of our clients that accounted for
more that 10% of our revenues and for our ten largest clients combined:
<TABLE>
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Year Ended Nine Months Ended
Client December 31, 1997 September 30, 1998
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AT&T.................................... 31.4% 20.4%
Citibank................................ (less than 10%) 12.0
Ten largest clients combined............ 74.4 76.5
</TABLE>
There can be no assurance that we will be able to maintain our historical rate
of growth or our current level of revenues derived from AT&T, Citibank or any
other client in the future.
We do not have long-term contracts with any of our clients. Our clients
generally hire us for one assignment at a time and do not pay us any retainer
fees in advance. Once an assignment is completed there can be no assurance that
a client will engage us for further services. As a result, a client that
generates substantial revenue for us in one period may not be a substantial
source of revenue in a subsequent period. In addition, our clients generally
have the right to terminate their relationships with us without penalty and
with relatively short or no notice. The termination of our business
relationships with any of our significant clients, including AT&T or Citibank,
or a material
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reduction in the use of our services by any of our significant clients, could
adversely affect our future financial performance.
Variability of our operating results may impact our stock price
Our operating results have fluctuated in the past, and may continue to
fluctuate in the future, as a result of a variety of factors, many of which are
outside of our control, including:
.timing of new projects;
.reductions, cancellations or completions of major projects;
.the loss of significant clients;
.the opening or closing of an office;
.our relative mix of business;
.changes in pricing by us or our competitors;
.employee utilization rates;
.changes in personnel;
.costs related to expansion of our business;
.increased competition; and
.marketing budget decisions by our clients.
As a result of these fluctuations, we believe that period-to-period comparisons
of our operating results cannot be relied upon as indicators of future
performance. In some quarters our operating results may fall below the
expectations of securities analysts and investors due to any of the factors
described above. In such event, the trading price of the Class A common stock
would likely decline.
We also experience some variation in operating results throughout the year
which results in part from the marketing communications spending patterns and
business cycles of our clients, and from marketing communications spending
patterns in general. Our revenues have historically been higher during the
second half of our fiscal year as our clients prepare marketing campaigns for
products and services launched in anticipation of fall trade shows and the
holiday season. We expect this variation in operating results to continue in
the future.
The integration of our separate business units may adversely affect our
operating results
Our company is the result of the combination of three separate businesses,
the Modem Partnership, the Northern Lights Interactive division of True North
and the interactive marketing operations of Poppe Tyson focused on providing
long-term strategic advice to clients. Accordingly, we have only recently begun
to operate as a combined entity. We expect that the integration of our
operations will place a significant burden on our management. Such integration
is subject to risks and uncertainties, including:
. the inability to effectively assimilate the operations, services,
technologies, personnel and cultures of the combining entities;
. the potential disruption of our business; and
. the impairment or loss of relationships with employees and clients.
If in connection with combining our businesses we fail to integrate our
operations successfully or on a timely basis, or if we incur any unforeseen
expenses, our financial performance could be materially and adversely affected.
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If we fail to accurately estimate costs in fixed-fee assignments, our operating
results may be adversely affected
In the nine months ended September 30, 1998, approximately 74% of our
revenues were derived from fixed-fee assignments. If we fail to estimate costs
accurately, control costs during performance of a fixed-fee assignment,
anticipate technical problems or obtain a fee adjustment in the event that we
underestimate costs, our future financial performance could be adversely
affected. We recognize revenues from assignments based on our estimate of the
percentage of each assignment completed in a reporting period. To the extent
our estimates are inaccurate, the revenues and operating profits, if any, we
report for periods during which we are working on an assignment may not
accurately reflect the final results of the assignment and we would be required
to record an expense for such period equal to the amount by which our revenues
were previously overstated.
The interests of True North, our controlling stockholder, may conflict with our
interests
True North owns, directly or indirectly, all of the shares of our Class B
common stock, each share of which entitles its holder to five votes on most
stockholder actions. As a result, True North will have 84.9% of the combined
voting power of both classes of our common stock after this offering. The
purchasers of the shares of Class A common stock offered hereby will be
entitled to one vote per share and will have 7.8% of the combined voting power.
After the offering, True North will have three representatives on our Board of
Directors and will have enough votes to elect all members of the Board of
Directors. As a result of its stock ownership after this offering, True North
will be in a position, without the approval of our public stockholders, to take
corporate actions that could conflict with the interests of our public
stockholders, such as:
. amending our corporate documents;
. approving or defeating mergers or takeover attempts;
. determining the amount and timing of dividends paid to itself and to
holders of Class A common stock;
. changing the size and composition of our Board of Directors and
committees of our Board of Directors; and
. otherwise controlling management and operations and the outcome of most
matters submitted for a stockholder vote.
True North is the sixth largest advertising company in the world. True North
may decide to provide its traditional advertising clients with interactive
marketing solutions that compete with the services we provide. While we have
entered into an agreement with True North whereby it has agreed not to compete
with us, such agreement will expire at the end of 1999. In addition, True North
may expand, through development of new lines of products or businesses, by
acquisition or otherwise, to compete with us.
Currently, two of our five directors are also members of management of True
North and are compensated by True North in connection with their employment by
True North. In addition, one of our current directors is a director of True
North and was selected to serve on our board of directors by True North. These
directors may have conflicts of interest in addressing business opportunities
and strategies in circumstances where our interests differ from those of True
North. For example, if a dispute were to arise between True North and our
directors who are also officers and directors of True North, they may be unable
to act on our behalf if such action would have a negative impact on True North.
In such a case these directors would not be able to participate in resolving
such dispute
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and our remaining officers and directors would be required to act
independently. We have not adopted any formal plan or arrangement to address
these potential conflicts of interest.
Continued growth of our business will place increased demands on our systems
and resources and may impact our operating results
The expansion of our business and customer base has placed increased demands
on our management, operating systems, internal controls and financial and
physical resources. Our continued growth, if any, may strain existing
management and human resources in particular, affecting our ability to attract
and retain talented personnel. Consequently, we may be required to increase
expenditures to hire new employees, open new offices and invest in new
equipment or make other capital expenditures. Any failure to expand any of the
foregoing areas in an efficient manner could adversely affect our business.
There also can be no assurance that we will be able to sustain the rates of
growth that we have experienced in the past.
We will be required to implement a new accounting system to support future
growth
As a result of the recent growth of our business operations, our current
operational, financial and management information systems may not be adequate
to support our expected growth of operations in the future. In this regard, we
are currently in the process of installing a new financial accounting system.
We have spent approximately $800,000 to date on such system and intend to make
additional capital expenditures of approximately $800,000 in 1999 to complete
this system. If we are unsuccessful in implementing our new accounting system
as required, our business may be adversely affected.
We depend on our key management personnel for our future success
We rely on our key management personnel, including Gerald M. O'Connell, our
Chief Executive Officer, and Robert C. Allen, II, our President. We believe
that our future success will depend upon our ability to attract and retain
additional highly skilled personnel. If any of our officers or key employees
leave our company, the relationships that they have with our clients could be
lost. In addition, our ability to generate revenues directly relates to our
personnel, both in terms of the number and expertise of the personnel we have
available to work on our projects and the mix of full time employees, temporary
employees and contract service providers we utilize. The competition for
employees at all levels of the digital interactive marketing industry is
intense and is increasing. As a result, if we fail to retain existing employees
or hire new employees when necessary, our business, financial condition and
operating results could be materially and adversely affected.
Conflicts of interest and exclusivity arrangements with our clients may limit
our ability to provide services to others
Conflicts of interest between clients and potential clients are inherent in
the marketing communications industry. Moreover, as is customary in the
marketing communications industry, we have entered into exclusivity
arrangements with many of our largest clients that restrict our ability to
provide services to their competitors. We have in the past been, and may in the
future be, unable to take on new clients because such opportunities would
require us to provide services to direct competitors of our existing clients.
In addition, we risk harming relationships with existing clients when we agree
to provide services to indirect competitors of existing clients. Prospective
clients may choose also not to retain us for reasons of actual or perceived
conflicts of interest.
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The developing market for our digital interactive marketing solutions is
subject to uncertainties
The market for digital interactive marketing solutions has only recently
begun to develop, is evolving rapidly and is characterized by an increasing
number of market entrants. Demand for and market acceptance of recently
introduced services are subject to a high level of uncertainty and are
dependent on a number of factors, including:
. the growth in consumer access to and acceptance of new interactive
technologies, such as the Internet, online services and corporate
intranets;
. the development of technologies that facilitate interactive communication
between organizations and targeted audiences; and
. our ability to anticipate such technologies and incorporate them into our
services in a timely fashion.
Significant issues concerning the commercial use of these technologies remain
unresolved, and may have a negative impact on the growth of marketing
activities that utilize these technologies. Such significant issues include
security, privacy, reliability, cost, ease of use and quality of service. In
addition, no standards have yet been widely accepted for the measurement of the
effectiveness of interactive marketing, and there can be no assurance that such
standards will develop sufficiently to support interactive marketing as a
significant marketing medium. There can be no assurance that the market for
interactive marketing services will continue to grow, that demand for our
services will continue or that individual personal computer users in business
or at home will continue to use the Internet or other interactive media for
commerce and communication. If the market for digital interactive marketing
solutions develops more slowly than we expect, or if our services do not
continue to achieve market acceptance, our future operating performance could
be materially adversely affected.
Our business depends on continued growth in use and improvement of the Internet
Because we are in the business of providing digital interactive marketing
services, our future success depends on the continued expansion of, and
reliance of consumers and businesses on, the Internet. The Internet may not be
able to support an increased number of users or an increase in the volume of
data transmitted over it. As a result, the performance or reliability of the
Internet may be adversely affected as use increases. The improvement of the
Internet in response to increased demands will require timely improvement of
the high speed modems and other communications equipment that form the Internet
infrastructure. The Internet has already experienced certain outages and delays
as a result of damage to portions of its infrastructure. The effectiveness of
the Internet may also decline due to delays in the development or adoption of
new technical standards and protocols designed to support increased levels of
activity. There can be no assurance that the infrastructure, products or
services necessary to maintain and expand the Internet will be developed, or
that the Internet will be a viable commercial medium for advertisers.
Changes in government regulation could adversely affect our business
The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth in and
fairness of advertising. We must comply with Federal Trade Commission
regulations governing the marketing of products and services and similar state
regulations. In addition, there has been an increasing tendency in the United
States on the part of businesses to resort to the judicial system to challenge
comparative advertising of their competitors on the grounds that the
advertising is false and deceptive. There can be no assurance that
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we will not be subject to claims against us or our clients by other companies
or governmental agencies or that any such claims, regardless of merit, would
not have a material adverse effect on our future operating performance.
Due to the increasing popularity and use of the Internet, any number of
state, federal, foreign international laws and regulations may be adopted
regarding pricing, acceptable content, taxation and quality of products and
services. Any new legislation could inhibit the growth in use of the Internet
and decrease the acceptance of the Internet as a communications and commercial
medium, or could in turn decrease the demand for our services or otherwise have
a material adverse effect on our future operating performance.
Consumers' concerns about privacy on the internet may adversely affect our
business
An important feature of the services we provide to our clients is the ability
to develop and maintain individual user profiles to measure the effectiveness
of digital marketing programs and to determine the nature of the content to be
provided to particular customers. Profile information is often captured when
consumers visit a site on the Internet and volunteer information in response to
questions or other forms of solicitation concerning their backgrounds,
interests and preferences. These profiles are used by our clients to manage the
distribution and frequency as well as the content of advertising placement.
However, privacy concerns may cause consumers to resist providing the personal
data necessary to support this profiling capability. Moreover, even the
perception of privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of the Internet as a means of commerce and marketing. Privacy
concerns would be heightened by legislative or regulatory requirements that
mandate notification to Internet users that the data captured on certain
Internet sites may be used by marketing entities to address product promotion
and advertising to that user. While we are not aware of any such legislation or
regulatory requirements in the United States, no assurance can be given that
they will not be adopted. If the privacy concerns of consumers are not
adequately addressed, our future operating performance could be materially and
adversely affected.
We may be liable to our clients for damages
Many of our engagements involve the development, implementation and
maintenance of marketing programs that are critical to our clients' businesses.
Our failure or inability to meet a client's expectations in the performance of
services could injure our business reputation or result in a claim for
substantial damages against us regardless of our responsibility for such
failure. In addition, the marketing programs we provide for our clients may
include confidential or proprietary client information. Although we have
implemented policies to prevent such client information from being disclosed to
unauthorized parties or used inappropriately, any such unauthorized disclosure
or use could result in a claim against us for substantial damages. Our
contractual provisions attempting to limit such damages may not be enforceable
in all instances or may otherwise fail to protect us from liability for
damages, which could adversely affect our future operating performance.
We depend on True North for services and client referrals
We have historically depended on True North for corporate administrative
functions. In addition, True North has provided legal, accounting, treasury
consulting, financing, cash management, tax and payroll administration,
insurance, employee benefits administration, debt and lease guaranties services
to us in the past. We have entered into agreements with True North to continue
providing legal, tax preparation, insurance, treasury consulting, financing and
debt and lease guaranty services after the offering. If we are no longer able
to obtain these services from True North, we will be
13
<PAGE>
required to provide such services internally or find a third-party provider of
these services. There can be no assurance that, if required, we will be able to
secure the provision of these services on acceptable terms. If we are
unsuccessful in obtaining an acceptable provider of any of these services upon
termination of our agreements with True North, our future financial performance
could be adversely affected. Because we are a wholly-owned subsidiary of True
North, none of these agreements resulted from arm's-length negotiations and,
therefore, the prices charged to us for services provided thereunder may be
higher or lower than prices that may be charged by third parties.
We have also from time to time received client referrals from True North and
have worked with True North in obtaining new clients. In such cases, True North
management generally will contact our management and give us the opportunity to
offer our services to a True North client or prospective client in need of
digital interactive marketing solutions. We believe that True North provides us
with such referrals because, as a major shareholder, True North has a
substantial interest in our success. We also believe that True North regards
client referrals to us as preferable to such clients' engagement of an
unaffiliated competitor advertising agency or digital interactive marketing
solution provider. However, True North is not required to assist us in
obtaining new clients or to refer any of its clients to us. There can be no
assurance that True North will continue to assist us in obtaining new clients
in the future. If True North stops assisting us in obtaining new clients, or if
True North provides us with less help than in the past, our ability to obtain
new clients could be impaired and our future operating performance could be
adversely affected.
Problems related to the "Year 2000 Issue" could adversely affect our business
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. The
failure to correct any such programs or hardware could result in system
failures or miscalculations causing disruptions of our operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. We have determined
that we will have to modify or replace portions of our information processing
systems so that those systems will properly utilize dates beyond December 31,
1999. We plan to complete the modifications and replacements necessary to
correct those systems prior to December 31, 1999. If such modifications and
replacements are not made, or are not completed on a timely basis, the Year
2000 Issue could have a material impact on our future operating performance.
We frequently conduct transactions and perform services that interface
directly with systems of our clients. There is no guarantee that the systems of
our clients or other companies on which our systems rely will be timely
converted and will not experience material business disruptions that could
affect us as a result of the Year 2000 problem. Responses of clients and third
party suppliers to our inquiries to date indicate that they expect, at this
time, to be compliant by the Year 2000 based on their progress to date.
However, the inability of a substantial number of our suppliers to complete
their Year 2000 compliance could cause significant disruptions in our ability
to provide services to our clients. Moreover, the inability of a substantial
number of our clients to complete their Year 2000 compliance could cause them
to reduce spending on interactive marketing programs. Either event could have a
material adverse effect on our future operating performance.
The most reasonable worst case scenario for Year 2000 Issues, which we
believe is unlikely, would result in delayed billings to customers and
difficulties in making payments to suppliers and employees. In such event, we
would prepare manual bills for customers and advance funds to
14
<PAGE>
suppliers and employees until Year 2000 Issues are resolved. We believe that
the additional costs of temporary staff to process billings and payments would
not have a material adverse impact on our results of operations. In addition,
the Year 2000 Issue could also result in large-scale failures of utility power
or local and long distance voice and data circuits or the failure of a large
portion of our hardware and software systems affecting one or more of our
offices. It is reasonably likely that any one or a combination of these
failures could effectively prevent one or more of our offices from conducting
normal service operations for clients, from billing clients, or making payments
to suppliers and employees in a timely manner. In such event, our plan is to
temporarily transfer the operations of the affected office to one or more of
our functional offices. All of our offices are networked together and data may
be distributed between offices through our own network or through the Internet.
Market volatility may impact our share price
The stock market in general, and the market for technology-related stocks in
particular, have experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our Class A
common stock, regardless of our actual operating performance.
15
<PAGE>
COMPANY BACKGROUND
Modem Media is the result of the combination of three separate businesses,
the Modem Partnership, the Northern Lights Interactive division of True North
and the strategic interactive marketing operations of Poppe Tyson.
In October 1996, True North formed Modem Media as a subsidiary to acquire the
Modem Partnership and to combine it with True North's digital interactive
marketing operations, including Northern Lights Interactive. In 1998, True
North undertook to consolidate all of its strategic interactive marketing
operations in Modem Media, and to remove from Modem Media those operations it
had originally contributed in 1996 that were not compatible with Modem Media's
core business. Accordingly, True North agreed to transfer to Modem Media the
strategic interactive marketing operations of Poppe Tyson, another True North
subsidiary, in exchange for the non-strategic portion of the operations
originally contributed to Modem Media in 1996. The operations to be removed
consisted of all operations originally contributed other than Northern Lights
Interactive. This combination was completed prior to the offering with effect
from October 1, 1998.
The Modem Partnership, a provider of digital interactive marketing services,
was founded in 1987. Poppe Tyson was formed in December 1985 and has provided
interactive marketing services to domestic and international clients since
1988. Poppe Tyson became a True North subsidiary in December 1997 when True
North acquired Poppe Tyson's parent company, Bozell, Jacobs, Kenyon & Eckhardt,
Inc. ("Bozell"). The strategic interactive marketing operations of Poppe Tyson
contributed to Modem Media in 1998 focus on providing long-term strategic
advice to clients, and include client relationships and related accounts
receivable in the United States, and interactive agencies in the United Kingdom
and Hong Kong.
16
<PAGE>
Set forth below are the ownership interests of Modem Media, consisting of the
Modem Partnership and the operations originally contributed by True North in
1996, and of the strategic interactive marketing operations of Poppe Tyson
prior to their combination with Modem Media and this offering:
Poppe Tyson Strategic
Modem Media InteractiveMarketing
Operations
[GRAPH OF OWNERSHIP INTERESTS APPEARS HERE]
True North is a publicly-owned company. One director and two officers of True
North serve as directors of Modem Media. See "Relationship with True North and
Certain Transactions."
17
<PAGE>
Set forth below are the ownership interests of Modem Media after the October
1998 combination and this offering:
Modem Media
[GRAPH OF OWNERSHIP INTERESTS APPEARS HERE]
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Modem Media from the sale of the Class A
common stock in this offering, after deducting estimated expenses of $2.4
million, all of which are payable by Modem Media, and underwriting discounts
and commissions, are estimated to be approximately $36.2 million (approximately
$42.1 million if the underwriters exercise their over-allotment option in
full), at the initial public offering price of $16.00 per share. The principal
purposes of this offering are to repay indebtedness owed to True North, to
obtain additional capital, to create a public market for Modem Media's Class A
common stock and to facilitate future access by Modem Media to public
securities markets.
Modem Media will use approximately $6.0 million of the net proceeds from this
offering to pay indebtedness owed to True North. This indebtedness is due and
payable upon consummation of this offering and is non-interest bearing. Modem
Media currently expects to use the remaining $30.2 million of net proceeds for
general corporate purposes, including working capital and capital expenditures.
A portion of the net proceeds from this offering may also be used to acquire or
invest in complementary marketing communications companies, services, products
or technologies, or to invest in geographic expansion. Pending use of the net
proceeds for the above purposes, Modem Media intends to invest such funds in
short-term, interest-bearing, investment grade obligations or may advance a
portion of such funds to True North under its current intercompany lending
arrangements.
DIVIDEND POLICY
Modem Media anticipates that it will retain any future earnings for use in
the expansion and operation of its business and does not anticipate paying any
cash dividends in the foreseeable future. Any determination to pay dividends in
the future will be at the discretion of Modem Media's Board of Directors and
will depend upon Modem Media's financial condition, results of operations and
capital requirements. See "Risk Factors--The interests of True North, our
controlling stockholder, may conflict with our interests."
19
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of Modem Media at
September 30, 1998: (i) on an actual basis; and (ii) on a pro forma basis after
giving effect to the combination of Modem Media and the strategic interactive
marketing operations of Poppe Tyson, the offering and the application of the
net proceeds of the offering, including:
. the purchase of fixed assets of $1,624,000;
. the forgiveness of $5,275,000 of intercompany payables;
. the sale to True North of the non-strategic digital interactive marketing
operations originally contributed by True North to Modem Media in 1996;
.the issuance of an aggregate of 809,514 shares of Class B common stock to
True North;
. increased goodwill due to the payment of the additional purchase price of
$15,587,000 by True North to the former partners of the Modem Partnership
upon consummation of this offering;
.the repayment of a $6,000,000 note payable to True North; and
. the issuance and sale of 2,600,000 shares of Class A common stock offered
hereby at the initial public offering price of $16.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
Unless otherwise indicated, the information in this prospectus:
. reflects a 0.95-for-1 reverse split of our outstanding shares of Class A
common stock and Class B common stock which took place prior to this
offering;
. reflects an amendment of our Certificate of Incorporation authorizing an
aggregate of 39,351,376 shares of Class A common stock and 5,648,624
shares of Class B common stock, which will take place concurrently with
this offering; and
. does not take into account the possible issuance of additional shares of
Class A common stock to the underwriters pursuant to their right to
purchase additional shares to cover over-allotments.
<TABLE>
<CAPTION>
September 30, 1998
-------------------
Actual Pro Forma
-------- ---------
(in thousands)
<S> <C> <C>
Intercompany loans payable................................. $ 11,275 $ --
Capital lease obligations, less current portion............ 507 507
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares au-
thorized, none issued and outstanding, actual and pro
forma................................................... -- --
Common stock, $0.001 par value; 39,351,376 shares of
Class A common stock and 5,648,624 shares of Class B
common stock authorized, 2,423,831 shares of Class A
common stock and 4,839,110 shares of Class B common
stock issued and outstanding, actual; 39,351,376 shares
of Class A common stock and 5,648,624 shares of Class B
common stock authorized, 5,023,831 shares of Class A
common stock and 5,648,624 shares of Class B common
stock issued and outstanding, pro forma................. 8 12
Paid-in capital.......................................... 47,273 98,559
Accumulated deficit...................................... (10,498) (10,498)
Accumulated other comprehensive income................... 19 19
-------- --------
Total stockholders' equity............................. 36,802 88,092
-------- --------
Total capitalization................................... $ 48,584 $ 88,599
======== ========
</TABLE>
20
<PAGE>
DILUTION
The pro forma net tangible book value of Modem Media as of September 30, 1998
was $1.9 million or $0.24 per share of common stock. Net tangible book value
per share is determined by dividing the net tangible book value of Modem Media
(total tangible assets less total liabilities) by the number of shares of
common stock outstanding. After giving effect to the sale by Modem Media of the
2,600,000 shares of Class A common stock offered hereby (at the initial public
offering price of $16.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses), Modem Media's adjusted pro
forma net tangible book value at September 30, 1998 would have been
approximately $38.9 million or $3.65 per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders of $3.41
per share and an immediate dilution to new investors of $12.35 per share. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Class A common stock.. $16.00
Pro forma net tangible book value per share of common stock as of
September 30, 1998.............................................. $0.24
Increase in net tangible book value per share of common stock
attributable to new investors................................... 3.41
Pro forma net tangible book value per share of common stock after
the Offering.................................................... 3.65
------
Dilution per share of Class A common stock to new investors...... $12.35
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30, 1998
the difference between the number of shares of common stock purchased from
Modem Media, the total consideration paid, and the average price per share paid
by existing stockholders and by the new investors (at the initial public
offering price of $16.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 8,072,455 76% $32,747,000 44% $ 4.06
New investors.............. 2,600,000 24% $41,600,000 56% $16.00
---------- --- ----------- ---
Total.................... 10,672,455 100% $74,347,000 100%
========== === =========== ===
</TABLE>
The foregoing table excludes an aggregate of 3,040,000 shares of Class A
common stock reserved for issuance pursuant to Modem Media's 1997 Stock Option
Plan, of which 1,890,542 have been granted to our employees, and 950,000 shares
of Class A common stock reserved for issuance pursuant to Modem Media's 1999
Employee Stock Purchase Plan. In connection with the removal of the non-
strategic operations originally contributed to Modem Media, True North has
agreed to satisfy up to an aggregate of 167,485 options held by employees
associated with those operations. Accordingly, upon exercise of such options,
the exercise price will be paid to True North and True North will surrender an
equivalent number shares of common stock to Modem Media. Similarly, True North
has agreed to satisfy options to purchase up to an aggregate of 149,510 shares
of common stock held by former employees of Poppe Tyson. If options are
exercised (other than those to be satisfied by True North), new investors will
incur additional dilution from the amount shown in the table above.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Modem Media should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the fiscal year
ended December 31, 1994 and the balance sheet data as of December 31, 1994 and
1995 are derived from financial statements of Modem Media that have been
audited by Arthur Andersen LLP, independent public accountants, which are not
included in this prospectus. The statement of operations data for the fiscal
years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1998 and the balance sheet data as of December 31, 1996 and 1997
and September 30, 1998 are derived from financial statements of Modem Media
that have been audited by Arthur Andersen LLP, independent public accountants,
and are included elsewhere in this prospectus. The statement of operations data
for the nine months ended September 30, 1997 are derived from the unaudited
financial statements of Modem Media. The unaudited nine month selected
financial data reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The operating results for
the nine months ended September 30, 1997 and 1998 are not necessarily
indicative of the results to be expected for any other interim period or any
other future fiscal year. As a result of the combination of Modem Media and the
strategic interactive marketing operations of Poppe Tyson effective October
1998 and other factors, Modem Media believes that the historical results of
operations may not be indicative of the results of operations to be expected in
the future, and that the results of operations for current interim periods are
not necessarily indicative of results to be expected for the entire year.
Accordingly, Modem Media has included pro forma results of operations data
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which management believes may be useful to investors in
evaluating the performance of Modem Media on an ongoing basis.
Our pro forma results of operations in the table below assume that the
following transactions occurred on January 1, 1997:
. the acquisition of the strategic interactive marketing operations of
Poppe Tyson; and
. the sale of Modem Media's non-strategic interactive marketing operations
to True North in connection with the combination of Modem Media and the
strategic interactive marketing operations of Poppe Tyson.
The pro forma balance sheet data reflects adjustments for transactions
related to the combination of Modem Media and the strategic interactive
marketing operations of Poppe Tyson, which have been recorded at historical
costs. These transactions include:
. the purchase of fixed assets of $1,624,000;
. the forgiveness of $5,275,000 of intercompany payables;
. the sale to True North of Modem Media's non-strategic digital interactive
marketing operations originally contributed by True North in 1996; and
. the issuance of an aggregate of 809,514 shares of our Class B common
stock to True North.
The pro forma balance sheet data also reflects adjustments for other
transactions, including:
. the sale of the 2,600,000 shares of Class A common stock offered hereby
at the initial public offering price of $16.00 per share;
22
<PAGE>
. application of the net proceeds from this offering after deducting
underwriting discounts and commissions, estimated offering expenses and
$6.0 million which will be used to pay indebtedness due and payable to
True North upon consummation of this offering; and
. increased goodwill due to the payment of the additional purchase price of
$15,587,000 by True North to the former partners of the Modem Partnership
upon consummation of this offering.
See "Use of Proceeds" and "Risk Factors--The interests of True North, our
controlling stockholder, may conflict with our interests."
<TABLE>
<CAPTION>
Actual Pro Forma
----------------------------------------------------- -----------------------------
(dollars in thousands, except per share data)
Nine
Months
Nine Months Ended Year Ended Ended
Year Ended December 31, September 30, December 31, September 30,
-------------------------------- ------------------- ------------ ----------------
1994 1995 1996 1997 1997 1998 1997 1997 1998
----- ------- ------- ------- ----------- ------- ------------ ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ -- $ 438 $ 2,093 $25,497 $18,025 $30,397 $29,422 $20,799 $30,397
Salaries and benefits
expense................ -- 308 1,322 15,894 11,187 20,793 19,244 13,793 20,793
Office and general
expense................ -- 215 712 9,038 6,162 10,309 12,217 8,176 10,309
Amortization of goodwill
expense................ -- -- -- 1,666 1,249 1,308 1,666 1,249 1,308
Operating losses of True
North Units Held for
Transfer............... (326) 1,766 1,309 2,180 1,600 13 -- -- --
----- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 326 (1,851) (1,250) (3,281) (2,173) (2,026) (3,705) (2,419) (2,013)
Interest income
(expense), net......... -- -- -- (76) (62) (5) (121) (84) (5)
----- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 326 (1,851) (1,250) (3,357) (2,235) (2,031) (3,826) (2,503) (2,018)
Provision (benefit) for
income taxes........... 70 (873) (548) (248) (246) 57 66 114 (59)
----- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 256 $ (978) $ (702) $(3,109) $(1,989) $(2,088) $(3,892) $(2,617) $(1,959)
===== ======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net
income (loss) per
share.................. $ -- $ -- $(35.10) $ (0.43) $ (0.27) $ (0.29) $ (0.48) $ (0.32) $ (0.24)
===== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
-------------------------- ------------------
1994 1995 1996 1997 Actual Pro Forma
----- ----- ------ ------ ------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash............................ $ -- $ -- $2,726 $7,056 $4,349 $34,597
Working capital................. -- 548 3,428 3,269 1,891 32,139
Total assets.................... 256 753 54,022 59,024 68,182 108,197
Capital lease obligations, less
current portion................ -- -- 193 472 507 507
Related party obligations, less
current portion................ -- 620 6,000 9,346 11,275 --
Other long-term obligations..... -- -- 55 41 24 24
Total stockholders' (deficit)
equity......................... 256 (846) 40,493 35,618 36,802 88,092
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Modem Media's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
Modem Media derives substantially all of its revenues from fees for digital
interactive marketing services rendered to a select number of Fortune 500
companies and emerging companies with online business models. Modem Media's
digital interactive marketing services include:
.strategic consulting and research;
.strategy development and planning;
. development of electronic customer service capabilities which Modem
Media refers to as "customer management platform development," and
. continuous monitoring of the quantitative and qualitative effectiveness
of services previously provided to the client by Modem Media, which is
commonly referred to in Modem Media's industry as "program measurement
and analysis."
A majority of Modem Media's revenues are derived from fixed-fee assignments.
Modem Media recognizes revenues as services are rendered. Modem Media
reassesses its estimated costs on each project on a monthly basis and losses
are accrued, on a project-by-project basis, to the extent costs incurred and
anticipated costs to complete projects exceed anticipated billings. Provisions
for losses on uncompleted contracts are recognized in the period in which such
losses are determined.
Clients generally hire Modem Media on an engagement basis rather than a
retainer basis. Once a project is completed, there can be no assurance that a
client will engage Modem Media for future services. As a result, a client that
generates substantial revenue for Modem Media in one period may not be a
substantial source of revenue in a subsequent period. In addition, Modem
Media's clients generally have the right to terminate their relationships with
Modem Media without penalty and with relatively short or no notice. The
termination of Modem Media's business relationships with any of its significant
clients, or a material reduction in the use of Modem Media's services by any
such clients, could adversely affect Modem Media's business, financial
condition and results of operations. Modem Media's five largest clients
accounted for 56.8% and 54.8% of revenues on a pro forma basis for the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. AT&T accounted for 31.4% and 20.4% of Modem Media's revenues on a
pro forma basis for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. In addition, Citibank accounted for 12.0% of
Modem Media's revenues on a pro forma basis for the nine months ended September
30, 1998.
Salaries and benefits represent the majority of Modem Media's operating
expenses. These expenses include salaries, employee benefits, incentive
compensation and other payroll-related costs. Office and general is comprised
of office rent and utilities, depreciation, amortization of software,
professional and consulting fees, travel, telephone and other related expenses.
Modem Media has experienced operating losses as well as net losses on both a
historical and pro forma basis, as defined below, in seven of the eleven
quarters in the period January 1, 1996
24
<PAGE>
through September 30, 1998. Although Modem Media has experienced revenue growth
in recent periods, these growth rates may not be sustainable or indicative of
future operating results. In addition, Modem Media has incurred substantial
costs to expand and integrate its operations and intends to continue to invest
heavily in ongoing expansion and integration efforts as well as infrastructure
development. As a result, Modem Media expects to continue to incur operating
losses through 1999 or beyond. There can be no assurance that Modem Media will
achieve or sustain profitability.
Modem Media was formed by True North in October 1996 to acquire the Modem
Partnership and to combine it with certain of True North's digital interactive
marketing operations, including its Northern Lights Interactive division. The
Modem Partnership was formed in 1987 by Gerald M. O'Connell, our Chief
Executive Officer, and Douglas C. Ahlers, our Executive Vice President.
Effective October 1998, Modem Media acquired the strategic interactive
marketing operations of Poppe Tyson from True North in exchange for non-
strategic digital interactive marketing businesses originally contributed by
True North to Modem Media in 1996, plus 809,514 shares of Class B common stock
and the forgiveness of approximately $5.3 million of intercompany payables.
This transaction occurred among companies under common control, and,
accordingly, has been recorded as of December 31, 1997 (the date of True
North's acquisition of the strategic interactive marketing operations of Poppe
Tyson) at historical costs. Poppe Tyson was formed in December 1985 as a
subsidiary of Bozell, which was acquired by True North in December 1997 in a
business combination accounted for under the pooling-of-interests method. See
"Company Background," "Certain Transactions" and Notes 1, 3 and 15 of Notes to
Consolidated Financial Statements of Modem Media . Poppe Tyson, Inc. and
Subsidiaries.
The results of operations for Modem Media include the results of:
. the Modem Partnership;
. the digital interactive marketing operations contributed by True North to
Modem Media in 1996, including both Northern Lights Interactive and the
non-strategic digital interactive marketing businesses that Modem Media
intends to sell back to True North prior to this offering; and
. the strategic interactive marketing operations of Poppe Tyson,
from their respective dates of acquisition by True North. The results of
operations of the businesses that Modem Media intends to sell back to True
North are presented as Operating Losses of True North Units Held for Transfer
in Modem Media's consolidated financial statements included elsewhere in this
prospectus.
The financial statements of:
. the Modem Partnership as of and for the years ended December 31, 1995 and
1996; and
. the strategic interactive marketing operations of Poppe Tyson as of and
for the years ended December 31, 1996 and 1997
are included herein as the financial statements of the predecessors to Modem
Media.
Pro Forma Results of Operations
The following table sets forth certain pro forma statements of operations
data of Modem Media for the years ended December 31, 1995, 1996 and 1997 and
for the nine months ended
25
<PAGE>
September 30, 1997 and 1998. The pro forma results of operations data of Modem
Media presented below assume that the following transactions each occurred on
January 1, 1995:
. the combination of Modem Media and the Modem Partnership;
. the acquisition of the strategic interactive marketing operations of
Poppe Tyson; and
. the disposition of the non-strategic digital interactive marketing
operations that Modem Media intends to sell back to True North prior to
this offering.
Management believes that the pro forma statements of operations data may be
useful to investors in evaluating the financial performance of Modem Media on
an ongoing basis. Such pro forma data may not, however, be indicative of the
results of operations of Modem Media that actually would have occurred had the
transactions reflected in the pro forma results occurred at the beginning of
the periods presented, or of the results of operations that may be obtained by
Modem Media in the future.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------ ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C>
Revenues......................... $12,156 $20,321 $29,422 $ 20,799 $ 30,397
Salaries and benefits............ 5,334 14,050 19,244 13,793 20,793
Office and general............... 2,955 6,569 12,217 8,176 10,309
Amortization of goodwill......... 1,666 1,666 1,666 1,249 1,308
------- ------- ------- -------- --------
Operating profit (loss).......... 2,201 (1,964) (3,705) (2,419) (2,013)
Interest income (expense), net... 8 16 (121) (84) (5)
Provision (benefit) for taxes.... 1,626 68 66 114 (59)
------- ------- ------- -------- --------
Net income (loss)................ $ 583 $(2,016) $(3,892) $ (2,617) $ (1,959)
======= ======= ======= ======== ========
</TABLE>
The following table sets forth certain statements of operations data of Modem
Media as a percentage of total revenues on a pro forma basis, as defined, for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------- -------------------
1995 1996 1997 1997 1998
----- ----- ----- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and benefits... 43.9 69.2 65.4 66.3 68.4
Office and general...... 24.3 32.3 41.5 39.3 33.9
Amortization of
goodwill............... 13.7 8.2 5.7 6.0 4.3
----- ----- ----- -------- --------
Operating profit
(loss)................. 18.1 (9.7) (12.6) (11.6) (6.6)
Interest income
(expense), net......... 0.1 0.1 (0.4) (0.4) --
Provision (benefit) for
taxes.................. 13.4 0.3 0.2 0.6 (0.2)
----- ----- ----- -------- --------
Net income (loss)....... 4.8% (9.9)% (13.2)% (12.6)% (6.4)%
===== ===== ===== ======== ========
</TABLE>
Pro Forma Nine Months Ended September 30, 1997 Compared to Pro Forma Nine
Months Ended September 30, 1998
Revenues. Pro forma revenues increased $9.6 million, or 46.2%, from $20.8
million for the nine months ended September 30, 1997 to $30.4 million for the
nine months ended September 30, 1998. Pro forma revenues increased primarily as
a result of increased services provided to existing clients, as well as the
addition of new clients.
26
<PAGE>
Salaries and Benefits. Pro forma salaries and benefits increased $7.0
million, or 50.7%, from $13.8 million for the nine months ended September 30,
1997 to $20.8 million for the nine months ended September 30, 1998. Pro forma
salaries and benefits represented 66.3% and 68.4% of pro forma revenues for the
nine months ended September 30, 1997 and 1998, respectively. Both the dollar
and percentage increases in pro forma salaries and benefits were attributable
to a company-wide increase in headcount to better manage the growth of its
business, service clients and actively pursue new client business.
Office and General. Pro forma office and general increased $2.1 million, or
25.6%, from $8.2 million for the nine months ended September 30, 1997 to $10.3
million for the nine months ended September 30, 1998. Pro forma office and
general represented 39.3% and 33.9% of pro forma revenues in the nine months
ended September 30, 1997 and 1998, respectively. The dollar increase in pro
forma office and general was due primarily to increased occupancy and office
support expenses incurred in connection with increases in headcount. The
decrease of office and general as a percentage of pro forma revenue is due
primarily to higher percentage growth rates in revenue.
Amortization of Goodwill. Pro forma amortization of goodwill increased by
$0.1 million, or 8.3%, from $1.2 million for the nine months ended September
30, 1997 to $1.3 million for the nine months ended September 30, 1998 as a
result of the payment of $3.3 million in additional purchase price for the
Modem Partnership in May 1998. Goodwill resulted from the combination of Modem
Media with the Modem Partnership in December 1996 (the "Modem Partnership
Combination") and is being amortized by Modem Media over a 20-year period. In
connection with the Modem Partnership Combination, True North is obligated to
pay the former owners of the Modem Partnership an aggregate of up to $18.6
million as additional consideration upon consummation of an initial public
offering. Such amount will result in additional amortization of goodwill by
Modem Media of up to $0.3 million per quarter over 18 years.
Income Taxes. Modem Media had a provision for income taxes of $0.1 million on
a pro forma pre-tax loss of $2.5 million for the nine months ended September
30, 1997, as compared to a benefit for income taxes of $0.1 million on a pro
forma pre-tax loss of $2.0 million for the nine months ended September 30,
1998. The effective income tax rate was 4.6% on a pro forma basis for the nine
months ended September 30, 1997 compared to an effective income tax benefit
rate of 2.9% on a pro forma basis for the nine months ended September 30, 1998.
The effective tax rates differ from the federal statutory rate primarily due to
the effect of non-deductible goodwill amortization and losses of foreign
subsidiaries on which Modem Media did not recognize a tax benefit.
Pro Forma Year Ended December 31, 1996 Compared to Pro Forma Year Ended
December 31, 1997
Revenues. Pro forma revenues increased by $9.1 million, or 44.8%, from $20.3
million for the year ended December 31, 1996 to $29.4 million for the year
ended December 31, 1997. The increase in pro forma revenues between 1996 and
1997 resulted principally from increased services provided to existing clients,
and, to a lesser extent, the addition of new clients. The opening of new
offices in the United Kingdom and Hong Kong during the fourth quarter of 1996
and first quarter of 1997, respectively, also contributed to the increase.
Salaries and Benefits. Pro forma salaries and benefits increased $5.1
million, or 36.2%, from $14.1 million for the year ended December 31, 1996 to
$19.2 million for the year ended December 31, 1997. As a percentage of
revenues, pro forma salaries and benefits decreased from 69.2% for the year
ended December 31, 1996 to 65.4% for the year ended December 31, 1997. The
dollar increase
27
<PAGE>
in pro forma salaries and benefits was due primarily to company-wide increases
in headcount to support new business and the establishment of two international
offices. The decrease of pro forma salaries and benefits as a percentage of pro
forma revenue is attributable primarily to higher percentage growth rates in
revenue.
Office and General. Pro forma office and general increased $5.6 million, or
84.8%, from $6.6 million in 1996 to $12.2 million in 1997. As a percentage of
revenues, pro forma office and general was 32.3% and 41.5% in 1996 and 1997,
respectively. Both the dollar and percentage increases were related to
continued infrastructure commitments to expand operations, the opening of new
offices in the United Kingdom and Hong Kong during the fourth quarter of 1996
and the first quarter of 1997, respectively, and the establishment of a $0.6
million reserve for the relocation of Modem Media's main office.
Amortization of Goodwill. Pro forma amortization of goodwill remained
constant at $1.7 million in 1996 and 1997. Goodwill resulted from the Modem
Partnership Combination and is being amortized over a 20-year period.
Income Taxes. Modem Media's pro forma provision for income taxes remained
constant at $0.1 million on pro forma pre-tax losses of $2.0 million and $3.8
million in 1996 and 1997, respectively. The effective pro forma income tax
rates were 3.5% in 1996 and 1.7% in 1997. These rates differ from the federal
statutory rate primarily due to the effect of non-deductible goodwill
amortization and losses of foreign subsidiaries on which Modem Media did not
recognize a tax benefit.
Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year Ended
December 31, 1996
Revenues. Pro forma revenues increased by $8.1 million, or 66.4%, from $12.2
million in the year ended December 31, 1995 to $20.3 million in the year ended
December 31, 1996. The increase in pro forma revenues between 1995 and 1996
resulted principally from increased services provided to existing clients, and,
to a lesser extent, the addition of new clients.
Salaries and Benefits. Pro forma salaries and benefits increased $8.8
million, or 166.0%, from $5.3 million for the year ended December 31, 1995 to
$14.1 million for the year ended December 31, 1996. As a percentage of
revenues, pro forma salaries and benefits increased from 43.9% for the year
ended December 31, 1995 to 69.2% for the year ended December 31, 1996. Both
dollar and percentage increases in pro forma salaries and benefits were due
primarily to company-wide increases in headcount to support new business and
establish new offices, as well as a $3.0 million non-recurring, non-cash
compensation charge related to the grant of options to purchase partnership
interests in the Modem Partnership.
Office and General. Pro forma office and general increased $3.6 million, or
120.0%, from $3.0 million in 1995 to $6.6 million in 1996. As a percentage of
revenues, pro forma office and general was 24.3% and 32.3% in 1995 and 1996,
respectively. Both the dollar and percentage increases were due to increases in
the size of Modem Media's operations and infrastructure commitments, as well as
the establishment of new offices, at higher percentage growth rates than
revenues.
Amortization of Goodwill. Pro forma amortization of goodwill remained
constant at $1.7 million in 1995 and 1996. Goodwill resulted from the Modem
Partnership Combination and is being amortized over a 20-year period.
28
<PAGE>
Income Taxes. Modem Media had a provision of $1.6 million on pro forma pre-
tax income of $2.2 million for 1995, as compared to a provision of $0.1 million
on a pro forma pre-tax loss of $2.0 million for 1996. The effective income tax
rate was 73.6% on a pro forma basis for 1995 as compared to 3.5% in 1996. These
rates differ from the federal statutory rate primarily due to the effect of
non-deductible goodwill amortization and, in 1996, the non-deductible losses of
foreign subsidiaries on which Modem Media did not recognize a tax benefit.
Factors Affecting Operating Results
Modem Media's revenues have historically been higher during the second half
of each year as its clients prepare marketing campaigns for products and
services launched in anticipation of fall trade shows and the holiday season.
During the first quarter of the year, Modem Media has historically experienced
revenue declines from the fourth quarter of the preceding year as clients
reestablish their annual marketing and advertising budgets. Modem Media expects
this variation in revenue to continue in the future.
Modem Media's operating results have fluctuated in the past, and may continue
to fluctuate in the future, as a result of a variety of factors, including the
timing of new projects, material reductions, cancellations or completions of
major projects, the loss of significant clients, the opening or closing of an
office, Modem Media's relative mix of business, changes in Modem Media's
pricing strategies or those of its competitors, employee utilization rates,
changes in personnel and other factors that are outside of Modem Media's
control. In addition, Modem Media has experienced some variation in operating
results throughout the year resulting in part from marketing communications
spending patterns and business cycles of its clients. As a result, period-to-
period comparisons of Modem Media's operating results cannot be relied upon as
indicators of future performance.
Historical Results of Operations
Overview
The following table sets forth certain items from Modem Media's statements of
operations data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 438 $ 2,093 $25,497 $18,025 $30,397
Salaries and benefits......... 308 1,322 15,894 11,187 20,793
Office and general............ 215 712 9,038 6,162 10,309
Amortization of goodwill...... -- -- 1,666 1,249 1,308
Operating losses of True North
Units Held for Transfer...... 1,766 1,309 2,180 1,600 13
------- ------- ------- ------- -------
Operating loss................ (1,851) (1,250) (3,281) (2,173) (2,026)
Interest income (expense),
net.......................... -- -- (76) (62) (5)
(Benefit) provision for
taxes........................ (873) (548) (248) (246) 57
------- ------- ------- ------- -------
Net loss...................... $ (978) $ (702) $(3,109) $(1,989) $(2,088)
======= ======= ======= ======= =======
</TABLE>
29
<PAGE>
The following table sets forth certain items from Modem Media's statements of
operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------------- -----------------
1995 1996 1997 1997 1998
------ ----- ----- ----------- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and benefits............ 70.3 63.2 62.3 62.1 68.4
Office and general............... 49.1 34.0 35.5 34.2 33.9
Amortization of goodwill......... -- -- 6.5 6.9 4.3
Operating losses of True North
Units Held for Transfer......... 403.2 62.5 8.6 8.9 0.1
------ ----- ----- ----- -----
Operating loss................... (422.6) (59.7) (12.9) (12.1) (6.7)
Interest income (expense), net... -- -- (0.3) (0.3) --
(Benefit) provision for taxes.... (199.3) (26.2) (1.0) (1.4) 0.2
------ ----- ----- ----- -----
Net loss......................... (223.3)% (33.5)% (12.2)% (11.0)% (6.9)%
====== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1998
Revenues. Revenues increased $12.4 million, or 68.9%, from $18.0 million for
the nine months ended September 30, 1997 to $30.4 million for the nine months
ended September 30, 1998. Revenues increased $4.8 million, or 26.7%, due to the
addition of the revenues of the strategic interactive marketing operations of
Poppe Tyson as a result of the combination of those operations with Modem
Media, and also as a result of increased services provided to existing clients
and the addition of new clients. See Note 1 of Notes to Consolidated Financial
Statements of Modem Media . Poppe Tyson, Inc. and Subsidiaries.
Salaries and Benefits. Salaries and benefits increased $9.6 million, or
85.7%, from $11.2 million for the nine months ended September 30, 1997 to $20.8
million for the nine months ended September 30, 1998. Salaries and benefits
represented 62.1% and 68.4% of revenues in the nine months ended September 30,
1997 and 1998, respectively. The dollar and percentage increases in salaries
and benefits are attributable to a company-wide increase in headcount,
partially as a result of the combination of Modem Media and the strategic
interactive marketing operations of Poppe Tyson.
Office and General. Office and general increased $4.1 million, or 66.1%, from
$6.2 million for the nine months ended September 30, 1997 to $10.3 million for
the nine months ended September 30, 1998. Office and general represented 34.2%
and 33.9% of revenues for the nine months ended September 30, 1997 and 1998,
respectively. The dollar increase in office and general was due primarily to
the addition of office and general expense of the strategic interactive
marketing operations of Poppe Tyson as a result of the combination of these
operations with Modem Media ($2.3 million, or 37.1%), as well as increased
occupancy and office support incurred in connection with increases in
headcount. The decrease in office and general as a percentage of revenue is due
primarily to a higher rate of revenue growth than the rate of growth in office
and general.
Amortization of Goodwill. Amortization of goodwill increased by $0.1 million,
or 8.3%, from $1.2 million for the nine months ended September 30, 1997 to $1.3
million for the nine months ended September 30, 1998 as a result of the payment
of $3.3 million in additional purchase price for the Modem Partnership in May
1998. Goodwill resulted from the Modem Partnership Combination and is being
amortized over a 20-year period. In connection with the Modem
30
<PAGE>
Partnership Combination, True North is obligated to pay the former owners of
the Modem Partnership an aggregate of up to $18.6 million as additional
consideration upon consummation of an initial public offering. Such amount will
result in additional amortization of goodwill of up to $0.3 million per quarter
over 18 years (the remainder of the initial 20-year goodwill amortization
period).
Operating Losses of True North Units Held For Transfer. The operating loss of
the non-strategic digital interactive businesses that Modem Media sold back to
True North prior to this offering, shown on the face of the financial
statements as "Operating Losses of True North Units Held for Transfer,"
decreased $1.6 million or 100.0%, from an operating loss of $1.6 million during
the nine months ended September 30, 1997 to nearly breakeven during the nine
months ended September 30, 1998 principally due to the closure of an office and
overhead reductions at other locations.
Income Taxes. Modem Media had a benefit for income taxes of $0.2 million on
pre-tax losses of $2.2 million for the nine months ended September 30, 1997, as
compared to a provision for income taxes of $0.1 million on a pre-tax loss of
$2.0 million for the nine months ended September 30, 1998. The effective income
tax benefit rate was 11.0% for the nine months ended September 30, 1997 and the
effective income tax rate was 2.8% for the nine months ended September 30,
1998. The effective tax rates differ from the federal statutory rate primarily
due to the effect of non-deductible goodwill amortization, the tax effects of
the non-strategic digital interactive marketing operations that Modem Media
sold back to True North prior to this offering, and, in 1998, losses of foreign
subsidiaries on which Modem Media did not recognize a tax benefit.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Revenues. Revenues increased by $23.4 million from $2.1 million in the year
ended December 31, 1996 to $25.5 million in the year ended December 31, 1997.
The increase in revenues between 1996 and 1997 resulted principally from the
Modem Partnership Combination, which was accounted for under the purchase
method.
Salaries and Benefits. Salaries and benefits increased $14.6 million from
$1.3 million in 1996 to $15.9 million in 1997. As a percentage of revenues,
salaries and benefits decreased from 63.2% in 1996 to 62.3% in 1997. The
overall increase in salaries and benefits was primarily due to the addition of
the Modem Partnership salaries and benefits as a result of the Modem
Partnership Combination. The decrease in salaries and benefits as a percentage
of revenue was due primarily to higher percentage revenue growth rates compared
to salaries and benefits growth rates.
Office and General. Office and general increased $8.3 million from $0.7
million in 1996 to $9.0 million in 1997. As a percentage of revenues, office
and general was 34.0% and 35.5% in 1996 and 1997, respectively. The overall
increase in office and general was the addition of the Modem Partnership office
and general as a result of the Modem Partnership Combination.
Amortization of Goodwill. Amortization of goodwill increased from zero in
1996 to $1.7 million in 1997. Goodwill resulted from the Modem Partnership
Combination and is being amortized over a 20-year period.
Operating Losses of True North Units Held For Transfer. The operating loss of
the non-strategic digital interactive marketing operations that Modem Media
sold back to True North prior to this offering, shown on the face of the
financial statements as "Operating Losses of True North Units Held for
Transfer," increased $0.9 million, or 69.2%, from $1.3 million in 1996 to
$2.2 million in 1997.
31
<PAGE>
Income Taxes. Modem Media's benefit for income taxes decreased by $0.3
million, from a benefit of $0.5 million on pre-tax losses of $1.3 million in
1996 to a benefit of $0.2 million on pre- tax losses of $3.4 million in 1997.
The effective income tax benefit rate was 43.8% in 1996 and 7.4% in 1997. These
rates differ from the federal statutory rate primarily due to the effect of
non-deductible goodwill amortization.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Revenues. Revenues increased by $1.7 million from $0.4 million for the year
ended December 31, 1995 to $2.1 million for the year ended December 31, 1996.
The increase resulted principally from revenue growth in Northern Lights
Interactive in addition to revenues from operations in Canada.
Salaries and Benefits. Salaries and benefits increased $1.0 million from $0.3
million in 1995 to $1.3 million in 1996. As a percentage of revenues, salaries
and benefits represented 70.3% and 63.2% in 1995 and 1996, respectively. The
dollar increase in salaries and benefits were due primarily to company-wide
increases in headcount. The percentage decrease was due primarily to a higher
rate of revenue growth than the rate of growth in salaries and benefits.
Office and General. Office and general increased $0.5 million from $0.2
million in 1995 to $0.7 million in 1996. As a percentage of revenues, office
and general was 49.1% and 34.0% in 1995 and 1996, respectively. The principal
reason for the dollar increase was increased costs to support office revenue,
and the principal reason for the decrease as a percentage of revenue was a
higher rate of revenue growth than the rate of growth in office and general.
Operating Losses of True North Units Held For Transfer. The operating loss of
the non-strategic digital interactive marketing operations that Modem Media
sold back to True North effective October 1998, shown on the face of the
financial statements as "Operating Losses of True North Units Held for
Transfer," decreased $0.5 million, or 27.8%, from $1.8 million in 1995 to
$1.3 million in 1996.
Income Taxes. Modem Media's benefit for income taxes decreased by $0.4
million, or 44.4%, from $0.9 million on pre-tax losses of $1.9 million in 1995,
to $0.5 million on pre-tax losses of $1.3 million in 1996. The effective income
tax benefit rate was 47.2% in 1995 and the effective income tax rate was 43.8%
in 1996. These rates differ from the federal statutory rate primarily due to
the effect of non-deductible goodwill amortization.
Liquidity and Capital Resources
Modem Media historically has financed its operations primarily from funds
generated from operations and borrowings from True North. At September 30,
1998, Modem Media had a non-interest bearing intercompany note payable to True
North of $6.0 million, which will be repaid from the net proceeds of this
offering. Pursuant to agreements between True North and its lenders, Modem
Media is subject to limitations on indebtedness which could adversely affect
Modem Media's ability to secure debt financing in the future.
Net cash (used in) provided by operating activities was $(0.3) million,
$(3.7) million and $6.4 million for the years ended December 31, 1995, 1996 and
1997, respectively, and $4.2 million and $0.3 million for the nine months ended
September 30, 1997 and 1998, respectively. The investment in working capital
was partially offset by depreciation expense and goodwill amortization,
32
<PAGE>
which totaled $2.9 million for the year ended December 31, 1997, and $2.1
million and $2.5 million for the nine months ended September 30, 1997 and 1998,
respectively.
Net cash of $2.6 million was provided by investing activities for the year
ended December 31, 1996 due to the acquisition of the Modem Partnership's cash
via the Modem Partnership Combination. Net cash (used in) investing activities
was $(1.2) million for the year ended December 31, 1997, and $(0.9) million and
$(2.6) million for the nine months ended September 30, 1997 and 1998,
respectively. Investing activities reflect capital expenditures to purchase and
install enterprise software in 1998, and to purchase other computer software,
computer hardware, furniture and office equipment in all periods.
Net cash provided by (used in) financing activities was $0.3 million, $3.8
million, and $(0.9) million for the years ended December 31, 1995, 1996 and
1997, respectively, and $(1.9) million and $(0.4) million for the nine months
ended September 30, 1997 and 1998, respectively. The primary source of cash
flows from financing activities was borrowings from True North of $0.5 million,
$5.4 million, $0.7 million for the years ended December 31, 1995, 1996 and
1997, respectively.
Modem Media's short-term capital commitments include payments of
approximately $0.8 million in 1999 to complete a new financial accounting
system, as well as lease payments aggregating approximately $3.9 million in
1999. In addition, in September 1998, Modem Media executed a letter of intent
relating to an investment of up to $5.0 million in a company that places
advertisements on the Internet. The long-term capital needs of Modem Media will
depend on numerous factors, including the rates at which Modem Media is able to
obtain new business from clients and expand its personnel and infrastructure to
accommodate growth, as well as the rate at which it chooses to invest in new
technologies. Modem Media has ongoing needs for capital, including working
capital for operations, project development costs and capital expenditures to
maintain and expand its operations.
Capital Resources. In August 1998, True North extended a credit facility to
Modem Media allowing for revolving borrowings in the amount of up to $3.0
million to be outstanding at any given time. The credit facility with True
North expires two years from the date of completion of this offering, or sooner
upon the occurrence of certain events. See "Relationship with True North and
Certain Transactions--Intercompany Agreements."
Modem Media believes that the net proceeds from this offering (estimated to
be $36.2 million), together with funds available from operations, if any, will
be sufficient to meet the capital needs of Modem Media for at least the next
twelve months. A portion of the net proceeds from this offering may also be
used to acquire or invest in complementary marketing communications companies,
services, products or technologies, or to invest in geographic expansion. Modem
Media has no agreements or commitments with respect to any such transactions.
Year 2000 Compliance
Modem Media has completed an assessment of its non-information technology
systems, and believes based on that assessment that these systems do not
contain any elements that are susceptible to Year 2000 problems. Based on
recent assessments of its information technology systems, however, Modem Media
has determined that it will be required to modify or replace some portions of
its information processing systems in order to ensure that those systems are
Year 2000 compliant. Modem Media intends to replace these systems in 1999, and
does not believe that the cost of
33
<PAGE>
replacement will be material. As a result, Modem Media believes that its
internal computer systems will properly utilize dates beyond December 31, 1999.
If, in the worst case scenario, such replacement is not made, or is not
completed on a timely basis, the Year 2000 issue could have a material impact
on the operations of Modem Media.
Modem Media regularly conducts transactions and performs services that
interface directly with systems of its clients. Modem Media has not undertaken
to confirm that its clients' systems are Year 2000 compliant. In the worst case
scenario, the inability of a substantial number of Modem Media's clients to
complete their Year 2000 compliance could cause them to reduce substantially
their spending on interactive marketing programs.
Furthermore, there can be no assurance that Modem Media's suppliers will not
experience material business disruptions as a result of the Year 2000 issue
that could affect Modem Media. In this regard, Modem Media has asked each of
its third-party suppliers to confirm that they are Year 2000 compliant.
Substantially all of Modem Media's third-party suppliers have indicated that
they expect to be Year 2000 compliant by the Year 2000 based on their progress
to date, and a majority have indicated that their Year 2000 compliance programs
have already been completed. However, in the worst case scenario, a substantial
number of third parties could be unable to complete their Year 2000 resolution
process, causing significant disruptions in Modem Media's ability to provide
services to its clients.
In addition, True North has agreed to provide legal, tax preparation,
insurance, treasury, financing and debt and lease guaranty services to Modem
Media after the offering. Modem Media does not believe that any Year 2000
problems experienced by True North would have a material effect on True North's
ability to provide these services to Modem Media, for the following reasons:
. True North's ability to provide these services is based for the most
part on the availability of its personnel, rather than the integrity of
its systems;
. The use of these systems by True North personnel is generally incidental
to the service provided; and
. The systems used generally consist of off-the-shelf software that is
readily replaceable.
Modem Media has not established contingency plans in case of failure of its
information technology systems since it expects to have its material systems in
place by the second quarter of 1999. In connection with Modem Media's
assessment of third party readiness in early 1999, Modem Media will evaluate
the necessity of contingency plans based on the level of uncertainty regarding
such compliance. In the event Modem Media's clients, intermediaries or vendors
do not expect to be Year 2000 compliant, Modem Media's contingency plan may
include replacing such intermediaries or vendors or conducting the particular
operation itself.
In order to keep pace with the growth and expansion of its business, Modem
Media decided in 1997 to replace its existing financial accounting system and
is currently in the process of doing so. Under the purchase agreement, the
system provider has given Modem Media a two-year limited warranty that the
replacement financial accounting system will be Year 2000 compliant.
Recently Issued Accounting Pronouncements
Segment Disclosures. In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosure About Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way that public
34
<PAGE>
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. The
statement also establishes standards for related disclosure about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, but is not required to be
applied to interim financial statements in the initial year of adoption.
Therefore, Modem Media will adopt the new requirements retroactively in its
annual consolidated financial statements for the year ended December 31, 1998.
The adoption of SFAS No. 131 will not affect Modem Media's results of
operations or financial position.
Derivative Instruments. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Modem Media currently believes that there will
be no impact from SFAS No. 133 on Modem Media's earnings.
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BUSINESS
The following Business section contains forward-looking statements, which
involve risks and uncertainties. Modem Media's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
Modem Media provides marketing programs that are delivered over the Internet
and other electronic media, and that facilitate two-way communication between
its clients and their customers. Modem Media refers to these programs in our
industry as digital interactive marketing solutions. By developing marketing
programs that incorporate advanced communication technologies, Modem Media
enables its clients to establish, retain and manage customer relationships.
Marketing programs offered by Modem Media include the design and implementation
of electronic business programs that utilize the Internet to enable its clients
to acquire, communicate with and service customers, thereby increasing the
value of their globally-recognized brands. Modem Media combines its substantial
expertise in strategic marketing, creative design and digital technology to
deliver on a worldwide basis a complete range of digital interactive marketing
services, including strategic consulting and research, website design,
electronic commerce and electronic customer communication services, interactive
advertising and promotions, and data collection and analysis. For visual
examples of Modem Media's interactive marketing services in action, please see
the screen shots on the inside front cover of this prospectus.
Modem Media's marketing programs are designed to enable its clients to target
narrowly-defined market segments, provide their customers with detailed product
and service information, sell products and services, and provide post-sale
customer support electronically, and promote consumer interest in their entire
product lines. Marketing programs developed by Modem Media are delivered
primarily through the Internet, but also through other digital channels such as
corporate intranets, proprietary online services, CD-ROMs and interactive
kiosks. Modem Media has received numerous industry awards for its interactive
marketing campaigns, websites, banner advertisements and CD-ROMs, including the
Zima.com campaign and website, the AT&T Olympic Games Connection Website, the
AT&T "Intermercial" Campaign, the AT&T Worldnet CD-ROM, the iVillage.com "About
Work" campaign, the Sony PlayStation campaign and the Diet Pepsi "Convert a
Million" campaign. In 1998, Modem Media won the "Interactive Agency Of The
Year" award from the Internet Advertising Bureau, a trade association, and
Modem Media is the only company to win two consecutive "CASIE" awards for
interactive marketing.
Modem Media focuses on promoting long-term client relationships by devising
programs that can be integrally linked to its clients' business functions.
Modem Media believes that interactive technologies, which provide its clients
with the ability to establish highly specific, direct communications with their
customers, are becoming an increasingly important component of successful
marketing strategies. Accordingly, Modem Media works primarily with a select
group of established Fortune 500 clients committed to interactive marketing, as
well as companies with new online business models. For the nine months ended
September 30, 1998, our ten largest clients with whom we have a continuing
relationship measured by revenue were: AT&T; BancBoston Robertson Stephens;
Citibank; Delta Air Lines; Intel; JC Penney; John Hancock; Kraft; Sony and
Unilever.
Modem Media's predecessor, the Modem Partnership, was founded more than ten
years ago by pioneers in interactive marketing and electronic commerce. In
1987, the founders of the Modem
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Partnership created the first interactive marketing communications company, by
delivering interactive electronic commerce applications that allowed clients to
engage their prospective and current customers in two-way marketing-oriented
online communication. Modem Media combines the Modem Partnership with Northern
Lights Interactive and the strategic interactive marketing operations of Poppe
Tyson. Modem Media currently serves more than 30 clients through its global
network of seven offices in North America, Europe and Asia. Additional
information regarding our operations in different geographic regions is set
forth in Note 11 of Notes to Consolidated Financial Statements set forth
elsewhere in this prospectus. Modem Media had pro forma revenues in 1997 and
for the nine months ended September 30, 1998 of $29.4 million and $30.4
million, respectively. See Note 11 of Notes to Consolidated Financial
Statements of Modem Media . Poppe Tyson, Inc. and Subsidiaries.
Industry Background
Modem Media believes that the emergence of the Internet has stimulated demand
for high quality, cost effective digital interactive marketing solutions. Modem
Media believes there are a number of trends that are currently shaping the
marketing communications needs of its clients. These trends include the
following:
Growth of the Internet and Demand for Delivery of Services Online
The Internet has experienced unprecedented growth in recent years and this
growth is expected to continue. According to International Data Corporation
("IDC"), the number of Internet users worldwide will grow from an estimated 100
million in 1998 to an estimated 320 million in 2002. Several factors have
contributed to the growth of the Internet, its increasing value to users and
its adoption as a vehicle for commerce, including:
. the large and growing number of personal computers in homes and
businesses;
. improvements in network infrastructure and capacity, which have produced
increases in performance levels and speed;
. easy, low-cost access to the Internet;
. global awareness of the Internet among consumer and business users; and
. the rapidly expanding availability of online content and commerce.
The acceptance of the Internet as a global communications medium has driven
demand for digital content which can be accessed online. Similarly, the growing
use of the Internet as a channel for communication and commerce has made it
possible to use digital content to provide services to users online and over
the Internet, which Modem Media refers to as digital services. Digital services
can be easily developed, updated, manipulated and distributed either broadly or
to targeted audiences. The rapid development of the Internet and other
technologies that facilitate these services is having a profound impact on the
development and delivery of customer acquisition, retention, and loyalty
solutions and on the conduct of commerce.
Rapid Growth of E-Business and Internet Advertising
The Internet is dramatically affecting the methods by which consumers and
businesses are evaluating and buying goods and services, and by which
businesses are providing customer service. The Internet provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers with a broad selection, increased pricing power and
unparalleled convenience. As a result,
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the volume of business transacted on the Internet is growing. IDC estimates
that business to consumer commerce on the Internet will grow from approximately
$5 billion in 1997 to approximately $95 billion in 2002 and business to
business commerce on the Internet will grow from approximately $7 billion in
1997 to approximately $331 billion in 2002.
The Internet is an important medium for advertisers due to its interactive
nature, global reach and rapidly growing audience, as well as the expected
increase in online commerce. Unlike advertising on traditional mass media, the
Internet gives marketers the potential to target advertisements to broad
audiences or to selected groups of users with specific interests and
characteristics. These features enable the development and delivery of
customized and targeted marketing programs and communications services that
incorporate digital data and advanced interactive features to inform, engage,
entertain and facilitate commerce with the target audience. The Internet also
allows advertisers and direct marketers to measure the effectiveness and
response rates of advertisements and to track the demographic characteristics
of Internet users in real time. Furthermore, unlike traditional media, which
permit consumers only passive reception of communications, the Internet enables
consumers to respond instantaneously to marketing messages. The interactive
nature of the Internet enables marketers to better understand potential
customers, by providing a two-way channel of communication between marketers
and consumers. In addition, the great speed at which communication takes place
between marketer and consumer over this new Internet channel provides marketers
with the added ability to change messages rapidly and cost-effectively in
response to customer interests and behavior. The unique capabilities of online
advertising, the growth in online traffic and the favorable demographics of
Internet users have led to a significant increase in online advertising.
Jupiter Communications estimates that total spending on the placement of
advertisements online in the United States in 1997 was $940 million and expects
this amount to grow to $4.4 billion in 2000.
Increased Emphasis on Consistent Global Marketing for Increased Brand Awareness
Recognition of the importance of building brands and conducting commerce on a
global basis has produced significant growth in demand for comprehensive global
interactive marketing and communication services by large corporate clients. As
companies expand their operations throughout the world, they seek to extend the
strength of their domestic brands. Critical to this strategy is the ability to
execute a consistent brand development and customer management program on a
worldwide basis while at the same time responding to regional or local demands
or tastes. The Internet's worldwide reach provides a cost-effective medium for
implementing one-to-one, interactive global marketing programs. Consequently,
companies are increasingly seeking digital interactive marketing advisors with
strategic marketing expertise and global full-service capabilities to develop
coordinated, interactive global marketing programs. Zenith Media, a media
research and planning firm, estimates that worldwide advertising expenditures
will increase from $183.2 billion in 1986 to $469.3 billion in 2000, and that
the percentage of advertising outside North America will increase from 44.0% of
total worldwide advertising expenditures in 1986 to 56.6% in 2000.
Need for Full Service Digital Interactive Marketing Solutions for Global Brands
Modem Media believes that successful interactive marketing programs will
generate new customer relationships for its clients and significantly increase
the value of their brands. Current industry trends have resulted in heightened
demand for digitally distributed marketing communications services and
solutions. Interactive digital marketing programs help companies to improve
their customer relationships by permitting the effective and immediate
distribution of relevant services and information, providing
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instant and measurable feedback, and facilitating interaction between companies
and their customers. This information can be used by marketers to quickly
improve the effectiveness of brand marketing programs or to modify channel
management, products and services.
While the Internet offers numerous opportunities, global marketers face a
number of significant challenges in realizing the potential of the Internet as
a marketing channel. As businesses increase their use of the Internet, they
seek solutions and technologies that will allow them to deliver highly-targeted
messages, receive real-time feedback, benefit from business efficiencies and
capitalize on other potential advantages of online advertising and marketing.
Businesses seeking such comprehensive solutions have generally turned to three
sources: conventional advertising and marketing firms, project-oriented
interactive marketing firms and information technology service providers.
Generally, traditional advertising and marketing firms lack the extensive
technical skills and full service capabilities required to produce and
implement the increasingly complex solutions demanded by clients today.
Project-oriented interactive marketing firms lack the strategic account
management capabilities, full service architecture and global network of
offices required to establish long-term global relationships with clients.
Furthermore, information technology service providers lack the creative and
marketing skills required to deliver unique and compelling content. Management
believes that increasing demand for digital interactive marketing services,
combined with the inability of most of today's marketing firms and information
technology service providers to supply the full range of skills required to
effectively deliver such services, provides Modem Media with significant market
opportunities and positions it for future growth.
The Modem Media Solution
Modem Media is a full-service digital interactive marketing company that
creates new ways for its global clients to use innovative digital content and
technologies to increase the value of their brands. Modem Media combines its
expertise in strategic marketing, technology and digital design and production
to develop comprehensive digital interactive marketing solutions for its
clients on a worldwide basis. Modem Media's tailored marketing solutions are
designed to deliver innovative digital customer relationship programs,
establish ongoing communications and services with targeted customers, and
provide prompt feedback on the overall effectiveness of interactive marketing
campaigns. Modem Media's solutions offer clients the following benefits:
Long-Term Strategic Marketing Relationships. Modem Media deploys marketing
professionals responsible for individual client relationships, who focus on
developing interactive marketing solutions for companies seeking to build
global brand equity. In developing strategic solutions, Modem Media works
closely with the senior management of its clients to devise programs that can
be integrally linked to a client's business functions. By embedding its
programs into a client's overall marketing strategy, Modem Media believes it
effectively positions itself to offer ongoing value-added services to
continuously supplement and enhance existing solutions and thereby cultivate
long-term client relationships. Modem Media's methodology in devising a digital
interactive marketing solution consists of:
. an initial assessment of the client's overall objective;
. the pursuit of this objective through a combination of website design, e-
business implementation and advertising and promotions; and
. the monitoring and analysis of the effectiveness of these implemented
programs to continuously enhance and improve the overall marketing
strategy.
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Modem Media believes that this methodology has a proven track record of
delivering value to clients and is an important factor in helping clients
develop and manage customer relationships and build brand equity.
Full Service Offering Framework. Modem Media offers comprehensive services
for clients seeking to create innovative marketing and customer management
programs incorporating advanced digital media and communications technologies.
Modem Media offers its clients a wide range of digital interactive marketing
services such as strategic consulting and research, website design, electronic
commerce and electronic customer communication services, interactive
advertising and promotions and data collection and analysis. By offering these
services Modem Media has positioned itself to develop and manage all aspects of
a client's interactive marketing strategy and implement needed programs on an
ongoing basis.
Superior Design and Execution Capabilities. Modem Media believes its
substantial capabilities in marketing strategy, its interactive media
expertise, its creative excellence and its award winning technical design and
production skills provide it with significant competitive advantages. In
particular, Modem Media attempts to provide, and has received numerous awards
for, creative and technology solutions that meet or exceed the highest
standards of service in the industry. In order to maintain high levels of
creativity and quality, Modem Media places great importance on recruiting and
retaining talented employees. In addition to its design capabilities, Modem
Media believes that its innovative use of sophisticated technology has enabled
it to provide superior marketing communications services. Modem Media's
development staff continues to design tools and applications to provide
marketing communication services quickly and efficiently. Modem Media has been
responsible for a number of innovations in the digital interactive marketplace,
including the pioneering of Internet advertising; the development of online
research and data analysis capabilities; the implementation of inbound e-mail
programs, Java-enabled web banner ads and instant win promotions online; the
development of customized targeted marketing programs; and the development of
customer relationship management programs.
Extensive Global Network. Modem Media provides its services through a network
of offices and professional staff in seven cities throughout North America,
Europe and Asia which can be deployed to effectively create and support a
client's worldwide interactive marketing campaigns. In addition, Modem Media
aggregates and preserves its best practices, technologies and creative work
from each engagement to consistently leverage and apply the capabilities and
experiences of the entire Modem Media . Poppe Tyson organization. Through its
network of local offices, Modem Media believes it can implement global
marketing campaigns that articulate consistent brand images while at the same
time addressing local and regional marketing demands or tastes. Approximately
12.0% of Modem Media's total revenues in the nine months ended September 30,
1998 were attributable to its international operations. See Note 11 of Notes to
Consolidated Financial Statements of Modem Media . Poppe Tyson, Inc. and
Subsidiaries.
Strategy
Modem Media's objective is to be the leading provider of digital interactive
marketing solutions. The key elements of Modem Media's strategy include the
following:
Develop and Maintain Long-Term Client Relationships. Modem Media has been
able to use its comprehensive approach to digital interactive marketing
solutions as an effective tool in forming its client relationships. Modem Media
provides a wide range of interactive marketing solutions to a core group of
clients rather than providing a limited number of services to an extensive
client base. As
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part of this strategy, Modem Media's account professionals pursue close
relationships with each client's senior management. For example, Modem Media's
relationship with JC Penney began in 1988. Modem Media's relationship with AT&T
began in 1992 and has expanded to its current status with Modem Media acting as
AT&T's interactive agency of record since 1995. Modem Media has also developed
ongoing, long-term relationships with Citibank, Delta Airlines, IBM, and John
Hancock, among other companies. Modem Media intends to continue to leverage its
experience and expertise to continue to build long-term client relationships.
Maintain Innovative Approach to Digital Interactive Marketing
Solutions. Since its founding, Modem Media has combined its full service
interactive marketing solutions with technology expertise to provide innovative
solutions to its clients. Modem Media intends to continue the development of
new service offerings, the establishment of strategic relationships with
leading technology companies to improve and expand service offerings, and the
rapid adoption of emerging technologies, including Internet tools, data
management solutions and customization technologies. Modem Media believes that
its innovative approach to digital interactive marketing solutions provides it
with a competitive advantage in the emerging digital interactive marketing
industry.
Continue to Attract and Retain Superior Professional Talent. Modem Media
believes that its culture is particularly attractive to professionals seeking
to use advanced technology to develop digital interactive marketing solutions.
Modem Media places a premium on innovation, and encourages its employees to
apply their creativity in the conception, design and implementation of
marketing programs for its clients. Modem Media recognizes that to maintain its
position as a leading digital interactive marketing organization, it must
continue to recruit and, more importantly, retain qualified and experienced
professionals with both creative and technological skills, which are currently
in high demand. As part of this strategy, Modem Media has implemented several
programs including an aggressive recruiting campaign, competitive compensation
packages, a company-wide incentive stock option plan, an internal employee
referral program, and an extensive in-house training program.
Continue to Expand Global Office Network. Modem Media believes that existing
and new clients will increasingly demand international marketing services to
help manage customer relationships and build global brand equity. In
anticipation of this demand, Modem Media is continuing to build its network of
offices. Modem Media believes that in the emerging market for providing digital
interactive marketing solutions, rapidly building a critical mass of strategic,
technical and creative talent will provide Modem Media with a substantial
competitive advantage. Modem Media believes that by expanding its geographic
presence, particularly in Europe and Asia, it will be better positioned to
provide its clients with comprehensive interactive global marketing solutions.
Services
Modem Media focuses on making its digital interactive marketing solutions an
integral part of its clients' marketing strategies in order to promote long-
term client relationships. Modem Media combines its strategic interactive
marketing knowledge with its technical expertise to provide high impact, cost-
effective digital interactive marketing and customer management solutions.
Modem Media uses dedicated client service teams with experience in consulting,
creative, media, technology and production disciplines, led by experienced
account directors, to provide its integrated digital marketing communication
services. Modem Media's proven processes and methodologies for executing client
work, developed over a decade, enable it to undertake interactive projects,
monitor progress and measure the return on its clients' investment in
interactive marketing campaigns. Modem Media incorporates client feedback into
successive strategic marketing campaigns and programs to further improve and
build upon online customer relationships.
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Client initiatives are guided by Modem Media's strategic account management
team through a four-point service framework that includes strategic consulting
and research, strategy development and planning, interactive marketing program
execution, and continuous program measurement and data analysis, as illustrated
below:
[FLOW CHART DEPICTING STRATEGIC ACCOUNT MANAGEMENT]
Strategic Consulting and Research. Modem Media provides clients with
diagnostic analysis to guide their enterprise-wide interactive marketing
efforts. Services include custom research, online marketing research, and
strategic consulting. These services are aimed at:
. identifying and prioritizing interactive opportunities to strengthen
customer relationships;
. creating strategies to position and brand products in order to create a
competitive advantage; and
. reducing marketing communication costs through the creative application
of interactive technologies.
In addition, a rigorous methodology is used to evaluate current customers
reached by the Internet. Modem Media's strategic business consultants and
research professionals prepare clients to develop interactive communication
programs that effectively and efficiently connect the clients' customers to
their products, services, market position and brand equity.
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Strategy Development and Planning. Modem Media works with clients to define
interactive marketing strategies and plans, and seeks to identify concepts that
will maximize these strategies. In formulating detailed program plans, Modem
Media combines creative marketing concepts and interactive technology to
provide customized marketing programs for its clients. The concepts and plans
articulated by Modem Media provide the basis for the development of interactive
marketing programs.
Interactive Marketing Program Execution. Based on the interactive strategy
and concepts, Modem Media works with clients to jointly design specific
solutions, determine roles and responsibilities for development work, and
manage the use and flow of data in creating interactive marketing programs
distributed across the following channels:
. websites, where Modem Media creates or services entire websites for
clients;
. banner advertising, where Modem Media creates discrete "banner" size
advertisements for clients to be posted on the websites of others; and
. e-mail, where Modem Media designs and enables client advertising by means
of both in-bound and out-bound electronic mail messages.
Modem Media assembles a development team consisting of account, creative,
production and media professionals to service clients and execute programs. The
team then helps define the components for the solutions and the required data
from client systems, and performs the required systems integration to architect
and build the solutions. Modem Media's programs may incorporate advertising and
promotion services, and are often enabled for e-commerce, e-care and other
value added utilities known in our industry as "e-business." Modem Media
designs, develops, creates, maintains and updates the various components of
each solution as required, consistent with the client's interactive strategy on
a global basis. Modem Media believes that the key to successful interactive
marketing is the incorporation of a participatory experience through services
and utilities that seamlessly integrate the brand into the three platform
channels (website, banner advertising and e-mail) that occupy the majority of
the client's customers time online.
Program Measurement and Data Analysis. Modem Media's data specialists
collect, manage and analyze data that results from interactions between
clients' marketing programs and their customers. Through usage and yield
analysis of traffic and sales transactions, Modem Media is able to gather
valuable insights into the effectiveness of digital marketing communication
programs as well as the segmentation of customer profiles. This acquired
knowledge of customer behavior and transaction patterns enables Modem Media to
further devise, design and implement targeted marketing programs aimed at
increasingly efficient customer acquisition and retention and additional sales
and marketing opportunities.
Continuous Program Improvement. Through strategic marketing initiatives and
ongoing programs for its clients, Modem Media has positioned itself to gain
insights into its clients' businesses. Modem Media uses the information it
collects in performing program measurement and data analysis to help its
clients improve their customer management programs and channels, continuously
improve the effectiveness of their digital interactive marketing programs, and
adapt and deploy these programs globally. Modem Media believes that its
continuous program improvement builds the foundation for recurring client
business.
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Modem Media is committed to establishing and maintaining high-quality
creative and technical standards for its digital interactive marketing
services. Modem Media has earned the following awards for its digital
interactive solutions:
<TABLE>
<CAPTION>
Award Client/Project Year
- ----------------------- ----------------------------------------------- ----------
<S> <C> <C>
AMA Spire Award Keystone Fishing Hotline 1992
Direct Marketing Diet Pepsi "Convert a Million" campaign 1993
Association (DMA) Gold
Echo Award John Hancock Silhouettes Certificate of 1998
Outstanding Achievment
AT&T Online/Offroad Sweepstakes Certificate 1998
Mentadent Sampling Program Certificate 1998
American Advertising Zima.com 1995; 1996
Award (ADDY)
Intel Rich advertising campaign 1998
John Hancock "Silhouettes" campaign 1998
iVillage "About Work" campaign 1998
AT&T "Consumer Catalog" 1998
Coalition for AT&T "Intermercial" campaign 1996
Advertising Supported
Information and AT&T Olympic Games Website 1996
Entertainment (CASIE)
Zima.com 1996
John Hancock Website 1997
John Hancock Silhouettes 1998
Kraft Cheese Wiz Campaign 1998
Mar.com--Best WWW AT&T Olympic Games Connection Website 1997
Marketing Campaign
--Best CD Rom/Floppy AT&T Worldnet CD ROM 1997
Disk-Based Ad
--Best Banner Series iVillage.com "About Work" campaign 1997
New York 1-800-CALL-ATT 1997
Festivals/Interactive
Multimedia
Competition IBM Think Magazine 1998
Sony PlayStation 1998
Hasbro Interactive 1998
iVillage "About Work" Gold Medal 1998
AT&T "Running Man" Finalist Certificate 1998
John Hancock "Silhouettes" Finalist Certificate 1998
The One Show Silver Lycos Banner Campaign 1998
Pencil
The One Show Bronze John Hancock "Silhouettes" campaign 1998
Pencil
The One Show Merit Rugby Football Union 1998
Award
Sony PlayStation 1998
Hasbro Interactive 1998
Cannes Cyberlions Finalist Certificate for AT&T Catalog 1998
Finalist Certificate for Intel "Reebok-RIA" 1998
The Web Awards
--Best Sports Site InsideEdge.com 1998
--Outstanding Website 3Com Big Picture 1998
Award
Compaq at home 1998
--Standard of Kraft Cheez Whiz 1998
Excellence
AT&T World Traveler 1998
Adweek Top Ten 1995-1998
Interactive Agencies
IAB Agency of the Year 1998
Award
Momentum Awards "Turbo 1998
Agency of the Year"
Red Herring Top Five 1998
Interactive Agencies
</TABLE>
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Modem Media Clients
Modem Media's clients consist primarily of organizations whose businesses are
impacted by rapidly changing digital media and interactive communications
technologies, and range from Fortune 500 companies with brands to companies
with new online business models. Modem Media's services for these clients
include strategic marketing assignments as well as global digital interactive
marketing and sales programs combining various platforms and services. Our
results of operations and our business depend on our relationship with a
limited number of large clients. Set forth below is the percentage of revenues
on a pro forma basis during the fiscal year ended December 31, 1997 and the
nine months ended September 30, 1998 for each of the clients that accounted for
more than 10% of our revenues and for our ten largest clients combined:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
Client December 31, 1997 1998
------ ----------------- -----------------
<S> <C> <C>
AT&T..................................... 31.4% 20.4%
Citibank................................. (less than 10%) 12.0
Ten largest clients combined............. 74.4 76.5
</TABLE>
The following is a list of our ten largest clients measured by revenues for
the nine months ended September 30, 1998 with whom Modem Media has a continuing
relationship, showing the year in which we began providing services to each
client and the primary industries served by these clients:
Communications Financial Services
AT&T (1992) BancBoston Robertson Stephens (1998)
Citibank (1997)
Computer Hardware John Hancock (1996)
Intel (1997) Travel
Delta Air Lines (1995)
Consumer Products/Retail
Kraft (1996)
JC Penney (1989)
Sony (1997)
Unilever (1997)
Modem Media's clients ordinarily hire Modem Media on an assignment basis
rather than on a retainer basis. Accordingly, Modem Media does not have long-
term contractual relationships with its clients. As a result, Modem Media's
clients generally have the right to terminate their relationships with Modem
Media without penalty and on relatively short or no notice. Once an assignment
is completed there can be no assurance that a client will engage Modem Media
for further services. For example, Modem Media provides services to AT&T and
Citibank pursuant to one-year, renewable contracts that provide the general
parameters of the relationship only. AT&T or Citibank may terminate its
agreement with Modem Media upon 90 days' prior written notice to Modem Media.
While Modem Media is not aware of plans by any of its significant clients to
terminate their use of Modem Media's services, the termination of Modem Media's
business relationship with any of its significant clients, including AT&T or
Citibank, or a material reduction in the use of Modem Media's services by a
significant client, could have a material adverse effect on Modem Media's
business, financial condition or results of operations.
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Conflicts of interest between clients and potential clients are inherent in
the marketing communications industry. Moreover, as is customary in the
marketing communications industry, we have entered into formal exclusivity
arrangements with many of our largest clients that restrict our ability to
provide services to competitors of these clients. More than 40% of our revenues
in the nine months ended September 30, 1998 were derived from clients with whom
we have entered into formal exclusivity arrangements. Even in the absence of
such arrangements, we have in the past been, and may in the future be, unable
to take on new clients because such opportunities would require us to provide
services to direct competitors of our existing clients.
Client Case Studies
Set forth below are descriptions of strategic interactive marketing solutions
developed by Modem Media for three of its ten largest clients for the nine
months ended September 30, 1998. Modem Media has provided strategic interactive
marketing solutions to each of these clients since at least 1996 and each
relationship has involved all aspects of Modem Media's service offerings
described above under "--Services." Accordingly, Modem Media believes that the
marketing solutions described below are representative of the services and
solutions it generally offers to its clients.
AT&T
AT&T is one of the world's largest providers of communications services,
including voice, data and video telecommunications, to large and small
businesses, consumers and government entities. Modem Media believes that AT&T
has long viewed the Internet as an essential strategic channel to build its
brand awareness, and in particular has been very focused on coordinating its
branding efforts among advertising channels to preserve the integrity of its
brand and present a consistent image. AT&T hired Modem Media in 1992 to access
Modem Media's full service architecture and its strategic approach to using the
Internet in the context of AT&T's overall strategy for building and maintaining
its valuable brand. Modem Media believes that as a result of its initiatives,
AT&T is one of the largest advertisers on the Internet today.
AT&T selected Modem Media as its interactive agency of record in 1995 based
on its belief that a long-term relationship with one interactive marketing firm
would produce the best interactive marketing programs. Modem Media's primary
responsibilities for AT&T have included creation and management of interactive
advertising and marketing campaigns, brand positioning, creative standards
development, media planning and buying, research and competitive analysis.
Modem Media's responsibilities extend through several of AT&T's business units.
Modem Media's relationship with AT&T has included such projects as developing
an electronic toll-free directory in 1992, providing strategic consulting for
interactive television market research in 1993, developing several fax-on-
demand systems for AT&T's Business Marketing Unit in 1994, contributing to a
market strategy for AT&T WorldNet Service launched in 1995 and establishing
AT&T's Centennial Olympic Games Web site, CD-ROM and "intermercial" campaign in
1996. In addition, Modem Media launched the online catalogue for AT&T's
consumer and small business markets in 1997, and created a new and creative
branding program for AT&T during the 1998 Nagano Olympics, using an ad server
network to deliver sequential targeted advertising based on prior user activity
in electronic trading card rooms. Modem Media believes that AT&T has
experienced increased brand awareness, improved client acquisition and
retention and increased sales as a result of Modem Media's marketing programs.
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JC Penney
JC Penney is one of the largest retailers in the United States. JC Penney
first hired Modem Media in 1988, seeking to ensure that its catalog customers
had an online alternative to purchase its retail products. Management believes
that JC Penney was looking in particular for a marketing firm that had
experience with online marketing and commerce, and hired Modem Media in part
because of its innovative work in establishing GE's online store, GEnie, and
its experience in establishing Prodigy's online commerce offering.
The goal of Modem Media's initial project was to build an online brand image
for JC Penney and ultimately draw shoppers to the site. In the process, Modem
Media had to create a new reporting system for the digital channel and create a
solution that could be integrated with JC Penney's existing systems. Modem
Media's work included the creation of customized systems and tools with which
JC Penney could measure demand for its products over time, and the formation of
a technology development partnership with JC Penney Information Systems that
co-developed custom systems integration solutions and a targeted media plan
that evolved into a number of affiliated programs. Modem Media also created a
multi-faceted Internet platform that allowed for personalization, custom
shopping, easy searching, gift reminder services, and the ability to request
catalogs online. Since its initial assignment, Modem Media has provided JC
Penney with consulting on corporate strategy, Internet-related business, and
organizational and operational design, performed marketing analysis of site
traffic and sales tracking, established media partnerships, and carried out
online merchandising, marketing and sales programs.
John Hancock
John Hancock, a diversified financial services and insurance provider, offers
a variety of financial products ranging from life insurance, annuities, and
mutual funds to long-term care insurance coverage to both consumers and
businesses worldwide. In late 1996, John Hancock wanted to take advantage of
the Internet as a new channel of distribution directed at high-income, well
educated consumers, and to modernize its brand image. John Hancock was facing
new competition due to deregulation in the financial services industry, as well
as decreasing interest in insurance products in favor of investments such as
mutual funds. John Hancock hired Modem Media in 1997 to accomplish the
following objectives: (i) reposition John Hancock as a balanced provider of
both insurance and investment products and services; (ii) generate qualified
leads for Hancock's agent/broker force; (iii) establish the Internet as a new
channel for selling products via e-commerce; and (iv) modernize John Hancock's
brand image.
Modem Media developed an interactive marketing strategy designed to educate
the consumer about financial planning for major life events, and emphasizing
John Hancock's image as a trusted advisor. The solution was "Portrait
Planning," a powerful Web-based approach for step-by-step financial planning
that aided users in planning for the future. By answering a series of simple
questions, users could begin planning for a number of significant life events,
such as the purchase of a house, retirement, or a child's education. The
marketing program built awareness of John Hancock's products, bonded consumers
to the John Hancock brand, and created a database of potential clients. In
order to better target "Portrait Planning," Modem Media devised its innovative
"Silhouettes" campaign, which used targeted banner ads to introduce "Portrait
Planning" to a more focused audience and thereby produce quantifiable results.
By tracking consumer responses to its online campaigns for John Hancock, Modem
Media was able to create an extensive database of potential clients with many
of their financial needs outlined. Modem Media believes that the
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<PAGE>
Internet has had now become one of Hancock's principal sources of new
customers. Furthermore, Modem Media has been advised by John Hancock that new
customers gained through the Internet have generally purchased large and
comprehensive insurance and annuity products and generate higher average fees
for John Hancock than customers gained from any other direct or
indirect channel.
Strategic Relationships
Modem Media has entered into several strategic relationships with other
companies whose products or services are included as part of the interactive
marketing solutions that Modem Media delivers to its clients. Modem Media seeks
to identify strategic partners whose products or services complement Modem
Media's program offerings and enable clients to engage in more effective
digital interactive marketing. As part of its strategic relationships, Modem
Media participates in the development and specification of its partners' new
and existing product and service offerings in order to enhance their utility
for Modem Media's clients.
Use of Technology
Modem Media's background in developing e-commerce solutions for online
services, the skills of its technology professionals and its legacy of firsts
have helped Modem Media to utilize technology to further the business and
marketing objectives of its client base. Modem Media utilizes technology to
implement its clients' interactive marketing efforts and to help its clients
manage their customer relationships.
Modem Media makes extensive use of third-party technologies and applications
as part of the solutions it engineers for its clients. Modem Media has utilized
third-party technology in order to perform several essential business and
marketing functions for its clients, including credit card processing, ad
serving, e-mail management, data warehousing, order fulfillment and data
processing. Utilizing third-party technology greatly reduces the cost of the
solutions Modem Media provides for its clients, while increasing their
scalability as well as the speed with which Modem Media can bring them to
market. Modem Media intends to continue incorporating advanced third-party
technologies into its service offerings as the interactive marketing needs of
its clients evolve.
The technologies used in digital interactive marketing are developing rapidly
and are characterized by evolving industry standards as well as frequent new
product and service introductions and enhancements. There can be no assurance
that the technologies we use and the expertise gained in those technologies
will continue to be applicable in the future. There can be no assurance that we
can correctly identify which technologies will achieve market acceptance, that
such new technologies will be made available to us or that such technologies
can be economically applied by us on a timely basis. The inability to identify
new and existing technologies and apply expertise in a timely manner to
subsequent projects and respond to both evolving demands of the marketplace and
competitive product and service offerings could have a material adverse effect
on our financial performance.
Management Information Systems
Modem Media is currently implementing various aspects of its service delivery
infrastructure, which includes financial and project management systems. Modem
Media believes that these systems will enhance its ability to manage its
engagements and monitor the utilization of its professional staff. In addition,
Modem Media is in the process of installing a secure global network which
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<PAGE>
provides access to Modem Media's proprietary corporate memory application,
which management believes will significantly improve consistent handling of
clients and business development efforts globally. The above, coupled with
Modem Media's existing proprietary process for service delivery across Modem
Media, will further improve client and business management globally.
Competition
The market for our services is very competitive and highly fragmented and is
characterized by pressures to incorporate new capabilities, accelerate job
completion schedules and reduce prices. We face competition from a number of
sources, including traditional advertising and marketing firms, project-
oriented interactive marketing firms and information technology service
providers. Modem Media's primary competitors include iXL, Agency.com, Grey New
Technologies, Think New Ideas and USWeb/CKS. Many traditional advertising
agencies have also started to develop digital media and interactive
communications capabilities. In this regard, True North may decide to provide
its traditional advertising clients with interactive marketing solutions that
compete with the services provided by Modem Media. Moreover, certain project-
oriented interactive marketing firms and information technology service
providers provide Internet consulting, corporate identity and packaging,
production, advertising and website design services, and are technologically
proficient in the digital media and interactive communications fields. In
addition, in-house marketing and information systems departments and graphic
design companies compete with certain portions of our business.
Some of our competitors and potential competitors have longer operating
histories, longer client relationships, and greater financial, management,
technology, development, sales, marketing and other resources than we do.
Competition depends to a large extent on clients' perception of the quality and
creativity as well as the technical proficiency of our digital interactive
marketing services and those of our competitors. We also compete on the basis
of price and the ability to serve clients on a broad geographic basis. To the
extent we lose clients to our competitors because of dissatisfaction with our
services, or if our reputation is adversely impacted for any other reason, our
future operating performance could be materially and adversely affected.
There are relatively low barriers to entry in the digital interactive
marketing industry, primarily because it is a service industry that requires
minimal capital expenditures from new entrants. We expect that we will face
additional competition from new market entrants. There can be no assurance that
existing or future competitors will not develop or offer digital interactive
marketing services and products that provide significant performance, price,
creative, technological or other advantages over our services, any of which
could have a material adverse effect on our future operating performance.
Intellectual Property
Modem Media's ability to anticipate and rapidly adapt its services to
capitalize on emerging technologies is important to establishing and
maintaining a technology leadership position. There can be no assurance that
Modem Media will correctly identify which technologies will achieve market
acceptance, that such new technologies will be made available to Modem Media or
that such technologies can be economically applied by Modem Media on a timely
basis. Despite Modem Media's efforts to control access to its technologies, it
may be possible for a third party to copy or otherwise obtain and use Modem
Media's technologies without authorization, or to develop similar or superior
services or technologies independently. In addition, effective copyright, trade
secret and patent protection may be unavailable or limited in certain foreign
countries. Litigation may be necessary in the future to enforce Modem Media's
intellectual property rights, to protect Modem
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Media's trade secrets, to determine the validity and scope of the rights to
technologies of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on Modem Media's business,
financial condition or results of operations.
Modem Media . Poppe Tyson, Inc., Modem Media, Poppe.com, and Northern Lights
Interactive are trademarks or tradenames of Modem Media.
Government Regulation
The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth in and
fairness of advertising. Modem Media must comply with Federal Trade Commission
regulations with respect to the marketing of products and services and similar
state regulations. In addition, there has had been an increasing tendency in
the United States on the part of businesses to resort to the judicial system
to challenge comparative advertising of their competitors on the grounds that
the advertising is false and deceptive.
Although there are currently few laws or regulations directly governing
access to or commerce on the Internet, due to the increasing popularity and
use of the Internet, a number of laws and regulations may be adopted regarding
user privacy, pricing, acceptable content, taxation and quality of products
and services. In addition, the government has been requested to regulate and
impose fees on Internet service providers and online service providers in a
manner similar to long distance telephone carriers. The adoption of any such
laws or regulations could affect the costs of communicating on the Internet
and adversely affect the growth in use of the Internet, or decrease the
acceptance of the Internet as a communications and commercial medium, which
could in turn decrease the demand for Modem Media's services or otherwise have
a material adverse effect on Modem Media's business, results of operations and
financial condition.
Employees
In order to maintain high levels of creativity and quality, Modem Media
places great importance on recruiting and retaining talented employees. As of
December 31, 1998, Modem Media had approximately 400 full-time employees.
Modem Media also hires temporary employees and contract service providers as
necessary. None of Modem Media's employees is represented by a labor union,
and Modem Media considers its employee relations to be good.
Modem Media's success will depend to a significant degree on the continuing
contributions of members of its senior management, including Gerald M.
O'Connell, its Chief Executive Officer, and Robert C. Allen, II, its
President, and its key account management, marketing, creative and technology
development personnel, as well as its ability to attract and retain highly
skilled personnel in all job categories. Competition for qualified personnel
in the digital interactive marketing industry is intense. Modem Media has at
times experienced, and continues to experience, difficulty in recruiting
sufficient numbers of qualified personnel. Although Modem Media's executive
officers have entered into employment agreements with Modem Media which
contain non-competition provisions, there can be no assurance that any of
these executives will not voluntarily terminate their employment with Modem
Media. The loss of the services of any senior management or other key employee
or the inability to attract and retain additional personnel as required could
adversely affect Modem Media's business, financial condition or results of
operations. If one or more of Modem Media's key employees resign from Modem
Media to join a competitor or to form a competing company, the loss of such
personnel or the related loss of potential clients, and the fact that there
can be no assurance
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that Modem Media would be able to prevent the unauthorized disclosure or use of
its technical knowledge, practices, procedures or client lists, could have a
material adverse effect on Modem Media's business, financial condition or
results of operations. See "Risk Factors--We depend on our key management
personnel for our future success."
Facilities
Modem Media's headquarters are located in two facilities in Westport,
Connecticut and use approximately 40,000 square feet of total leased office
space. The leases expire in January of 1999 and July 31, 2000, respectively. To
combine its existing operations, Modem Media has secured a lease for a 54,300
square foot facility for occupancy in January 1999. Modem Media has an option
in 2000 to enter into a 10-year lease for an additional 25,000 square feet in
this facility. Modem Media maintains additional offices in New York, Chicago,
San Francisco, Toronto, Hong Kong and London.
Modem Media believes that its current facilities, along with facilities
currently subject to negotiation, will be adequate to meet Modem Media's
requirements for the foreseeable future. There can be no assurance that Modem
Media will be successful in obtaining additional space, if required, or if such
space is obtained that it will be on terms acceptable to Modem Media.
Legal Proceedings
Modem Media is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers and directors of Modem Media as of the date of this
prospectus.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Gerald M. O'Connell (1)............. 37 Chief Executive Officer and Director
Douglas C. Ahlers................... 38 Executive Vice President
Robert C. Allen, II................. 31 President and Director
Steven C. Roberts................... 37 Chief Financial Officer
Donald M. Elliman, Jr. (1).......... 53 Director
Donald L. Seeley (1)................ 54 Director
Theodore J. Theophilos.............. 45 Director
</TABLE>
- --------
(1) Member of Public Offering Committee.
Gerald M. O'Connell has served as Chief Executive Officer and a director of
Modem Media since November 1998. From October 1996 to November 1998, Mr.
O'Connell was President and Chief Operating Officer and a director of Modem
Media. From 1987 to October 1996, Mr. O'Connell was a Managing Partner of the
Modem Partnership, which he co-founded in 1987. From 1986 to 1987, Mr.
O'Connell was Product Manager of CUC International, a consumer services
company, where he was responsible for Comp-u-Mall--an electronic shopping mall.
Mr. O'Connell received a B.A. in English and history from Middlebury College.
Mr. O'Connell is a director of the Direct Marketing Association.
Douglas C. Ahlers has served as Executive Vice President of Modem Media since
November 1998. From October 1996 to November 1998, Mr. Ahlers was President of
the Relationship Technology Group, a division of Modem Media, and a director of
Modem Media. From 1987 to October 1996, Mr. Ahlers was a Managing Partner of
the Modem Partnership, which he co-founded in 1987. From 1983 to 1987, Mr.
Ahlers served as Manager of Product Development of CUC International, a
consumer services company. Mr. Ahlers received a B.A. in sociology and theater
from the University of Rhode Island and an M.J. in journalism and
communications from Louisiana State University.
Robert C. Allen, II has served as President and a director of Modem Media
since November 1998. From October 1996 to November 1998, Mr. Allen was
President of a division of Modem Media and a director of Modem Media. From 1992
to October 1996, Mr. Allen served as a Managing Partner of the Modem
Partnership. From 1989 to 1992, Mr. Allen was the Director of Business
Development at the Modem Partnership. Mr. Allen received a B.A. in English from
Gettysburg College.
Steven C. Roberts has served as Chief Financial Officer of Modem Media since
August 1998. From January 1997 to August 1998, Mr. Roberts served in various
capacities with Modem Media, most recently as Vice President, Finance and
International Operations. From 1990 to January 1997, Mr. Roberts held various
management positions at a number of subsidiaries of United Technologies. From
1984 to 1989, Mr. Roberts served as Second Vice President of Corporate Finance
at Continental Bank. Mr. Roberts holds a B.A. in Economics from Middlebury
College and an M.B.A. in Finance and Production from the University of Chicago.
Donald L. Seeley has been a director of Modem Media since November 1998 and
has been Executive Vice President, Chief Financial Officer, of True North since
1997. From 1993 to 1997,
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Mr. Seeley was Chief Executive Officer of the Alexander Consulting Group. From
1988 to 1993, Mr. Seeley was Senior Vice President of Alexander & Alexander
Services Inc., the parent company of the Alexander Consulting Group. From 1986
to 1988, Mr Seeley was Vice President and Treasurer of United Airlines. Mr.
Seeley holds a B.S. in accounting and an M.B.A. from the University of Colorado
at Boulder, and is a Chartered Financial Analyst.
Theodore J. Theophilos has been a director of Modem Media since November 1998
and has been Executive Vice President, Corporate General Counsel, of True North
since 1996. From 1995 to 1996, Mr. Theophilos was Senior Vice President and
General Counsel of A.C. Nielsen Company, and from 1986 to 1995 was a partner of
Sidley & Austin (a law firm). Mr. Theophilos holds a B.A. and an M.A. from
Northwestern University and a J.D. from the University of Chicago.
Donald M. Elliman, Jr. has served as a director of Modem Media since November
1998, as a director of True North since May 1998 and as a director of Bozell
since 1991. Mr. Elliman is currently an Executive Vice President and director
of Time Inc. Mr. Elliman was the President of Sports Illustrated from September
1992 through January 1998 and has held various senior sales/marketing and
publishing positions with Time Inc. since 1967.
Messrs. O'Connell and Allen were elected to the Board of Directors of Modem
Media pursuant to an agreement with True North entered into in connection with
the formation of Modem Media in December 1996. Modem Media and True North
agreed in 1996 to cause each of Messrs. O'Connell and Allen to be elected to
Modem Media's Board of Directors as long as each serves as an executive officer
of Modem Media and until their collective ownership of Modem Media's Class A
common stock falls below certain levels. See "Description of Capital Stock--
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions."
Each officer serves at the discretion of Modem Media's Board of Directors.
There are no family relationships among any of the directors or officers of
Modem Media.
Modem Media's Board of Directors currently has two vacancies, which Modem
Media's Bylaws authorize the Board of Directors to fill. The Board of Directors
intends to appoint two persons who are not officers or employees of Modem Media
or True North to the Board of Directors within 90 days of the date of this
prospectus and is required to do so to maintain Modem Media's listing on the
Nasdaq National Market. If Modem Media does not add such independent directors
within 90 days following the offering, Modem Media could be delisted from the
Nasdaq National Market, which could have an adverse effect on the liquidity and
price of the Class A common stock.
Director Compensation
Effective upon consummation of the offering, Modem Media directors who are
not also employees of Modem Media or True North will be paid an annual retainer
of $10,000. Directors who are also employees of Modem Media or True North will
not receive any additional compensation for serving on the Board of Directors.
Committees of the Board of Directors
Modem Media's Board of Directors has a Public Offering Committee, which acts
in place of the Board on matters related to this offering. Such matters
include, without limitation, negotiation with the underwriters for the purpose
of determining the terms and pricing of the offering. The Public Offering
Committee consists of Messrs. O'Connell, Seeley and Elliman.
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Modem Media intends to establish an Audit Committee within 90 days following
this offering composed of at least two directors, which is required to maintain
Modem Media's listing on the Nasdaq National Market. No member of the Audit
Committee will be an employee of Modem Media or True North or a director of
True North. The Audit Committee will report to the Board regarding the
appointment of the independent public accountants of Modem Media, the scope and
fees of prospective annual audits and the results thereof, compliance with
Modem Media's accounting and financial policies and management's procedures and
policies relative to the adequacy of Modem Media's internal accounting
controls.
Compensation Committee Interlocks and Insider Participation
The Board of Directors intends to establish a compensation committee
comprised of independent directors that will make determinations regarding the
compensation of executive officers of Modem Media. In the past, compensation of
executive officers of Modem Media has been determined by directors of Modem
Media who were not officers of Modem Media. No interlocking relationship exists
between Modem Media's Board of Directors and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Limitation of Liability and Indemnification Matters
Modem Media's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. The Delaware General
Corporation Law provides that a corporation's certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a
director for monetary damages for breach of his or her fiduciary duties as a
director, except for liability for:
. any breach of the duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derives an improper personal
benefit.
Modem Media's Bylaws provide that Modem Media shall indemnify its directors
and officers and may indemnify its employees and agents to the fullest extent
permitted by Delaware law.
Modem Media has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in its Certificate of
Incorporation and Bylaws. Under these agreements, Modem Media is obligated to
indemnify its directors and officers for expenses, attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer of
Modem Media, any subsidiary of Modem Media or any other company or enterprise
to which the person provides services at the request of Modem Media. Modem
Media believes that these provisions and agreements are necessary to attract
and retain qualified individuals to serve as directors and officers. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling Modem Media pursuant to
the foregoing provisions, Modem Media has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of Modem Media where indemnification will
be required or permitted. Modem Media is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
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Executive Compensation and Employment Agreements
The following table sets forth information concerning the compensation
received for services rendered to Modem Media by its current Chief Executive
Officer and each of the other most highly-compensated executive officers of
Modem Media during the year ended December 31, 1998 whose total compensation in
fiscal 1998 equaled or exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus(5) Options
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Gerald M. O'Connell(1)
Chief Executive Officer......................... $300,000 142,500
Robert C. Allen, II(2)
President....................................... 300,000 142,500
Douglas C. Ahlers(3)
Executive Vice President........................ 212,500 --
Steven C. Roberts(4)
Chief Financial Officer......................... 174,000 60,454
</TABLE>
- --------
(1) Mr. O'Connell served as President and Chief Operating Officer of Modem
Media from January through November 1998. In November 1998, Mr. O'Connell
was appointed Chairman and Chief Executive Officer of Modem Media.
(2) Mr. Allen served as a division president from January through November
1998. In November 1998, Mr. Allen was appointed President of Modem Media.
(3) Mr. Ahlers served as President, Relationship Technology Group, from January
through June 1998. In June 1998, Mr. Ahlers was appointed Executive Vice
President of Modem Media.
(4) Mr. Roberts served as Vice President, Operations, of Modem Media from
January through August 1998. In August 1998, Mr. Roberts was appointed
Chief Financial Officer of Modem Media.
(5) Modem Media intends to pay a bonus to each of the executive officers for
services performed in fiscal 1998 based upon Modem Media's operating
performance during 1998. Such amounts have not yet been determined. In
fiscal 1997, Messrs. O'Connell, Ahlers, Allen and Roberts were paid bonuses
of $60,000, $60,000, $60,000 and $28,000, respectively.
The following table sets forth information as to options granted to the
executive officers during the year ended December 31, 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
Potential
Percent Realizable Value at
Number of Total Assumed Annual Rate
Securities Options of Stock
Underlying Granted to Appreciation for
Options Employees Exercise Option Term (3)
Granted(1) in Fiscal Price Per Expiration -------------------
Name (#) Year Share (2) Date 5% 10%
- ---- ---------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gerald M. O'Connell..... 142,500 13.8% $11.05 12/11/08 $990,509 $2,510,144
Robert C. Allen, II..... 142,500 13.8 11.05 12/11/08 990,509 2,510,144
Douglas C. Ahlers....... -- -- -- -- -- --
Steven C. Roberts....... 12,954 1.3 11.58 1/2/08 94,332 239,055
47,500 4.6 11.05 12/11/08 330,170 836,715
</TABLE>
- --------
(1) These options to purchase shares of Class A common stock were granted under
the Stock Option Plan and provide that the options vest as to 20% of the
underlying common stock on the date of grant and as to an additional 20%
per year thereafter.
(2) Options were granted at an exercise price equal to 100% of the fair market
value of Modem Media's Class A common stock on the date of grant, as
determined by the Board of Directors.
(3) This column shows the hypothetical gains or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full ten-year term of the options. The assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent Modem Media's estimate or projection of
future common stock prices.
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The following table sets forth information with respect to unexercised
options held by the executive officers as of December 31, 1998. No options were
exercised by the executive officers during fiscal 1998.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
December 31, 1998 at December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald M. O'Connell......... 43,700 136,800 $ -- $ --
Robert C. Allen, II......... 43,700 136,800 -- --
Douglas C. Ahlers........... 15,200 22,800 -- --
Steven C. Roberts........... 21,936 63,131 -- --
</TABLE>
- --------
(1) Calculated by determining the difference between the exercise price and the
deemed fair market value of the securities underlying the options at
December 31, 1998.
In December 1996, Modem Media entered into five-year employment agreements
with each of Messrs. O'Connell, Ahlers and Allen providing for an initial
annual base salary of $300,000 each, subject to increases at the discretion of
Modem Media's Board of Directors. Messrs. O'Connell and Allen currently receive
base salaries of $300,000 each. In June 1998, Mr. Ahlers' salary was set at
$150,000 per year in connection with his appointment as Executive Vice
President. Pursuant to the employment agreements, if Modem Media terminates any
executive's employment without cause, the executive is entitled to receive
severance benefits equal to salary plus profit sharing for a period equal to
the lesser of three years after such termination or the time remaining in the
initial term of employment. In addition, each of Messrs. O'Connell, Ahlers and
Allen has agreed to certain confidentiality, noncompetition and nonsolicitation
provisions.
In December 1996, Modem Media entered into an employment agreement with Mr.
Roberts providing for an initial annual base salary of $150,000. Mr. Roberts
currently receives a base salary of $174,000. Pursuant to the employment
agreement, if Modem Media terminates Mr. Roberts' employment without cause, he
is entitled to receive severance benefits equal to one year's salary. In
addition, Mr. Roberts has agreed to certain confidentiality, noncompetition and
nonsolicitation provisions.
Stock Plans
1997 Stock Option Plan
Modem Media has established a stock option plan pursuant to which a total of
3,040,000 shares of Class A common stock have been reserved for issuance to
provide additional incentive to its employees, officers, directors and
consultants. Pursuant to the stock option plan, Modem Media may grant stock
options and stock purchase rights to Modem Media's employees, officers,
directors and consultants. The Board of Directors, or a committee to whom the
Board has delegated authority (the "Plan Administrator"), selects the
individuals to whom options and stock purchase rights are granted, interprets
and adopts rules for the operation of the stock option plan and specifies the
vesting, exercise price and other terms of options and stock purchase rights.
As of September 30, 1998, options to purchase an aggregate of 968,170 shares of
Class A common stock had been granted, at a weighted average exercise price of
$7.74 per share. Subsequent to September 30, 1998, Modem Media issued options
to purchase an aggregate of approximately 904,000 shares of Class A
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common stock at an exercise price of $11.05 per share and options to purchase
an aggregate of approximately 47,500 shares of Class A common stock at an
exercise price of $11.58 per share. In connection with the removal of the non-
strategic operations originally contributed to Modem Media, True North has
agreed to satisfy up to an aggregate of 167,485 options held by employees
associated with those operations. Accordingly, upon exercise of such options,
the exercise price will be paid to True North and True North will surrender an
equivalent number shares of common stock to Modem Media. Similarly, True North
has agreed to satisfy options to purchase up to an aggregate of 149,510 shares
of common stock held by former employees of Poppe Tyson.
The maximum term of an incentive stock option granted under the Plan is
generally limited to ten years. If an optionee terminates his or her service
with Modem Media, the optionee generally may exercise only those options vested
as of the date of termination of service. Unless otherwise specified in the
option agreement, the optionee must effect such exercise within three months of
termination of service for any reason other than death or disability, and
within one year after termination due to death or disability. The exercise
price of incentive stock options granted under the stock option plan must be at
least equal to the fair market value of the Class A common stock of Modem Media
on the date of grant. Payment of the exercise price may be made by such methods
as determined by the Plan Administrator and may include cash, check, a
promissory note or shares of Modem Media's Class A common stock valued at the
fair market value on the date of exercise.
Terms of any stock purchase rights granted under the stock option plan shall
be determined by the Plan Administrator at the time such rights are issued.
Upon the termination of a purchaser's service with Modem Media, Modem Media
shall have an option to repurchase his or her shares at the original price paid
by the purchaser.
In the event Modem Media is acquired or merges with another entity or
transfers all or substantially all of its assets, then each outstanding option
and stock purchase right shall automatically vest and become fully exercisable
unless the successor entity assumes such option or stock purchase right or
replaces it with a comparable option or right.
1999 Employee Stock Purchase Plan
Concurrently with the offering, Modem Media intends to establish an Employee
Stock Purchase Plan under which a total of 950,000 shares of Class A common
stock will be made available for sale. The purchase plan, which is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code of 1986, as amended, will be administered by the
Board of Directors or by a committee appointed by the Board. Employees are
eligible to participate if they are employed by Modem Media or a subsidiary of
Modem Media designated by the Board for at least 20 hours per week and for more
than five months in any calendar year. The purchase plan permits eligible
employees to purchase Class A common stock through payroll deductions, which
may not exceed 15% of an employee's compensation, subject to certain
limitations. The purchase plan will be implemented in a series of consecutive,
overlapping offering periods, each approximately six months in duration.
Offering periods will begin on the first trading day on or after February 15
and August 15 of every other year and terminate on the last trading day in the
period six months later. However, the first offering period shall be the period
of approximately 24 months commencing on the date upon which the registration
statement of which this prospectus is a part is declared effective by the
Commission and terminating on the last trading day in the period
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ending February 14, 2001. Each participant will be granted an option to
purchase stock on the first day of the six-month purchase period and such
option will be automatically exercised on the last date of each offering
period. The purchase price of each share of Class A common stock under the
purchase plan will be equal to 85% of the lesser of the fair market value per
share of Class A common stock on the start date of that offering period or on
the date of purchase. Employees may modify or end their participation in the
offering at any time during the offering period. Participation ends
automatically on termination of employment with Modem Media. The purchase plan
will terminate in 2009 unless sooner terminated by Modem Media's Board of
Directors.
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RELATIONSHIP WITH TRUE NORTH AND CERTAIN TRANSACTIONS
Relationship with True North
Upon completion of the offering, True North will own approximately 52.9% of
the common stock outstanding (51.1% if the underwriters' over-allotment option
is exercised in full), representing 84.9% (83.9% if the underwriter's over-
allotment option is exercised in full) of the total voting power of Modem
Media. As long as True North controls a majority of the voting power of Modem
Media, it will be able, acting alone, to:
.elect at least a majority of the Board of Directors of Modem Media;
. amend Modem Media's Certificate of Incorporation or effect a merger, sale
of assets or other major corporate transaction;
.defeat any non-negotiated takeover attempt;
. determine the amount and timing of dividends paid to itself and to
holders of Class A common stock; and
. otherwise control the management and operations of Modem Media and the
outcome of most matters submitted for a stockholder vote.
Currently, two of the five directors of Modem Media (Messrs. Seeley and
Theophilos) are also members of management of True North, and are compensated
by True North in connection with their employment by True North. In addition,
one of the other current directors of Modem Media (Mr. Elliman) is a director
of True North and was selected by True North. These directors may have
conflicts of interest in addressing certain business opportunities and
strategies in circumstances where Modem Media's and True North's interests
differ. Modem Media has not adopted any formal plan or arrangement to address
such potential conflicts of interest.
The Modem Partnership Combination
Prior to 1996, True North provided limited digital interactive marketing
services through its Northern Lights Interactive division to a number of its
traditional advertising clients. In 1996, True North decided that it might be
possible to maximize stockholder value of True North by establishing a separate
subsidiary to operate its digital interactive marketing businesses. At the same
time, True North began to consider the acquisition of other complementary
digital interactive marketing companies and began to consider the potential
public offering of stock of the subsidiary. True North formed Modem Media in
October 1996 to acquire the Modem Partnership from Gerald M. O'Connell, Modem
Media's current Chairman and Chief Executive Officer, Douglas C. Ahlers, Modem
Media's current Executive Vice President, Robert C. Allen, II, Modem Media's
current President, and one other unaffiliated owner (the "Limited Partners")
and to consolidate True North's digital interactive marketing operations.
Accordingly, in December 1996, True North sold to Modem Media its digital
interactive marketing operations and its technology development operations. In
connection with the acquisition by True North of the Modem partnership and the
sale to Modem Media of True North's digital interactive marketing operations,
True North and the Limited Partners received the following consideration:
True North
.5,648,624 shares of Class B common stock of Modem Media.
Limited Partners
.an aggregate of 2,415,646 shares of Class A common stock of Modem
Media;
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.$24.4 million of common stock of True North; and
. an additional $4.0 million of common stock of True North and up to
$19.0 million cash from True North upon consummation of an initial
public offering of Modem Media (including this offering).
In accordance with EITF 90-13, "Accounting for Simultaneous Common Control
Mergers," the valuation of the 64% interest in the Modem Partnership acquired
by True North is stated at fair value in the consolidated financial statements
of Modem included elsewhere in this registration statement. The assets and
liabilities of the True North digital interactive marketing operations and the
36% interest in the Modem Partnership not acquired by True North are reflected
at historical costs.
The Combination and Related Transactions
As part of True North's decision to reorganize its interactive marketing
operations by centralizing them in Modem Media, True North decided to combine
the strategic interactive marketing operations then being conducted by Poppe
Tyson with the operations of its Northern Lights Interactive division and the
Modem Partnership. At the same time, True North decided to reacquire from Modem
Media businesses originally contributed to Modem Media that were not
complementary to the combined businesses. Accordingly, Modem Media completed
the following transactions effective as of October 1, 1998:
. Poppe Tyson formed a wholly-owned subsidiary ("Poppe Tyson Operations
Holding Company") and contributed fixed assets of $1.6 million and the
strategic interactive marketing operations of Poppe Tyson, including
client relationships and related accounts receivable in the United States
and interactive agencies in the United Kingdom and Hong Kong, to Poppe
Tyson Operations Holding Company.
. Bozell forgave approximately $5,275,000 of intercompany indebtedness owed
to Bozell by the strategic interactive marketing operations of Poppe
Tyson.
. Poppe Tyson declared a dividend of all the outstanding capital stock of
Poppe Tyson Operations Holding Company to Bozell, which in turn declared
a dividend of all the outstanding capital stock of Poppe Tyson Operations
Holding Company to True North, so that Poppe Tyson Operations Holding
Company became a direct, wholly-owned subsidiary of True North.
. Poppe Tyson Operations Holding Company was merged with and into Modem
Media, with Modem Media succeeding to all the business and operations of
Poppe Tyson Operations Holding Company. In exchange, Modem Media granted
True North the right to receive 1,666,288 shares of Class B common stock
of Modem Media.
. Assets and liabilities related to non-strategic digital interactive
marketing operations that were originally contributed by True North to
Modem Media in connection with the Modem Partnership Combination were
returned by Modem Media to True North and its affiliates. In exchange,
True North agreed to surrender to Modem Media 856,774 shares of Class B
common stock of Modem Media previously held by True North and its
affiliates.
These transactions have been accounted for at historical costs, as they
occurred between commonly controlled entities.
Intercompany Agreements
In the normal course of business, Modem Media and True North have from time-
to-time entered into various business transactions and agreements, and they may
enter into additional transactions in the future. The following is a summary of
each of the material agreements that Modem Media and True North have entered
into in connection with the combination of Modem Media and the strategic
interactive marketing operations of Poppe Tyson. Such summaries are qualified
in their entirety by
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those agreements, which are filed as exhibits to the registration statement of
which this prospectus is a part.
Administrative Services Agreement. Under an Administrative Services
Agreement, True North will perform various administrative functions and provide
other services to Modem Media, including tax preparation, insurance, treasury
consulting and legal. During the period in which True North performs
administrative functions for Modem Media, expenses associated with such
functions will be charged to Modem Media based on rates and estimates set forth
on schedules attached to the Administrative Service Agreement. Modem Media may
terminate this agreement at any time upon 90 days' prior written notice, and
True North may terminate the agreement 12 months following the combination of
Modem Media and the strategic interactive marketing operations of Poppe Tyson,
but must give 180 days' written notice of such intent to terminate.
Intercompany Credit Arrangements. Modem Media and True North are parties to
certain intercompany credit agreements. In August 1998, True North extended a
credit facility to Modem Media allowing for revolving borrowings in the amount
of up to $3.0 million to be outstanding at any given time at an interest rate
equal to True North's cost of borrowings, plus two percent. In addition, True
North has agreed at its discretion to provide guarantees for Modem Media
borrowings from time to time in exchange for a fee of 0.5% per annum on the
amount guaranteed. The credit facility with True North expires two years from
the date of completion of the initial public offering, or sooner upon the
occurrence of certain events. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Modem Media provides advances to True North under an Intercompany
Demand Note from time to time upon True North's request and at Modem Media's
discretion. Such advances are due on demand and bear interest at 5.75% per
annum. At September 30, 1998, an aggregate of $2.5 million was outstanding
under such advances.
Sublease with Bozell. Modem Media has entered into a sublease with Bozell
pursuant to which Modem Media will lease office space in New York. The rent per
square foot under the sublease agreement is based on the average monthly rent
per square foot and other related costs under Bozell's underlying lease.
Brazil Affiliation Agreement. Modem Media has entered into an agreement with
Bozell pursuant to which Bozell has agreed, for a period of two years, to
provide services to Modem Media's clients through its office in Sao Paolo,
Brazil as requested by Modem Media. In return, Modem Media has granted a
license to Bozell to operate its office in Brazil under the name "Modem Media .
Poppe Tyson, Inc." during the same period.
Tax Matters Agreement. In connection with the transactions consummated
effective October 1, 1998, after the offering, Modem Media and True North
intend to enter into an agreement providing for unitary state tax sharing
arrangements.
Parent Company Guarantees. Commencing on July 1, 1998, True North has
guaranteed payment on behalf of Modem Media under operating and other leases at
a fee of 0.5% of the amount guaranteed.
Modem Media believes that all of the transactions set forth above were made
on terms no less favorable to Modem Media than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
Modem Media and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board, and
will be on terms no less favorable to Modem Media than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Modem Media's common stock as of December 31, 1998 and
as adjusted to reflect the sale of shares of Class A common stock by Modem
Media offered hereby, by:
. each person or entity who is known by Modem Media to beneficially own
five percent or more of the outstanding shares of either class of common
stock of Modem Media;
. each director;
. each executive officer; and
. all directors and executive officers of Modem Media as a group.
<TABLE>
<CAPTION>
Class B Common
Class A Common Stock Common Stock Stock
--------------------------------- ------------ --------------------
Percent of Total
Percent of Ownership Voting Power
--------------------------------- --------------------
Shares Shares
Beneficially Before After Beneficially Before After
Name Owned(1) Offering Offering(2) Owned(1) Offering Offering(2)
- ---- ------------ -------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
True North
Communications
Inc.(3)................ -- -- % -- % 5,648,624 92.1% 84.9%
101 East Erie Street
Chicago, Illinois 60611
Gerald M. O'Connell
(4)(5)................. 1,099,673 44.6 21.7% -- 3.6 3.3%
Douglas C. Ahlers
(4)(6)................. 1,071,174 43.9 21.3% -- 3.5 3.2%
Robert C. Allen, II
(4)(5)................. 319,789 13.0 6.3% -- 1.0 1.0%
Steven C. Roberts
(4)(7)................. 26,600 1.1 * -- * *
Donald M. Elliman, Jr.
(8).................... -- -- -- 5,648,624 92.1 84.9%
Donald L. Seeley (9).... -- -- -- 5,648,624 92.1 84.9%
Theodore J. Theophilos
(10)................... -- -- -- 5,648,624 92.1 84.9%
All directors and
executive officers as a
group (seven
persons)(11)........... 2,517,237 98.6 48.8% 5,648,624 99.9 92.1%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Class A
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of September 30, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes shares of Class B common stock held by various wholly-owned
subsidiaries of True North.
(4) The address of each of Messrs. O'Connell, Ahlers, Allen and Roberts is c/o
Modem Media . Poppe Tyson, Inc., 228 Saugatuck Avenue, Westport,
Connecticut 06880.
(5) Includes 43,700 shares of Class A common stock subject to options which are
exercisable within 60 days of December 31, 1998.
(6) Includes 15,200 shares of Class A common stock subject to options which are
exercisable within 60 days of December 31, 1998.
(7) Includes 26,600 shares of Class A common stock subject to options which are
exercisable within 60 days of December 31, 1998.
(8) Includes 5,648,624 shares of Class B common stock beneficially owned by
True North and its wholly-owned subsidiaries. Mr. Elliman disclaims
beneficial ownership of such shares.
(9) Includes 5,648,624 shares of Class B common stock beneficially owned by
True North and its wholly-owned subsidiaries. Mr. Seeley disclaims
beneficial ownership of such shares.
(10) Includes 5,648,624 shares of Class B common stock beneficially owned by
True North and its wholly-owned subsidiaries. Mr. Theophilos disclaims
beneficial ownership of such shares.
(11) Includes an aggregate of 129,200 shares of Class A common stock subject to
options held by directors and executive officers of Modem Media, which are
exercisable within 60 days of December 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
Pursuant to Modem Media's Certificate of Incorporation, Modem Media has
authority to issue an aggregate of 50,000,000 shares of capital stock,
consisting of 39,351,376 shares of Class A common stock, par value $0.001 per
share, 5,648,624 shares of Class B common stock, par value $0.001 per share,
and 5,000,000 shares of preferred stock, par value $0.001 per share.
Set forth below is a description of the common stock and the preferred stock
that may be issued under Modem Media's Certificate of Incorporation.
Common Stock
Shares of Class A common stock and Class B common stock are identical in all
respects, except for voting rights and certain conversion rights, as described
below.
Voting Rights. Each outstanding share of Class A common stock is entitled to
one vote on all matters submitted to a vote of Modem Media's stockholders,
including the election of directors, and each share of Class B common stock is
entitled to five votes on each such matter. Except as required by applicable
law, holders of the Class A common stock and Class B common stock vote together
as a single class on all matters. There is no cumulative voting in the election
of directors.
For so long as there are any shares of Class B common stock outstanding, any
action that may be taken at a meeting of the stockholders may be taken by
written consent in lieu of a meeting if Modem Media receives consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present and voted. This could permit the holders of Class B common
stock to take action regarding certain matters without providing other
stockholders the opportunity to voice dissenting views or raise other matters.
The right to take such action by written consent of stockholders will expire
when there are no longer any shares of Class B common stock outstanding.
Dividends, Distributions and Stock Splits. Holders of Class A common stock
and Class B common stock are entitled to receive dividends at the same rate if,
and when such dividends are declared by Modem Media's Board of Directors out of
assets legally available therefor after payment of dividends required to be
paid on shares of preferred stock, if any.
In the case of dividends or distributions payable in Class A common stock or
Class B common stock, only shares of Class A common stock will be distributed
with respect to the Class A common stock and only shares of Class B common
stock will be distributed with respect to the Class B common stock. In the case
of dividends or other distributions consisting of other voting shares of Modem
Media, Modem Media will declare and pay such dividends in two separate classes,
identical in all respects except that the voting rights of each such security
paid to the holders of the Class A common stock shall be one-fifth of the
voting rights of each such security paid to the holders of Class B common
stock. In the case of dividends or other distributions consisting of non-voting
securities convertible into, or exchangeable for, voting securities of Modem
Media, Modem Media will provide that such convertible or exchangeable
securities and the underlying securities be identical in all respects, except
that the voting rights of each security underlying the convertible or
exchangeable security paid to the holders of the Class A common stock shall be
one-fifth of the voting rights of each security underlying the convertible or
exchangeable security paid to the holders of Class B common stock, and such
underlying securities paid to the holders of Class B common stock shall convert
into the security paid to the holders of the Class A common stock upon the same
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terms and conditions applicable to the conversion of Class B common stock into
Class A common stock.
Neither the Class A common stock nor the Class B common stock may be
subdivided or combined in any manner unless the other class is subdivided or
combined in the same proportion.
Conversion. The shares of Class A common stock are not convertible.
Each share of Class B common stock is convertible into one share of Class A
common stock at any time at the option of the holder. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon the sale or transfer of such share of Class B common stock to any person
other than a parent corporation, subsidiary or other related party of such
holder or other qualified recipient. The holders of Class B common stock shall
have, upon conversion of their shares of Class B common stock into shares of
Class A common stock, one vote per share of Class A common stock held.
Liquidation. In the event of any dissolution, liquidation, or winding up of
the affairs of Modem Media, whether voluntary or involuntary, after payment of
the debts and other liabilities of Modem Media and making provision for the
holders of preferred stock, if any, the remaining assets of Modem Media will be
distributed ratably among the holders of the Class A common stock and the Class
B common stock, treated as a single class.
Mergers and Other Business Combinations. Upon a merger, combination, or other
similar transaction in which shares of common stock are exchanged for or
changed into other stock or securities, cash and/or any other property, holders
of the Class A common stock and Class B common stock will be entitled to
receive an equal amount per share of stock, securities, cash, and/or any other
property, as the case may be, into which or for which each share of any other
class of common stock is exchanged or changed; provided that in any transaction
in which shares of capital stock are distributed, such shares so exchanged for
or changed into may differ as to voting rights and conversion rights to the
extent and only to the extent that the voting rights and conversion rights of
Class A common stock and Class B common stock differ at that time.
All shares of Class A common stock and Class B common stock outstanding are
fully paid and nonassessable, and all the shares of Class A common stock and
Class B common stock to be outstanding upon completion of this offering will be
fully paid and nonassessable.
Preferred Stock
Upon consummation of the offering, 5,000,000 shares of undesignated preferred
stock will be authorized, and no shares will be outstanding. Modem Media's
Board of Directors has the authority to issue preferred stock in one or more
series and to establish the rights and restrictions granted to or imposed on
any unissued shares of preferred stock and to fix the number of shares
constituting any series without any further vote or action by the stockholders.
Modem Media's Board of Directors has the authority, without approval of the
stockholders, to issue preferred stock that has voting and conversion rights
superior to the common stock, which could have the effect of delaying or
preventing a change in control of Modem Media. Modem Media currently has no
plans to issue any shares of preferred stock.
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Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Modem Media is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a business
combination with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the stockholder. For purposes
of Section 203, an "interested stockholder" is defined to include any person
that is:
. the owner of 15% or more of the outstanding voting stock of the
corporation;
. an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and
. an affiliate or associate of the persons described in the foregoing
bullet points.
Stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither Modem Media's
Certificate of Incorporation nor the Bylaws exempt Modem Media from the
restrictions imposed under Section 203 of the Delaware General Corporation Law.
It is anticipated that the provisions of Section 203 of the Delaware General
Corporation Law may encourage companies interested in acquiring Modem Media to
negotiate in advance with the Board of Directors of Modem Media because the
stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction that results in the stockholder becoming an interested stockholder.
Annual meetings of stockholders shall be held to elect the Board of Directors
of Modem Media and transact such other business as may be properly brought
before the meeting. Special meetings of stockholders may be called by the
Chairman or the Chief Executive Officer or by a majority of the Board. Modem
Media's Certificate of Incorporation and Bylaws provide that any action
required or permitted to be taken by the stockholders of Modem Media may be
effected at a duly called annual or special meeting of the stockholders or may
be taken by a consent in writing by stockholders.
Modem Media's Certificate of Incorporation may be amended with the approval
of a majority of the Board and the holders of a majority of Modem Media's
outstanding voting securities.
The number of directors shall be fixed by resolution of the Board. The size
of the Board is currently fixed at seven members. The directors shall be
elected at the annual meeting of the stockholders, except for filling
vacancies. Directors may be removed with the approval of the holders of a
majority of Modem Media's voting power present and entitled to vote at a
meeting of stockholders. Vacancies and newly-created directorships resulting
from any increase in the number of directors may be filled by a majority of the
directors then in office, a sole remaining director, or the holders of a
majority of the voting power present and entitled to vote at a meeting of
stockholders. In connection with the combination of Modem Media and the Modem
Partnership in December 1996 (the "Modem Partnership Combination"), Modem Media
and True North agreed to cause the election of the following individuals to the
Board of Directors, subject to certain conditions:
. each of Messrs. O'Connell and Allen, so long as they collectively own at
least 45% of the aggregate amount of Class A common stock they received
pursuant to the Modem Partnership Combination;
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. Mr. O'Connell, so long as Messrs. O'Connell, Ahlers and Allen
collectively own at least 30% of the aggregate amount of Class A common
stock they received pursuant to the Modem Partnership Combination.
The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the stockholders entitled to vote generally shall
constitute a quorum for stockholder action at any meeting.
Limitation of Liability; Indemnification
Modem Media's Certificate of Incorporation contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions eliminate a director's personal liability for
monetary damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, including:
. for any breach of the director's duty of loyalty to Modem Media or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate the rights of Modem Media or any
stockholder to seek non-monetary relief, such as an injunction or rescission,
in the event of a breach of a director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. Modem Media's
Bylaws also contain provisions indemnifying the directors and officers of Modem
Media to the fullest extent permitted by the Delaware General Corporation Law.
Modem Media believes that these provisions are necessary to attract and retain
qualified individuals to serve as directors and officers. See "Management--
Limitation of Liability and Indemnification Matters."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Class A common stock is First
Chicago Trust Company of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for Modem Media's
common stock. Modem Media cannot predict the effect, if any, that sales of
shares of the Class A common stock to the public or the availability of shares
for sale to the public will have on the market price of the Class A common
stock prevailing from time to time. Nevertheless, if a significant number of
shares of Class A common stock are sold in the public market, or if people
believe that such sales may occur, the prevailing market price of our Class A
common stock could decline.
Upon consummation of this offering, Modem Media will have 5,023,831 shares of
Class A common stock outstanding (5,413,831 shares if the underwriters' over-
allotment is exercised in full) and 5,648,624 shares of Class B common stock
outstanding. Of the shares outstanding after the offering, the 2,600,000 shares
of Class A common stock sold in the offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), except for any such shares which may be acquired by an "affiliate" of
Modem Media, which shares will be subject to the volume limitations of Rule 144
under the Securities Act. As defined in Rule 144, an "affiliate" of an issuer
is a person who, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such issuer.
Substantially all of the remaining 2,423,831 shares of Class A common stock and
all of the 5,648,624 shares of Class B common stock outstanding will be
"restricted securities" as that phrase is defined in Rule 144 and may not be
resold in the absence of registration under the Securities Act or pursuant to
an exemption from such registration, including the exemption provided by Rule
144 under the Securities Act. Each share of Class B common stock will
automatically convert into one share of Class A common stock upon the sale or
transfer of such share of Class B common stock to any person other than a
parent corporation or subsidiary of such holder or other qualified recipient.
Subject to the foregoing and to the lock-up agreements described below, under
Rule 144 as currently in effect, beginning 180 days after the date of this
prospectus, holders of restricted securities will be entitled to sell a number
of shares of common stock within any three-month period equal to the greater of
1% of the then outstanding shares of the common stock (approximately 106,725
shares immediately after the offering) or the average weekly reported volume of
trading of the common stock on the Nasdaq National Market during the four
calendar weeks preceding such sale, provided that certain manner of sale and
notice requirements and requirements as to the availability of current public
information concerning Modem Media are satisfied.
Immediately after the offering, there will be options to purchase
approximately 1,890,542 shares of Class A common stock outstanding. Subject to
the provisions of the lock-up agreements described below, holders of these
options may rely on the resale provisions of Rule 701 under the Securities Act,
which permits nonaffiliates to sell shares without having to comply with the
current public information, holding period, volume limitation or notice
provisions of Rule 144 and permits affiliates to sell their shares without
having to comply with the holding period provision of Rule 144, in each case
beginning 90 days after the consummation of this offering. In addition,
immediately after this offering, Modem Media intends to file a registration
statement on Form S-8 covering all options granted under the 1997 Stock Plan.
Shares of Class A common stock registered under such registration statement
will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market, unless such shares are subject to
vesting restrictions with Modem Media or the lock-up agreements described
below. See "Management--Stock Plans--1997 Stock Option Plan."
67
<PAGE>
Notwithstanding the foregoing, in connection with this offering, each of
Modem Media, True North and its affiliates, and Modem Media's directors and
officers has agreed that, without the prior written consent of BancBoston
Robertson Stephens Inc. on behalf of the underwriters, during the period ending
180 days after the date of this prospectus, he, she or it will not directly or
indirectly:
. offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge, or grant any right with respect to, any shares of common stock
or any securities convertible into or exchangeable for shares of common
stock, whether such shares or any such securities are then owned by
such person or are thereafter acquired directly from Modem Media.
The above 180-day restriction does not apply to the following:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement, as described below;
. the issuance of common stock upon the exercise of outstanding options;
or
. the issuance of options under existing stock option and incentive
plans, provided such options do not vest prior to the expiration of the
180-day period referenced above. See "Underwriting."
68
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., NationsBanc Montgomery Securities LLC and
Bear, Stearns & Co. Inc., have severally agreed with Modem Media, subject to
the terms and conditions of the underwriting agreement, to purchase from Modem
Media the number of shares of Class A common stock set forth opposite their
names below. The underwriters are committed to purchase and pay for all such
shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. ............................. 990,000
NationsBanc Montgomery Securities LLC........................... 544,500
Bear, Stearns & Co. Inc. ....................................... 445,500
Morgan Stanley & Co. Incorporated............................... 100,000
First Union Capital Markets Corp. .............................. 100,000
ING Baring Furman Selz LLC...................................... 100,000
Advest, Inc..................................................... 80,000
C.E. Unterberg, Towbin.......................................... 80,000
E*TRADE Group, Inc. ............................................ 80,000
Kaufman Bros., L.P. ............................................ 80,000
---------
Total......................................................... 2,600,000
=========
</TABLE>
The representatives of the underwriters have advised Modem Media that the
underwriters propose to offer the shares of Class A common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession of not in excess of $0.67
per share, of which $0.10 may be reallowed to other dealers. After this
offering, the public offering price, concession, and reallowance to dealers may
be reduced by the representatives. No such reduction shall change the amount of
proceeds to be received by Modem Media as set forth on the cover page of this
prospectus. The Class A common stock is offered by the underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-Allotment Option. Modem Media has granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 390,000 additional shares of Class A common stock at the same
price per share as Modem Media will receive for the 2,600,000 shares that the
underwriters have agreed to purchase. To the extent that the underwriters
exercise such option, each of the underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Class A common stock to be purchased by it shown in the
above table represents as a percentage of the 2,600,000 shares offered hereby.
If purchased, such additional shares will be sold by the underwriters on the
same terms as those on which the 2,600,000 shares are being sold. Modem Media
will be obligated, pursuant to the option, to sell shares to the extent the
option is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Class A
common stock offered hereby. If such option is exercised in full, the total
price to public, underwriting discounts and commissions and proceeds to company
will be $47.8 million, $3.3 million and $44.5 million, respectively.
69
<PAGE>
Directed Share Program. At the request of Modem Media, the underwriters have
reserved up to 129,900 shares of Class A common stock to be issued by Modem
Media and offered hereby for sale, at the initial public offering price, to
directors, officers, employees, business associates and related persons of
Modem Media. The number of shares of Class A common stock available for sale to
the general public will be reduced to the extent such individuals purchase such
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered hereby.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and Modem Media against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each officer and director of Modem Media and certain
other holders of shares of common stock have agreed, during the period ending
180 days after the date of this prospectus ("the lock-up period"), subject to
certain exceptions, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
common stock or any options or warrants to purchase any shares of common stock,
or any securities convertible into or exchangeable for shares of common stock
owned as of the date of this prospectus or thereafter acquired directly by such
holders or with respect to which they have the power of disposition, without
the prior written consent of BancBoston Robertson Stephens Inc. However,
BancBoston Robertson Stephens Inc. may, in its sole discretion and at any time
without notice, release all or any portion of securities subject to the lock-up
agreement. There are no existing agreements between the representatives of the
underwriters and any of Modem Media's stockholders providing consent to the
sale of shares prior to the expiration of the lock-up period.
Future Sales. In addition, Modem Media has agreed that during the lock-up
period Modem Media will not, without the prior written consent of BancBoston
Robertson Stephens Inc., subject to certain exceptions, (i) consent to the
disposition of any shares held by stockholders subject to lock-up agreements
prior to the expiration of the lock-up period or (ii) issue, sell, contract to
sell, or otherwise dispose of, any shares of common stock, any options to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock other than Modem
Media's sale of shares in this offering, the issuance of common stock upon the
exercise of outstanding options, and the issuance of options under existing
stock option and incentive plans provided such options do not vest prior to the
expiration of the lock-up period. See "Shares Eligible for Future Sale."
Listing. The Class A common stock has been approved for quotation on the
Nasdaq National Market under the symbol "MMPT."
No Prior Public Market. Prior to this offering, there has been no public
market for Modem Media's common stock. Consequently, the public offering price
for the Class A common stock offered by this prospectus has been determined
through negotiations among Modem Media and the representatives of the
underwriters. Among the factors considered in such negotiations were prevailing
market conditions, certain financial information of Modem Media, market
valuations of other companies that Modem Media and the representatives believe
to be comparable to Modem Media, estimates of the business potential of Modem
Media, the present state of Modem Media's development and other factors deemed
relevant.
70
<PAGE>
Stabilization. The representatives of the underwriters have advised Modem
Media that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price
of the Class A common stock at a level above that which might otherwise prevail
in the open market. A "stabilizing bid" is a bid for or the purchase of Class A
common stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the Class A common stock. A "syndicate covering
transaction" is the bid for or the purchase of Class A common stock on behalf
of the underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the Class A
common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised Modem Media that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the shares of Class A common stock offered hereby will be
passed upon for Modem Media by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, and for the underwriters by Davis Polk &
Wardwell, New York, New York.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
Modem Media has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act with respect to the
shares of Class A common stock offered hereby. This prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. Certain items are omitted in accordance with the rules
and regulations of the Commission. For further information with respect to
Modem Media and the Class A common stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance that a copy of such contract or other document has been filed as an
exhibit to the Registration Statement, reference is made to the exhibit filed,
each such statement being qualified in all respects by such reference. A copy
of the Registration Statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048,
71
<PAGE>
and copies of all or any part of the Registration Statement may be obtained
from such offices upon the payment of the fees prescribed by the Commission.
The Commission maintains a Website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
This prospectus includes statistical data regarding Internet usage and the
advertising and marketing industry which were obtained from industry
publications, including reports generated by International Data Corporation,
Jupiter Communications and Zenith Media. These industry publications generally
indicate that they have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of such
information. While Modem Media believes these industry publications to be
reliable, Modem Media has not independently verified such data. Modem Media
also has not sought the consent of any of these organizations to refer to their
reports in this prospectus.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Modem Media . Poppe Tyson, Inc. and Subsidiaries
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998..................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1997
(unaudited) and 1998................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1998..................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1997
(unaudited) and 1998................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Modem Media Advertising Limited Partnership
Report of Independent Public Accountants................................ F-25
Balance Sheets as of December 31, 1995 and 1996......................... F-26
Statements of Income for the years ended December 31, 1995 and 1996..... F-27
Statements of Partners' Capital for the years ended December 31, 1995
and 1996............................................................... F-28
Statements of Cash Flows for the years ended December 31, 1995 and
1996................................................................... F-29
Notes to Financial Statements........................................... F-30
Poppe Tyson Strategic Interactive Marketing Operations
Report of Independent Public Accountants................................ F-34
Balance Sheets as of December 31, 1996 and 1997......................... F-35
Statements of Operations for the years ended December 31, 1996 and
1997................................................................... F-36
Statements of Changes in Equity (Deficit) for the years ended December
31, 1996 and 1997...................................................... F-37
Statements of Cash Flows for the years ended December 31, 1996 and
1997................................................................... F-38
Notes to Financial Statements........................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Modem Media . Poppe Tyson, Inc.:
We have audited the accompanying consolidated balance sheets of Modem Media .
Poppe Tyson, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997 and September 30, 1998, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the years
ended December 31, 1995, 1996 and 1997 and the nine months ended September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audits 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 Modem Media . Poppe Tyson,
Inc. and subsidiaries as of December 31, 1996 and 1997 and September 30, 1998,
and the results of their operations and their cash flows for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
November 16, 1998
(except with respect to
certain matters discussed in
Notes 2 and 15, as to which
the date is February 3, 1999)
F-2
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, September 30, September 30,
1996 1997 1998 1998
------------ ------------ ------------- -------------
(unaudited)
(see Note 15)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash................... $ 2,726,000 $ 7,056,000 $ 4,349,000 $ 4,349,000
Accounts receivable,
net of bad debt
reserve of $408,000,
$452,000, $578,000
and $578,000,
respectively.......... 6,586,000 7,414,000 11,650,000 11,650,000
Unbilled revenues...... 590,000 1,044,000 987,000 987,000
Unbilled charges....... 650,000 658,000 563,000 563,000
Deferred taxes......... 3,000 303,000 699,000 699,000
Prepaid expenses and
other current
assets................ 154,000 341,000 717,000 717,000
True North note
receivable............ -- -- 2,500,000 2,500,000
------------ ------------ ------------ ------------
Total current
assets.............. 10,709,000 16,816,000 21,465,000 21,465,000
Property and Equipment:
Leasehold
improvements.......... 111,000 239,000 288,000 694,000
Computers and
software.............. 1,316,000 2,240,000 4,343,000 5,078,000
Furniture and other.... 419,000 1,480,000 2,350,000 2,833,000
------------ ------------ ------------ ------------
Total property and
equipment........... 1,846,000 3,959,000 6,981,000 8,605,000
Less: accumulated
depreciation and
amortization.......... (19,000) (1,134,000) (2,454,000) (2,454,000)
------------ ------------ ------------ ------------
Total property and
equipment, net...... 1,827,000 2,825,000 4,527,000 6,151,000
Other Assets:
Goodwill, net of
accumulated
amortization of $0,
$1,666,000,
$2,974,000 and
$2,974,000,
respectively.......... 32,161,000 31,645,000 33,600,000 33,600,000
Net assets of True
North Units Held for
Transfer.............. 9,291,000 7,573,000 7,444,000 --
Deferred taxes......... -- 84,000 179,000 179,000
Other assets,
including deferred
offering costs........ 34,000 81,000 967,000 967,000
------------ ------------ ------------ ------------
Total other assets... 41,486,000 39,383,000 42,190,000 34,746,000
------------ ------------ ------------ ------------
Total assets......... $ 54,022,000 $ 59,024,000 $ 68,182,000 $ 62,362,000
============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....... $ 1,656,000 $ 1,101,000 $ 2,764,000 $ 2,764,000
Pre-billed media....... 1,343,000 3,886,000 3,546,000 3,546,000
Advance billings....... 1,393,000 2,163,000 1,224,000 1,224,000
Deferred revenues...... 174,000 1,616,000 3,066,000 3,066,000
Income taxes payable... 174,000 549,000 661,000 661,000
Current portion of
long-term lease
obligations........... 76,000 342,000 449,000 449,000
Accrued expenses....... 690,000 1,494,000 3,401,000 3,401,000
Due to True North...... -- 729,000 1,212,000 7,212,000
Due to former Modem
Partnership
partners.............. 1,564,000 -- -- --
Other current
liabilities........... 211,000 1,667,000 3,251,000 3,251,000
------------ ------------ ------------ ------------
Total current
liabilities......... 7,281,000 13,547,000 19,574,000 25,574,000
Noncurrent Liabilities:
Due to Bozell, non-
interest bearing...... -- 3,346,000 5,275,000 --
Note payable to True
North................. 6,000,000 6,000,000 6,000,000 --
Deferred taxes......... 29,000 -- -- --
Capital lease
obligations, less
current portion....... 193,000 472,000 507,000 507,000
Other liabilities...... 26,000 41,000 24,000 24,000
Commitments and
contingencies..........
Stockholders' Equity:
Common stock, Class A,
$.001 par value--
39,351,376 shares
authorized, 2,423,831
issued and
outstanding........... 3,000 3,000 3,000 3,000
Common stock, Class B,
$.001 par value--
5,648,624 shares
authorized, 4,839,110
issued and
outstanding........... 5,000 5,000 5,000 6,000
Preferred stock, $.001
par value--5,000,000
shares authorized,
none issued and
outstanding........... -- -- -- --
Paid-in capital........ 43,588,000 44,828,000 47,273,000 46,727,000
Accumulated deficit.... (3,103,000) (9,192,000) (10,498,000) (10,498,000)
Accumulated other
comprehensive
income................ -- (26,000) 19,000 19,000
------------ ------------ ------------ ------------
Total stockholders'
equity.............. 40,493,000 35,618,000 36,802,000 36,257,000
------------ ------------ ------------ ------------
Total liabilities and
stockholders'
equity.............. $ 54,022,000 $ 59,024,000 $ 68,182,000 $ 62,362,000
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 438,000 $ 2,093,000 $25,497,000 $18,025,000 $30,397,000
Costs and Expenses:
Salaries and
benefits............. 308,000 1,322,000 15,894,000 11,187,000 20,793,000
Office and general.... 215,000 712,000 9,038,000 6,162,000 10,309,000
Amortization of
goodwill............. -- -- 1,666,000 1,249,000 1,308,000
Operating losses of
True North Units Held
for Transfer......... 1,766,000 1,309,000 2,180,000 1,600,000 13,000
----------- ----------- ----------- ----------- -----------
Total costs and
expenses........... 2,289,000 3,343,000 28,778,000 20,198,000 32,423,000
Operating Loss.......... (1,851,000) (1,250,000) (3,281,000) (2,173,000) (2,026,000)
Interest Expense, Net... -- -- (76,000) (62,000) (5,000)
----------- ----------- ----------- ----------- -----------
Loss before Income
Taxes.................. (1,851,000) (1,250,000) (3,357,000) (2,235,000) (2,031,000)
(Benefit) Provision for
Income Taxes........... (873,000) (548,000) (248,000) (246,000) 57,000
----------- ----------- ----------- ----------- -----------
Net Loss................ $ (978,000) $ (702,000) $(3,109,000) $(1,989,000) $(2,088,000)
=========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ -- $ (35.10) $ (0.43) $ (0.27) $ (0.29)
=========== =========== =========== =========== ===========
Pro forma basic and
diluted.............. $ (0.39) $ (0.26)
=========== ===========
Weighted-average number
of common shares
outstanding:
Basic and diluted..... -- 20,000 7,260,000 7,259,000 7,263,000
=========== =========== =========== =========== ===========
Pro forma basic and
diluted.............. 8,072,000 8,072,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
------------- Accumulated Other Total
Class Class Paid-in Earnings/ Comprehensive Stockholders'
A B Capital (Deficit) Income Equity
------ ------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1994............... $ -- $ -- $ -- $ 256,000 $ -- $ 256,000
Comprehensive income:
Net loss.............. -- -- -- (978,000) -- (978,000)
-----------
Total comprehensive
income............. (978,000)
Dividends............... -- -- -- (124,000) -- (124,000)
------ ------ ----------- ------------ -------- -----------
Balance as of December
31, 1995............... -- -- -- (846,000) -- (846,000)
Comprehensive income:
Net loss.............. -- -- -- (702,000) -- (702,000)
-----------
Total comprehensive
income............. (702,000)
Acquisition of Modem
Partnership............ 3,000 5,000 35,134,000 -- -- 35,142,000
Forgiveness of
intercompany
borrowings............. -- -- 8,454,000 -- -- 8,454,000
Dividends............... -- -- -- (1,555,000) -- (1,555,000)
------ ------ ----------- ------------ -------- -----------
Balance as of December
31, 1996............... 3,000 5,000 43,588,000 (3,103,000) -- 40,493,000
Comprehensive income:
Net loss.............. -- -- -- (3,109,000) -- (3,109,000)
Foreign currency
translation
adjustment........... -- -- -- -- 8,000 8,000
-----------
Total comprehensive
income............. (3,101,000)
-----------
Acquisition of Poppe
Tyson Strategic
Interactive Marketing
Operations............. (2,980,000) (34,000) (3,014,000)
Payment to former Modem
Partnership partners... -- -- 1,150,000 -- -- 1,150,000
Other, net.............. -- -- 90,000 -- -- 90,000
------ ------ ----------- ------------ -------- -----------
Balance as of December
31, 1997............... 3,000 5,000 44,828,000 (9,192,000) (26,000) 35,618,000
Comprehensive income:
Net loss.............. -- -- -- (2,088,000) -- (2,088,000)
Foreign currency
translation
adjustment........... -- -- -- -- 45,000 45,000
-----------
Total comprehensive
income............. (2,043,000)
-----------
Payment to former Modem
Partnership partners... -- -- 3,263,000 -- -- 3,263,000
Other, net.............. -- -- (818,000) 782,000 -- (36,000)
------ ------ ----------- ------------ -------- -----------
Balance as of September
30, 1998............... $3,000 $5,000 $47,273,000 $(10,498,000) $ 19,000 $36,802,000
====== ====== =========== ============ ======== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
MODEM MEDIA, POPPE TYSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (978,000) $ (702,000) $ (3,109,000) $ (1,989,000) $ (2,088,000)
Adjustments to
reconcile net loss to
net cash (used in)
provided by operating
activities:
Depreciation.......... 4,000 15,000 1,189,000 827,000 1,165,000
Amortization of
goodwill............. -- -- 1,666,000 1,249,000 1,308,000
Provision for doubtful
accounts............. -- -- 517,000 150,000 251,000
Loss on disposal of
equipment............ -- -- 98,000 -- 155,000
Changes in assets and
liabilities:
Accounts receivable.. (606,000) (1,692,000) (568,000) 1,206,000 (4,487,000)
Unbilled revenues.... -- (76,000) (454,000) (582,000) 57,000
Unbilled charges..... (123,000) (52,000) 38,000 (350,000) 95,000
Prepaid expenses and
other current
assets.............. -- -- (125,000) (174,000) (376,000)
Accounts payable and
other current
liabilities......... 129,000 (347,000) 535,000 436,000 3,247,000
Pre-billed media..... -- -- 2,543,000 (1,343,000) (340,000)
Advance billings..... -- 428,000 770,000 (1,110,000) (939,000)
Deferred revenues.... 89,000 (76,000) 1,442,000 3,620,000 1,450,000
Income taxes
payable............. (37,000) 210,000 375,000 424,000 112,000
Accrued expenses..... -- 378,000 196,000 840,000 1,907,000
Deferred taxes....... -- (135,000) (413,000) (99,000) (491,000)
Other, net........... -- 1,000 (22,000) 47,000 (896,000)
Net assets of True
North Units Held for
Transfer............ 1,215,000 (1,635,000) 1,718,000 1,090,000 129,000
---------- ----------- ------------ ------------ ------------
Net cash (used in)
provided by
operating
activities......... (307,000) (3,683,000) 6,396,000 4,242,000 259,000
Cash flows from
investing activities:
Purchase of property
and equipment......... (27,000) (139,000) (1,324,000) (923,000) (2,591,000)
Cash of acquired
companies............. -- 2,723,000 147,000 -- --
---------- ----------- ------------ ------------ ------------
Net cash (used in)
provided by
investing
activities......... (27,000) 2,584,000 (1,177,000) (923,000) (2,591,000)
Cash flows from
financing activities:
Funding from parent
company............... 458,000 5,380,000 729,000 (332,000) (88,000)
Dividends paid to True
North ................ (124,000) (1,555,000) -- -- --
Distributions to former
Modem Partnership
partners.............. -- -- (1,564,000) (1,564,000) --
Principal payments made
under capital lease
obligations........... -- -- (143,000) (96,000) (289,000)
Other, net............. -- -- 89,000 88,000 2,000
---------- ----------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... 334,000 3,825,000 (889,000) (1,904,000) (375,000)
---------- ----------- ------------ ------------ ------------
Net increase (decrease)
in cash................ -- 2,726,000 4,330,000 1,415,000 (2,707,000)
Cash, at beginning of
period................. -- -- 2,726,000 2,726,000 7,056,000
---------- ----------- ------------ ------------ ------------
Cash, at end of period.. $ -- $ 2,726,000 $ 7,056,000 $ 4,141,000 $ 4,349,000
========== =========== ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Modem Media . Poppe Tyson, Inc. ("Modem Media" or the "Company") was formed
by True North Communications Inc. ("True North") in 1996 to combine certain of
True North's strategic interactive marketing and website design and maintenance
units with Modem Media Advertising Limited Partnership (the "Modem
Partnership") in a business combination accounted for under the purchase method
(see Note 3). Accordingly, the Modem Partnership has been reflected in the
Modem Media financial statements since December 31, 1996. The Modem Partnership
is a predecessor entity of Modem Media, and its financial statements as of and
for the years ended December 31, 1995 and 1996 are included elsewhere in the
registration statement. The Company's name was changed from TN Technologies
Inc. to Modem Media . Poppe Tyson, Inc. in November 1998.
Effective October 1, 1998, the Company acquired the strategic interactive
marketing operations of Poppe Tyson Inc. (the "Poppe Tyson Strategic
Interactive Marketing Operations") from True North in exchange for certain of
the Company's subsidiaries and operations and an aggregate of 809,514 shares of
Class B common stock (the "Combination") (see Note 15). The Poppe Tyson
Strategic Interactive Marketing Operations consist of the strategic interactive
marketing operations of Poppe Tyson Inc. ("Poppe Tyson") in the United Kingdom,
Hong Kong and the U.S., and certain fixed assets. The historical financial
results of the Poppe Tyson Strategic Interactive Marketing Operations have been
prepared on a carved-out basis, and are included in the consolidated financial
statements of the Company from December 31, 1997, the date of the merger of
Bozell with True North. All adjustments necessary for the fair presentation of
the consolidated financial statements related to the Poppe Tyson Strategic
Interactive Marketing Operations are reflected herein. The accumulated deficit
arising from the operating results of the Poppe Tyson Strategic Interactive
Marketing Operations is reflected as a reduction in paid-in capital in the
accompanying consolidated balance sheet at September 30, 1998. The Poppe Tyson
Strategic Interactive Marketing Operations are a predecessor entity of the
Company, and their financial statements as of and for the years ended December
31, 1996 and 1997 are included elsewhere in the registration statement.
Poppe Tyson was formed in December 1985 as a subsidiary of Bozell, Jacobs,
Kenyon & Eckhardt, Inc. ("Bozell"), which was acquired by True North in
December 1997 in a business combination accounted for under the pooling-of-
interests method. Poppe Tyson includes the strategic interactive marketing
operations and website production and maintenance businesses of Bozell.
Prior to undertaking the Combination, the Company and True North management
agreed that the value of the non-strategic digital interactive marketing
operations contributed to Modem Media by True North in 1996 would be optimized
under True North management, as the strategic focus of those businesses would
not be complementary to the Company. True North and the Company have analyzed
the future cash flows of those businesses and believe the investment is fully
realizable at this time. Because the Combination occurred among True North and
majority-owned, controlled subsidiaries, the transaction has been recorded at
historical cost as of December 31, 1997, the date upon which the Company and
the Poppe Tyson Strategic Interactive Marketing Operations came under common
control.
In contemplation of the Combination effected as of October 1, 1998, the net
assets of the businesses to be sold back to True North have been presented as
one line, "Net Assets of True North
F-7
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Units Held for Transfer," on the face of the historical balance sheets in a
manner similar to that of assets held for sale. Similarly, the pre-tax losses
of those businesses have been presented as one line, "Operating Losses of True
North Units Held for Transfer," in the historical statements of operations.
Summarized financial data of the businesses to be sold back to True North are
as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $11,001,000 $18,401,000 $16,766,000 $12,598,000 $10,140,000
Costs and expenses...... 12,766,000 19,663,000 18,652,000 14,125,000 10,019,000
Loss before income
taxes.................. (1,766,000) (1,309,000) (2,180,000) (1,600,000) (13,000)
Net loss................ (930,000) (751,000) (1,718,000) (1,096,000) (129,000)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------- September 30,
1996 1997 1998
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
Current assets......................... $ 7,590,000 $10,378,000 $10,089,000
Goodwill, net.......................... 6,212,000 5,893,000 5,686,000
Total assets........................... 18,255,000 19,845,000 19,444,000
Current liabilities.................... 6,881,000 4,119,000 5,251,000
Total liabilities...................... 8,964,000 12,272,000 12,000,000
Net assets............................. 9,291,000 7,573,000 7,444,000
</TABLE>
2. Summary of Significant Accounting Policies
Nature of Operations--The Company has been a leading provider of digital
interactive marketing solutions since 1987. By developing marketing programs
that incorporate advanced communications technologies, the Company enables its
clients to establish, retain and manage customer relationships. The Company's
marketing programs include the design and implementation of electronic business
programs that enable its clients to support and leverage their world class
brands. The Company combines its substantial expertise in strategic marketing,
creative design and digital technology to deliver, on a worldwide basis, a
complete range of digital interactive marketing services, including strategic
consulting and research, electronic commerce and electronic consumer care
services, interactive advertising and promotions, and data collection analysis.
The Company's marketing programs are designed to enable its clients to target
narrowly-defined market segments, provide their customers with detailed product
and service information, sell products and services and provide post-sale
customer support electronically, and offer ongoing marketing programs.
Marketing programs developed by the Company are delivered primarily through the
Internet. The Company has operations in the United States, Canada, Hong Kong
and the United Kingdom.
The Company is subject to certain risk factors including: history of
operating losses; dependence on key clients; variability of operating results;
and integration of the separate business units. All of these risk factors are
described in detail under "Risk Factors."
Principles of Consolidation--The accompanying consolidated financial
statements include all of the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-8
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interim Financial Statements--The consolidated balances as of and for the
nine months ended September 30, 1997 are unaudited. The unaudited consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of its operating results. The operating results for the nine
months ended September 30, 1997 and 1998 are not necessarily indicative of the
results to be expected for any other interim period or any future fiscal year.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition and Billing--A majority of the Company's revenues are
derived from fixed-fee assignments. Revenues are recognized as services are
rendered. Unbilled revenues represent labor costs incurred and estimated
earnings in excess of billings. Unbilled charges represent production and other
client reimbursable out-of-pocket costs in excess of billings. Revenue is
reported net of such reimbursable costs. Pre-billed media represents amounts
billed to customers for media placement in advance of the advertisements being
placed. Advanced billings represent billings of production and other client
reimbursable out-of-pocket costs in excess of those incurred. Amounts billed to
clients in excess of revenues recognized to date are classified as deferred
revenues. The Company reassesses its estimated costs on each project on a
monthly basis and losses are accrued, on a project-by-project basis, to the
extent the costs incurred and anticipated costs to complete projects exceed
anticipated billings. Provisions for estimated losses on uncompleted projects
are made in the period in which such losses are determinable.
Business Concentrations and Credit Risk--The Company's services have been
provided to a limited number of clients located worldwide in a variety of
industries. The Company had revenues from five clients during the year ended
December 31, 1997 and the nine months ended September 30, 1997 and 1998 that
accounted for 65.5%, 64.9% and 54.8% of total revenues, respectively. No one
client accounted for more than 10% of revenues during the years ended December
31, 1995 or 1996.
The Company is subject to a concentration of credit risk with respect to its
accounts receivable. One customer accounted for 28.4% and 16.4% of accounts
receivable as of December 31, 1996 and 1997, respectively, and two customers
accounted for 38.9% of accounts receivable as of September 30, 1998.
Property and Equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three to five years for computers and software, and five to
twelve years for furniture and other. Purchased software and third-party costs
incurred to develop software for internal use are capitalized and amortized
principally over three years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the remaining lease term. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of, the Company reviews its recorded property and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not
F-9
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be recoverable and provides currently for any identified impairments. In
conjunction with the transactions that occurred effective October 1, 1998 (see
Note 1), the Company performed a physical inventory of property and equipment
at certain international locations. As a result of such inventory, the Company
recorded a non-cash impairment loss of $154,000 during the third quarter of
1998.
Income Taxes--Modem Media and True North have certain tax-sharing
arrangements that are described in Note 10. The Company accounts for income
taxes under the liability method in accordance with SFAS No. 109, Accounting
for Income Taxes. In accordance with such standard, the provision for income
taxes includes deferred income taxes resulting from items reported in different
periods for income tax and financial statement purposes. Deferred tax assets
and liabilities represent the expected future tax consequences of the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The effects of changes in tax
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
Goodwill--Goodwill represents acquisition costs in excess of the fair value
of tangible net assets of purchased subsidiaries and is amortized using the
straight-line method over 20 years. Carrying values are periodically reviewed
for impairment and adjusted, if necessary, based upon current facts and
circumstances and management's estimates of undiscounted future cash flows from
the related businesses.
Fair Value of Financial Instruments--The carrying values of the Company's
current assets and current liabilities approximate fair value because of the
short maturities of these financial instruments.
Pro Forma Net Loss Per Share--In accordance with SFAS No. 128, Earnings Per
Share, basic net loss per share is computed using the weighted-average number
of common shares outstanding during each period. Diluted net loss per share
gives effect to all potential dilutive securities that were outstanding during
each period. Pro forma basic net loss per share is computed using the weighted-
average number of common shares of Modem Media outstanding upon consummation of
the transaction with True North effective as of October 1, 1998 (see Note 1).
Pro forma diluted net loss per share gives effect to all potential dilutive
securities that were outstanding during the period. The Company had a net loss
for all periods presented herein; therefore, none of the options outstanding
during each of the periods presented were included in the computations of
diluted loss per share or pro forma diluted loss per share as they were
antidilutive. See Note 6 for the details of options outstanding.
On January 11, 1999, the Company's Board of Directors approved a 0.95-for-1
reverse split of the Company's outstanding common stock effective upon
completion of the Combination. Accordingly, all historical weighted-average
share and per-share amounts have been restated to reflect the reverse stock
split.
Proposed Public Offering--In connection with its contemplated initial public
offering of securities, the Company has incurred approximately $750,000 in
offering-related costs that are being deferred until the consummation of the
offering, at which time they will be charged against paid-in capital. If the
offering is not consummated, the deferred costs will be expensed.
F-10
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation--The Company's financial statements were
prepared in accordance with the requirements of SFAS No. 52, Foreign Currency
Translation. Under this method, net foreign currency transaction gains (losses)
are included in the accompanying consolidated statements of operations. Such
gains (losses) were immaterial for the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1997 and 1998. The Company had no
foreign currency transaction gains (losses) during the year ended December 31,
1995.
Comprehensive Income--The Company reflects its comprehensive income, such as
unrealized gains or losses on the Company's foreign currency translation
adjustments, as a separate component of stockholders' equity as required by
SFAS No. 130, Reporting Comprehensive Income. There were no other items of
comprehensive income during these periods.
Recently Issued Accounting Standard--In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. The
statement also establishes standards for related disclosure about products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, but, it is not required to be
applied to interim financial statements in the initial year of adoption.
Therefore, the Company will adopt the new requirements retroactively in its
annual consolidated financial statements for the year ended December 31, 1998.
The Company currently believes that it operates in one segment and that the
adoption of SFAS No. 131 will not materially affect the Company's current
disclosure of geographic information (see Note 11).
3. Acquisitions
On December 31, 1996, True North, through the Company, acquired a 64%
interest in the Modem Partnership for $32,590,000. The consideration was
comprised of $24,387,000 in common stock of True North and a 36% interest in
certain operations of the Company valued at $8,203,000 by independent appraisal
experts. In addition, True North is obligated to make cash payments of up to
$19,000,000 (reduced by the payments discussed below) and issue $4,000,000 in
shares of True North common stock to the former owners of the Modem Partnership
upon completion of an initial public offering of common stock and/or certain
other events. True North contributed its interests in the Modem Partnership to
the Company in exchange for shares of Class B common stock. The remaining
interests in the Modem Partnership were contributed by its former owners to the
Company in exchange for shares of Class A common stock. The above transactions
resulted in True North holding 4,839,110 shares of Class B common stock of the
Company and the former owners of the Modem Partnership holding 2,415,646 shares
of Class A common stock of the Company at December 31, 1996. Assets acquired,
liabilities assumed and intercompany indebtedness forgiven by True North in
this transaction were $42,300,000, $7,158,000 and $8,454,000, respectively, and
are reflected in the accompanying consolidated balance sheets. In accordance
with EITF 90-13, "Accounting for Simultaneous Common Control Mergers", the
valuation of the 64% interest in the Modem Partnership acquired by True North
is stated at fair value in the accompanying consolidated financial statements.
The assets and liabilities of the operations of the Company and the 36% of the
Modem Partnership not acquired by True North are reflected at historical costs.
The difference
F-11
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
between the initial purchase price and the fair value of assets acquired of
approximately $32,161,000, excluding costs of the transaction, has been
allocated to goodwill by the Company.
Additional payments made will be allocated to the cost in excess of the fair
value of tangible net assets acquired and amortized by the Company over the
remaining life of the assets. The acquisition agreement also requires
additional payments contingent on future earnings to be made in the event that
an initial public offering has not occurred, which payments thereby reduce the
aforementioned $19,000,000 obligation. Pursuant to the agreement, payments
aggregating $1,150,000 and $3,263,000 were made to the former owners in
February 1997 and May 1998, respectively, resulting in a corresponding increase
in goodwill.
Effective October 1, 1998, the Company purchased the Poppe Tyson Strategic
Interactive Marketing Operations in exchange for the non-strategic digital
interactive marketing operations originally contributed by True North to Modem
Media in 1996 and 809,514 shares of Class B common stock of the Company (see
Note 1). The Poppe Tyson Strategic Interactive Marketing Operations consist of
the strategic interactive marketing operations of Poppe Tyson in the United
Kingdom, Hong Kong and the U.S., and certain fixed assets. Assets acquired and
liabilities assumed by the Company in this transaction were $1,565,000 and
$4,579,000, respectively, and are reflected in the accompanying consolidated
balance sheets as of December 31, 1997, the date upon which the Company and the
Poppe Tyson Strategic Interactive Marketing Operations came under common
control.
The following information reflects pro forma statements of operations data
for the years ended December 31, 1995, 1996, and 1997 assuming the acquisitions
of the Modem Partnership and the Poppe Tyson Strategic Interactive Marketing
Operations were consummated on January 1, 1995 (see Note 1).
<TABLE>
<CAPTION>
Poppe Tyson
Strategic
Interactive
The The Modem Marketing Pro Forma
Company Partnership Operations Adjustments Combined
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1995
Revenues................ $ 438,000 $11,718,000 $ -- $ -- $12,156,000
(Loss) income before
income taxes........... (1,851,000) 3,960,000 -- (1,666,000) 443,000
Net (loss) income....... (978,000) 3,960,000 -- (3,329,000) (347,000)
Basic net loss per
common share........... --
Year Ended December 31,
1996
Revenues................ $ 2,093,000 $18,102,000 $ 126,000 $ -- $20,321,000
(Loss) income before
income taxes........... (1,250,000) 137,000 (480,000) (1,666,000) (3,259,000)
Net (loss) income....... (702,000) 137,000 (480,000) (1,723,000) (2,768,000)
Basic net loss per
common share........... (138.40)
Year Ended December 31,
1997
Revenues................ $25,497,000 $ -- $ 3,925,000 $ -- $29,422,000
Loss before income
taxes.................. (3,357,000) -- (2,648,000) -- (6,005,000)
Net loss................ (3,109,000) -- (2,500,000) -- (5,609,000)
Basic net loss per
common share........... (.77)
</TABLE>
The pro forma adjustments above reflect the annual amortization expense on
approximately $32,000,000 in goodwill, over a useful life of 20 years, that
would have resulted from the acquisition of the Modem Partnership were it to
have occurred on January 1, 1995 and the tax provision that
F-12
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would have been recorded on the earnings of the Modem Partnership had it ceased
existing as a limited partnership as of such date.
4. Debt
Restrictions on Indebtedness--Pursuant to certain agreements between True
North and its lenders, the Company is subject to certain limitations on
indebtedness. Such limitations could adversely affect the Company's ability to
secure debt financing in the future.
Lines of Credit--In June 1997, the Modem Partnership increased its bank line
of credit from $1,000,000 to $2,000,000 and the facility subsequently expired
in June 1998. No borrowings were outstanding under this line of credit as of
the balance sheet dates.
Interest Expense--The Company incurred interest expense on all borrowings,
including those from related parties, of $0, $0 and $119,000 for the years
ended December 31, 1995, 1996 and 1997, and $79,000 and $127,000 for the nine
months ended September 30, 1997 and 1998, respectively. Related party interest
expense in the respective totals above are $0, $0, $46,000, $24,000 and
$32,000.
5. Equity
Pursuant to the Company's Amended and Restated Certificate of Incorporation
(see Note 15), the Company has authority to issue an aggregate of 50,000,000
shares of capital stock, consisting of 39,351,376 shares of Class A common
stock, par value $.001 per share, 5,648,624 shares of Class B common stock, par
value $.001 per share, and 5,000,000 shares of undesignated preferred stock,
par value $.001 per share.
Common Stock--The shares of Class A common stock and Class B common stock are
identical in all respects, except for voting rights and certain conversion
rights. Each share of Class A common stock outstanding is entitled to one vote
on all matters submitted to a vote of the Company's stockholders, including the
election of directors, and each share of Class B common stock entitles the
holder to five votes on each such matter. True North owns, directly or
indirectly, all of the outstanding shares of Class B common stock. Except as
required by applicable law, holders of Class A common stock and Class B common
stock vote together as a single class on all matters submitted to a vote of the
stockholders of the Company. There is no cumulative voting in the election of
directors.
The shares of Class A common stock are not convertible. The shares of Class B
common stock are convertible into shares of Class A common stock, in whole or
in part, at any time at the option of the holder, into an equal number of
shares of Class A common stock. Each share of Class B common stock will also
automatically convert into one share of Class A common stock upon the sale or
transfer of such share of Class B common stock to any person other than a
parent corporation or wholly-owned subsidiary of such holder or other qualified
recipient. The holders of Class B common stock shall have, upon conversion of
their shares of Class B common stock into shares of Class A common stock, one
vote per share of Class A common stock held on all matters submitted to a vote
of the Company's stockholders.
F-13
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the event of any dissolution, liquidation, or winding up of the affairs of
the Company, whether voluntary or involuntary, after payment of the debts and
other liabilities of the Company and making provision for the holders of
preferred stock, if any, the remaining assets of the Company will be
distributed ratably among the holders of the Class A common stock and the Class
B common stock, treated as a single class.
Upon a merger, combination, or other similar transaction in which shares of
common stock are exchanged for or changed into other stock or securities, cash
and/or any other property, holders of the Class A common stock and Class B
common stock will be entitled to receive an equal per share amount of stock,
securities, cash, and/or any other property, as the case may be, into which or
for which each share of any other class of common stock is exchanged or
changed; provided that in any transaction in which shares of capital stock are
distributed, such shares so exchanged for or changed into may differ as to
voting rights and certain conversion rights to the extent and only to the
extent that the voting rights and certain conversion rights of Class A common
stock and Class B common stock differ at that time.
The holders of the Class A common stock and Class B common stock are not
entitled to preemptive rights. There are no redemption provisions or sinking
fund provisions applicable to the Class A common stock or the Class B common
stock.
All shares of Class A common stock and Class B common stock outstanding are
fully paid and nonassessable, and all the shares of Class A common stock and
Class B common stock to be outstanding upon completion of this offering will be
fully paid and nonassessable.
Preferred Stock--Preferred stock may be issued, from time to time, pursuant
to a resolution by the Company's Board of Directors that will set forth the
voting powers and other pertinent rights of such series.
6. Stock-Based Compensation Plan
The Company has established various stock option plans for its officers,
directors, key employees and consultants. Options to purchase 345,244 shares of
Class A common stock that vested immediately and expire on September 30, 2006
were issued under the Modem Media Advertising Limited Partnership 1996 Option
Plan at an exercise price of $0.64 per share. The TN Technologies, Inc. 1997
Stock Option Plan provides for up to 1,140,000 shares of Class A common stock
to be issued at an exercise price of at least 100% of the fair market value of
the stock on the date of grant as determined by the Board of Directors. On
December 11, 1998, the number of shares authorized to be optioned under the
plan was increased to 3,040,000 (see Note 15). These options expire ten years
after the date of grant with 20% vesting on the date of grant and the remainder
vesting at an additional 20% on each anniversary thereof.
The Company utilizes the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and applies APB No. 25 and related
interpretations in accounting for its stock option plan. Under APB No. 25,
because the exercise prices of the Company's employee stock options are equal
to the market prices of the underlying Company stock on the date of grant, no
compensation expense is recognized. If compensation expense for stock options
awarded under the
F-14
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's plans had been determined consistent with SFAS No. 123, the Company's
net loss and net loss per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1996 1997 1998
--------- ----------- -------------
<S> <C> <C> <C>
Net loss:
As reported......................... $(702,000) $(3,109,000) $(2,088,000)
Pro forma........................... (709,000) (4,077,000) (2,602,000)
Basic and diluted loss per share:
As reported......................... $ (35.10) $ (0.43) $ (0.29)
Pro forma........................... (35.45) (0.56) (0.36)
</TABLE>
The effect of applying SFAS No. 123 on the pro forma net loss per share
disclosures is not indicative of future amounts because it does not take option
grants to be made in future years into consideration.
The following is a summary of the activity under the Company's stock option
plans for each annual period presented:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the
year.................................... -- $ -- 355,608 $ 0.96
Granted.................................. 355,608 0.96 694,187 11.58
Exercised................................ -- -- 7,714 11.58
Forfeited................................ -- -- 73,861 11.37
------- -------
Outstanding at the end of the year....... 355,608 968,220
------- -------
Exercisable at the end of the year....... 347,317 472,924
------- -------
Weighted average fair value of options
granted................................. $8.28 $ 8.37
===== ======
</TABLE>
The following is a summary of the activity under the Company's stock option
plans for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding at the beginning of the period.................. 968,220 $ 7.69
Granted..................................................... 66,171 11.58
Exercised................................................... 3,703 0.64
Forfeited................................................... 62,518 11.58
-------
Outstanding at the end of the period........................ 968,170
=======
Exercisable at the end of the period........................ 574,911
=======
Weighted average fair value of options granted.............. $10.54
======
</TABLE>
F-15
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
---------------- September 30,
1996 1997 1998
-------- ------- -------------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.44% 6.75% 5.15%
Expected life................................. 10 years 9 years 10 years
Expected volatility........................... -- 52.77% 98.99%
Expected dividend yield....................... -- -- --
</TABLE>
The following table summarizes information regarding the Company's stock
options outstanding and exercisable as of September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Shares Life Price Shares Price
-------------- ------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
$0.64...................... 340,128 8 years $ 0.64 340,128 $ 0.64
$11.58..................... 628,042 9 years $ 11.58 234,783 $ 11.58
</TABLE>
7. Related Party Transactions
The Company believes that the historical financial statements reflect all
costs of doing business. Many of such costs are derived from transactions with
related parties.
In the normal course of business, the Company and True North have from time-
to-time entered into various business transactions and agreements, and the
Company and True North may enter into additional transactions in the future.
The following is a summary of each of the material agreements between the
Company and True North.
Administrative Services Agreement. Under an Administrative Services
Agreement, True North will provide administrative functions and other services
to the Company, including tax preparation, insurance, treasury consulting and
legal. During the period in which True North performs administrative functions
for the Company, expenses associated with such functions will be charged to the
Company based on rates and estimates set forth on schedules attached to the
Administrative Services Agreement. The Company may terminate this agreement at
any time upon 90 days' prior written notice, and True North may terminate the
agreement 12 months following the Combination, but must give 180 days' written
notice of such intent to terminate.
Intercompany Credit Arrangements. The Company and True North are parties to
intercompany credit agreements. In August 1998, True North extended a credit
facility to the Company allowing for revolving borrowings in the amount of up
to $3.0 million to be outstanding at any given time at an interest rate equal
to True North's cost of borrowing plus two percent. In addition, True North has
agreed at its discretion to provide guarantees for Modem Media borrowings from
time to time in exchange for a fee of 0.5% per annum on the amount guaranteed.
The credit facility with True North expires two years from the date of
completion of the initial public offering, or sooner upon the occurrence of
certain events. See "Management's Discussion and Analysis of Financial
Condition
F-16
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and Results of Operations--Liquidity and Capital Resources." In May 1998, the
Company agreed to provide advances to True North from time to time upon True
North's request and subject to the Company's discretion.
Sublease with Bozell. The Company has entered into a sublease with Bozell
pursuant to which the Company will lease office space in New York. The rent per
square foot under the sublease agreement is based on the average monthly rent
per square foot and other related costs under Bozell's underlying lease.
Brazil Affiliation Agreement. The Company has entered into an agreement with
Bozell pursuant to which Bozell has agreed, for a period of two years, to
provide services to the Company's clients through its office in Sao Paolo,
Brazil as requested by the Company. In return, the Company has granted a
license to Bozell to operate its office in Brazil under the name "Modem Media .
Poppe Tyson, Inc." during the same period.
Tax Matters Agreement. In connection with the transactions consummated
effective October 1, 1998, after the offering, the Company and True North
intend to enter into an agreement providing for certain unitary state tax
sharing arrangements.
Parent Company Allocations--True North charges each of its operating units
for general corporate expenses incurred at the parent company level, including
costs to administer employee benefit plans (see also Note 8); legal, accounting
and treasury services; use of office facilities; and other services for certain
operations. The amount of the charge is primarily based on its budgeted
revenue. The Company believes that the method used to allocate these expenses
is reasonable. These charges amounted to approximately $0, $262,000 and
$291,000 for the years ended December 31, 1995, 1996 and 1997, respectively,
and approximately $229,000 and $308,000 for the nine months ended September 30,
1997 and 1998, respectively, and are included in office and general expenses in
the consolidated statements of operations. True North ceased charging
allocations to the Company as of June 30, 1998, as the Company has taken on
responsibility for the majority of the functions that generate the
aforementioned corporate expenses. The Company expects that it may incur
increased expenses associated with being a public company.
Parent Company Guarantees--Commencing on July 1, 1998, True North has
guaranteed payment on behalf of the Company under certain operating and other
leases at a fee of 0.5% of the amount guaranteed.
As a result of the above agreements and other related transactions the
financial statements reflect the following balances:
True North Note Receivable--On May 26, 1998, the Company entered into an
agreement to loan up to $3,000,000 to True North under a demand note facility.
The Company receives payments from True North under such facility from time to
time, as requested. The loan bears interest at 5.75% per annum, payable
quarterly, unless the parties agree upon other arrangements. The principal
amount outstanding under the facility is due and payable at termination of the
agreement, which may be effected at either party's sole discretion upon one
business day's written notice. The outstanding balance under this facility is
$2,500,000 as of September 30, 1998 and is reflected as True North Note
Receivable in the accompanying consolidated balance sheets.
F-17
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to Bozell--Amounts borrowed from Bozell to fund operations are non-
interest bearing. Amounts owed to Bozell as of the date of the reorganization
will be contributed to paid-in capital. Accordingly, the balances outstanding
as of December 31, 1997 and September 30, 1998 have been reflected as
noncurrent liabilities in the accompanying consolidated balance sheets.
The average amounts outstanding for the year ended December 31, 1997 and for
the nine months ended September 30, 1998 were $1.7 million and $4.3 million,
respectively. The amounts were incurred ratably over the periods as advances to
fund operations of Poppe Tyson.
Due to True North--On December 31, 1996, the Company entered into a one-year
agreement with True North, whereby True North provided the Company with a
credit facility. The agreement has been extended indefinitely beyond the
initial one-year term by mutual consent and under the terms outlined hereafter.
The Company receives advances from True North under the facility from time to
time, as requested. Prior to 1998, outstanding borrowings bore interest at
LIBOR plus .75%, which was due monthly. All accrued interest is due and payable
upon termination of the agreement. In 1998, True North ceased charging interest
to the Company under this facility. The outstanding balances at December 31,
1997 and September 30, 1998 were $6,659,000 and $7,152,000, respectively,
including $5,930,000 and $5,940,000 included in Net Assets of True North Units
Held for Transfer as of such dates, respectively. Future payments under this
facility will be made at the option of the Company or on demand. At December
31, 1997 and September 30, 1998, $729,000 and $1,212,000, respectively, are
reflected as Due to True North in the accompanying consolidated balance sheets.
The average amount outstanding for the nine months ended September 30, 1998
for which no interest expense has been accrued is approximately $971,000. The
amounts incurred represent advances to fund operations.
Due to Former Modem Partnership Partners--In December 1996, prior to the
acquisition by True North, the partners of the Modem Partnership declared a
distribution of $1,564,000, which was paid in cash on January 2, 1997.
Note Payable to True North--On December 31, 1996, True North capitalized
intercompany payables of $8,454,000 from the Company to True North into equity,
including $6,394,000 recorded in the balance sheets of the non-strategic
digital interactive marketing operations to be sold back to True North prior to
the offering. The remaining $6,000,000 intercompany payables became a
noncurrent obligation, payable by the Company upon completion of an initial
public offering.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
8. Employee Benefit Plans
The Company maintains a profit-sharing plan with a 401(k) feature for the
benefit of its eligible employees. There is no minimum length of service
required to participate in the plan and employees
F-18
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the Company are eligible to begin participation on designated quarterly
enrollment dates provided that they have reached 21 years of age. The Company
makes annual matching and/or profit-sharing contributions to the plan at its
discretion. In addition, certain employees of the Company have participated in
other similar defined contribution plans. Such employees subsequently became
participants of the aforementioned profit-sharing plan. Aggregate cost of
contributions made by the Company to all employee benefit plans were $0, $0 and
$40,000 during the years ended December 31, 1995, 1996 and 1997, respectively,
and $31,000 and $156,000 during the nine months ended September 30, 1997 and
1998, respectively.
The Company intends to adopt a 1999 Employee Stock Purchase Plan effective
upon the completion of its initial public offering.
9. Commitments and Contingencies
Information Systems--In April 1998, the Company entered into a contract for
the replacement of its financial accounting systems. The cost of such systems,
which will be capitalized and amortized over five years, will be approximately
$1,600,000, of which $800,000 has been incurred as of September 30, 1998. The
project's completion is expected during the second quarter of 1999.
Lease Obligations--The Company leases its office facilities and certain
equipment under both operating and capital leases, the expirations of which
extend through 2008. Future minimum lease payments under noncancellable leases
with lease terms in excess of one year as of December 31, 1997 and September
30, 1998, are as follows:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1998
--------------------- -----------------------
Capital Operating Capital Operating
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998......................... $ 390,000 $1,560,000 $ 101,000 $ 580,000
1999......................... 328,000 1,660,000 437,000 3,421,000
2000......................... 140,000 1,328,000 252,000 3,089,000
2001......................... 68,000 976,000 140,000 2,731,000
2002......................... 42,000 386,000 117,000 1,981,000
Thereafter................... -- -- 36,000 8,091,000
--------- ---------- ---------- -----------
968,000 1,083,000
$5,910,000 $19,893,000
========== ===========
Less: amount representing
interest.................... (154,000) (127,000)
--------- ----------
$ 814,000 $ 956,000
========= ==========
</TABLE>
Rent expense, including rent expense resulting from leases with related
parties (see Note 7), was $0, $117,000 and $1,131,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and $770,000 and $1,649,000 for
the nine months ended September 30, 1997 and 1998, respectively. The Company
incurred a non-cash charge of $570,000 during the year ended December 31, 1997
in connection with the termination of a lease for office space that is included
in office and general expenses in the accompanying consolidated statements of
operations.
Employment Agreements--In December 1996, the Company entered into five-year
employment agreements with certain senior executives providing for aggregate
initial base salaries of approximately $1,100,000, subject to increases at the
discretion of the Company's Board of
F-19
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Directors. Pursuant to the agreements, if the Company terminates any
executive's employment without cause, the executive is entitled to receive
severance benefits for a predetermined period.
Other--In September 1998, the Company executed a letter of intent relating to
an investment of up to $5.0 million in a company that provides media placement
on the Internet.
10. Income Taxes
The Company and its predecessor entities operated under tax-sharing
arrangements with their former parents. The Poppe Tyson Strategic Interactive
Marketing Operations are, and until October 1, 1998, the effective date of the
Combination, will continue to be, for federal income tax purposes, included in
the consolidated group of which True North is the common parent. The Poppe
Tyson Strategic Interactive Marketing Operations' federal taxable income and
loss through October 1, 1998 will be included in such group's consolidated tax
return filed by True North.
Prior to 1997, the Company was included in the consolidated federal and state
tax returns of True North. The settlement of tax provisions or benefits with
True North occurred in the subsequent year after True North filed its related
consolidated tax returns. Income taxes receivable or payable therefore
represent amounts due from or to True North. In 1997, the Company filed a
stand-alone consolidated federal tax return. After the offering, the Company
and True North intend to enter into a tax sharing arrangement whereby the
Company provides for and pays or receives certain state taxes.
The components of loss before (benefit) provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Domestic................ $ (85,000) $ 75,000 $ (1,258,000) $ (687,000) $ (1,608,000)
International........... -- (16,000) 81,000 52,000 (410,000)
True North Units Held
for Transfer........... (1,766,000) (1,309,000) (2,180,000) (1,600,000) (13,000)
------------ ------------ ------------ ------------ ------------
$ (1,851,000) $ (1,250,000) $ (3,357,000) $ (2,235,000) $ (2,031,000)
============ ============ ============ ============ ============
</TABLE>
The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Current (benefit)
provision:
Federal............... $ (453,000) $ (399,000) $ 250,000 $ 318,000 $ 307,000
Foreign............... -- (7,000) 40,000 25,000 71,000
State................. (425,000) (466,000) 68,000 21,000 170,000
---------- ---------- ---------- ---------- ---------
(878,000) (872,000) 358,000 364,000 548,000
---------- ---------- ---------- ---------- ---------
Deferred provision
(benefit):
Federal............... 5,000 196,000 (458,000) (462,000) (365,000)
Foreign............... -- 2,000 (2,000) (2,000) (16,000)
State................. -- 126,000 (146,000) (146,000) (110,000)
---------- ---------- ---------- ---------- ---------
5,000 324,000 (606,000) (610,000) (491,000)
---------- ---------- ---------- ---------- ---------
Total (benefit) provi-
sion................... $ (873,000) $ (548,000) $ (248,000) $ (246,000) $ 57,000
========== ========== ========== ========== =========
</TABLE>
F-20
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between the Company's effective income tax rate and the U.S.
statutory rate were as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------- ------------------
1995 1996 1997 1997 1998
---- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Statutory federal tax rate......... 35.0% 35.0% 35.0% 35.0% 35.0%
State taxes, net of federal
benefit........................... 14.9 17.7 1.5 3.6 (1.9)
Impact of foreign operations....... -- -- (2.8) (3.3) (9.8)
Goodwill amortization.............. -- (7.4) (20.7) (23.4) (26.1)
Other.............................. (2.7) (1.5) (5.6) (0.9) --
---- ---- ----- -------- --------
Effective rate................... 47.2% 43.8% 7.4% 11.0% (2.8)%
==== ==== ===== ======== ========
</TABLE>
The deferred tax assets and liabilities included in the consolidated
financial statements as of the balance sheet dates consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998
---------- --------- -------------
<S> <C> <C> <C>
Current assets (liabilities):
Accrued compensation................ $ 3,000 $ 51,000 $ 476,000
Bad debt reserve.................... -- 13,000 72,000
Lease reserve....................... -- 239,000 151,000
---------- --------- ---------
3,000 303,000 699,000
True North Units Held for Transfer.. 33,000 16,000 16,000
---------- --------- ---------
36,000 319,000 715,000
---------- --------- ---------
Noncurrent (liabilities) assets:
Accelerated amortization............ (27,000) 108,000 109,000
Other............................... (2,000) (24,000) 70,000
---------- --------- ---------
(29,000) 84,000 179,000
True North Units Held for Transfer.. (336,000) (126,000) (126,000)
---------- --------- ---------
(365,000) (42,000) 53,000
---------- --------- ---------
Net deferred tax (liabilities) and
assets............................... $ (329,000) $ 277,000 $ 768,000
========== ========= =========
</TABLE>
Management of the Company believes that the deferred tax assets are fully
realizable through future operations, therefore no valuation allowance has been
provided.
F-21
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Geographic Information
Information about the Company's operations in different geographic regions as
of and for the years ended December 31, 1995, 1996 and 1997, and as of and for
the nine months ended September 30, 1997 and 1998, is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Domestic.............. $ 438,000 $ 1,967,000 $ 25,008,000 $ 17,708,000 $ 26,752,000
International......... -- 126,000 489,000 317,000 3,645,000
------------ ------------ ------------ ------------ ------------
$ 438,000 $ 2,093,000 $ 25,497,000 $ 18,025,000 $ 30,397,000
============ ============ ============ ============ ============
(Loss) income before
(benefit)
provision for income
taxes:
Domestic.............. $ (85,000) $ 75,000 $ (1,258,000) $ (687,000) $ (1,608,000)
International......... -- (16,000) 81,000 52,000 (410,000)
True North Units Held
for Transfer......... (1,766,000) (1,309,000) (2,180,000) (1,600,000) (13,000)
------------ ------------ ------------ ------------ ------------
$ (1,851,000) $ (1,250,000) $ (3,357,000) $ (2,235,000) $ (2,031,000)
============ ============ ============ ============ ============
Net (loss) income:
Domestic.............. $ (48,000) $ 60,000 $ (1,434,000) $ (922,000) $ (1,494,000)
International......... -- (11,000) 43,000 29,000 (465,000)
True North Units Held
for Transfer......... (930,000) (751,000) (1,718,000) (1,096,000) (129,000)
------------ ------------ ------------ ------------ ------------
$ (978,000) $ (702,000) $ (3,109,000) $ (1,989,000) $ (2,088,000)
============ ============ ============ ============ ============
Identifiable assets:
Domestic.............. $ 44,657,000 $ 49,641,000 $ 57,429,000
International......... 74,000 1,810,000 3,309,000
True North Units Held
for Transfer......... 9,291,000 7,573,000 7,444,000
------------ ------------ ------------
$ 54,022,000 $ 59,024,000 $ 68,182,000
============ ============ ============
</TABLE>
12. Assets under Capital Leases
Assets under capital leases are included in the consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1996 1997 1998
-------- --------- -------------
<S> <C> <C> <C>
Computers and software.................. $ 12,000 $ 343,000 $ 387,000
Furniture and other..................... 305,000 779,000 1,152,000
-------- --------- ----------
317,000 1,122,000 1,539,000
Less: accumulated depreciation and
amortization........................... (81,000) (272,000) (491,000)
-------- --------- ----------
Total assets under capital leases..... $236,000 $ 850,000 $1,048,000
======== ========= ==========
</TABLE>
Depreciation on assets under capital leases is included in depreciation
expense for all periods presented.
F-22
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Supplemental Cash Flow Data
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest paid................... $ -- $ -- $119,000 $ 79,000 $127,000
Taxes paid (refunded)........... $(37,000) $15,000 $256,000 $322,000 $689,000
</TABLE>
14. Bad Debt Reserve
The bad debt reserve and related activity is as follows:
<TABLE>
<CAPTION>
Write-
Balance at Provision for offs, Balance at
Beginning Doubtful Net of End of
of Period Accounts Recoveries Other Period
---------- ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996................... $ -- $ -- $ -- $408,000 $408,000
Year Ended December 31,
1997................... $408,000 $517,000 $(489,000) $ 16,000 $452,000
Nine Months Ended
September 30, 1998..... $452,000 $251,000 $(125,000) $ -- $578,000
</TABLE>
"Other" represents the bad debt reserve balances acquired in the acquisitions
of the Modem Partnership in 1996 and the Poppe Tyson Strategic Interactive
Marketing Operations in 1997.
15. Subsequent Events
On November 25, 1998, the Company authorized its management to proceed with
an initial public offering of its Class A common stock.
On December 11, 1998, the Company's Board of Directors approved a proposal to
increase the number of shares of Class A common stock reserved for issuance
under the TN Technologies, Inc. 1997 Stock Option Plan from 1,140,000 to
3,040,000. Immediately thereafter, the Company granted options to purchase an
aggregate of 903,506 shares of its Class A common stock with an exercise price
of $11.05 per share to employees under such plan.
On January 11, 1999, the Company's Board of Directors approved an amendment
to the Company's Certificate of Incorporation to provide for the authorization
of an aggregate of 39,351,376 shares of Class A common stock and 5,648,624
shares of Class B common stock and a 0.95-for-1 reverse split of both classes
of the Company's outstanding common stock effective upon completion of the
Combination. Accordingly, all historical share and per-share amounts have been
restated to reflect the changes in authorized shares and the reverse stock
split.
On February 3, 1999, the Company signed a definitive agreement with True
North to purchase the Poppe Tyson Strategic Interactive Marketing Operations
effective October 1, 1998 in exchange for the net assets of non-strategic
digital interactive marketing businesses originally contributed by True North
to Modem Media in 1996 and 809,514 shares of common stock of the Company.
The unaudited pro forma consolidated balance sheet at September 30, 1998
reflects certain adjustments related to the Combination, including:
. the purchase of fixed assets of $1,624,000;
F-23
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. the forgiveness of $5,275,000 of intercompany payables;
. the sale to True North of non-strategic digital interactive marketing
operations originally contributed by True North to Modem Media in 1996;
. the issuance of an aggregate of 809,514 shares of Class B common stock to
True North; and
. the reclassification of a $6,000,000 note payable to True North to
current liabilities in conjunction with this offering.
All of the above transactions have been recorded at historical costs.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To True North Communications Inc.:
We have audited the accompanying balance sheets of Modem Media Advertising
Limited Partnership (a Connecticut limited partnership) as of December 31, 1995
and 1996, and the related statements of income, partners' capital and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of Modem Media
Advertising Limited Partnership. Our responsibility is to express an opinion on
these 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 audits 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 Modem Media Advertising
Limited Partnership as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 6, 1997
F-25
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................. $ 184,000 $2,586,000
Accounts receivable, net of bad debt reserve of
$262,000 and $408,000, respectively.................. 4,933,000 4,287,000
Unbilled revenues..................................... 316,000 514,000
Unbilled charges...................................... 759,000 475,000
Prepaid expenses and other current assets............. 22,000 125,000
---------- ----------
Total current assets.................................. 6,214,000 7,987,000
Property and Equipment:
Leasehold improvements................................ 84,000 144,000
Computers and software................................ 1,104,000 1,957,000
Furniture and other................................... 330,000 576,000
---------- ----------
Total property and equipment.......................... 1,518,000 2,677,000
Less: accumulated depreciation and amortization....... (312,000) (998,000)
---------- ----------
Total property and equipment, net..................... 1,206,000 1,679,000
Other Assets........................................... 43,000 33,000
---------- ----------
Total assets.......................................... $7,463,000 $9,699,000
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable...................................... $2,551,000 $1,576,000
Pre-billed media...................................... 211,000 1,343,000
Advance billings...................................... 32,000 965,000
Deferred revenues..................................... 110,000 161,000
Current portion of capital lease obligations.......... 82,000 76,000
Accrued compensation.................................. 320,000 313,000
Bank overdrafts....................................... 157,000 --
Due to partners....................................... -- 1,564,000
Other current liabilities............................. 52,000 506,000
---------- ----------
Total current liabilities............................. 3,515,000 6,504,000
Noncurrent Liabilities:
Capital lease obligations, less current portion....... 186,000 193,000
Other liabilities..................................... -- 26,000
Partners' Capital:
General partner's interest............................ 2,029,000 3,031,000
Limited partners' interest............................ 1,733,000 (55,000)
---------- ----------
Total partners' capital............................... 3,762,000 2,976,000
---------- ----------
Total liabilities and partners' capital............... $7,463,000 $9,699,000
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-26
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Revenues.................... $11,718,000 $18,102,000
Costs and Expenses:
Salaries and benefits..... 4,397,000 8,252,000
Guaranteed payments to
partners................. 629,000 1,003,000
Office and general........ 2,740,000 5,680,000
Expense related to
issuance of partnership
options.................. -- 3,045,000
----------- -----------
Total operating
expenses............... 7,766,000 17,980,000
Operating Income............ 3,952,000 122,000
Interest income........... 20,000 44,000
Interest expense.......... (12,000) (29,000)
----------- -----------
Net Income.................. $ 3,960,000 $ 137,000
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-27
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
General Limited Total
Partner's Partners' Partners'
Interest Interest Capital
---------- ---------- ----------
<S> <C> <C> <C>
Partners' Capital, December 31, 1994........ $1,051,000 $ 276,000 $1,327,000
Net income................................ 2,020,000 1,940,000 3,960,000
Distributions............................. (1,042,000) (483,000) (1,525,000)
---------- ---------- ----------
Partners' Capital, December 31, 1995........ 2,029,000 1,733,000 3,762,000
Net income................................ 70,000 67,000 137,000
Distributions............................. (2,113,000) (1,855,000) (3,968,000)
Issuance of partnership options........... 3,045,000 -- 3,045,000
---------- ---------- ----------
Partners' Capital, December 31, 1996........ $3,031,000 $ (55,000) $2,976,000
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 3,960,000 $ 137,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 253,000 686,000
Provision for doubtful accounts.................... 258,000 394,000
Expense related to issuance of partnership
options........................................... -- 3,045,000
Changes in assets and liabilities:
Accounts receivable............................... (4,302,000) 252,000
Unbilled revenues................................. (183,000) (198,000)
Unbilled charges.................................. (238,000) 284,000
Prepaid expenses and other current assets......... (7,000) (103,000)
Accounts payable and other current liabilities.... 2,498,000 (521,000)
Pre-billed media.................................. 211,000 1,132,000
Advance billings.................................. 32,000 933,000
Deferred revenues................................. 7,000 51,000
Accrued compensation.............................. -- (7,000)
Other, net........................................ (12,000) 36,000
----------- -----------
Net cash provided by operating activities........ 2,477,000 6,121,000
Cash flows from investing activities:
Purchase of property and equipment.................. (894,000) (952,000)
----------- -----------
Net cash used in investing activities............ (894,000) (952,000)
Cash flows from financing activities:
Bank overdrafts..................................... 158,000 (157,000)
Principal payments made under capital lease
obligations........................................ (34,000) (206,000)
Partners' distributions, net........................ (1,525,000) (2,404,000)
----------- -----------
Net cash used in financing activities............ (1,401,000) (2,767,000)
----------- -----------
Net increase in cash................................. 182,000 2,402,000
Cash, at beginning of period......................... 2,000 184,000
----------- -----------
Cash, at end of period............................... $ 184,000 $ 2,586,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ 13,000 $ 29,000
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-29
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Business and Significant Accounting Policies
Description of business--Modem Media Advertising Limited Partnership (the
"Modem Partnership"), a Connecticut limited partnership, was founded as
Interactive Response Media, a Connecticut general partnership, in 1987. In June
1993, Interactive Response Media reorganized as a Connecticut limited
partnership and changed its name to Modem Media Advertising Limited
Partnership. The Modem Partnership is a technology-based marketing
communications firm that provides interactive marketing solutions to its
customers.
Effective December 31, 1996, True North Communications Inc. ("True North")
acquired a 64% interest in the Modem Partnership directly from the partners.
True North contributed its ownership in the Modem Partnership and certain other
businesses to its subsidiary, TN Technologies Inc., now named Modem Media .
Poppe Tyson, Inc. These transactions are further described in Note 3 to the
consolidated financial statements of Modem Media . Poppe Tyson, Inc. appearing
elsewhere in this registration statement.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition--Revenues are recognized as services are rendered.
Unbilled revenues represent labor costs incurred and estimated earnings in
excess of billings. Unbilled charges represent production and other client
reimbursable out-of-pocket costs in excess of billings. Revenue is reported net
of such reimbursable costs. Pre-billed media represents amounts billed to
customers for media placement in advance of the advertisements being placed.
Advanced billings represent billings of production and other client
reimbursable out-of-pocket costs in excess of those incurred. Amounts billed to
clients in excess of revenues recognized to date are classified as deferred
revenues. Provisions for estimated losses on uncompleted projects are made in
the period in which such losses are determinable.
Business Concentration--The Modem Partnership's services have been provided
to a limited number of customers located in the United States in a variety of
industries. One customer accounted for approximately 78% of the Modem
Partnership's revenues during each of the years ended December 31, 1995 and
1996.
Property and equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three years for computers and software, and five to seven years
for furniture and other. Leasehold improvements are amortized over the lesser
of their estimated useful lives or the remaining lease term. The Modem
Partnership reviews its recorded fixed assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and provides currently for any identified impairments.
Income taxes--The Modem Partnership is a limited partnership pursuant to the
provisions of the Internal Revenue and Connecticut State Tax Codes.
Consequently, any federal and state income taxes
F-30
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
applicable to the Modem Partnership's income are payable directly by its
partners. Taxable income to the partners, computed on a modified cash basis,
was $1,537,000 and $5,105,000 for the years ended December 31, 1995 and 1996,
respectively, as compared to pre-tax book income of $3,960,000 and $137,000 for
the identical periods.
Fair value of financial instruments--The carrying value of the Modem
Partnership's current assets and current liabilities approximate their fair
values due to the short maturities of these financial instruments.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation. These changes had no impact on previously
reported results of operations or partners' capital.
2. Bad Debt Reserve
The Modem Partnership's bad debt reserve and related activity is as follows:
<TABLE>
<CAPTION>
Write-
Balance at Provision for offs, Balance at
Beginning Doubtful Net of End of
of Period Accounts Recoveries Period
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31,
1995..................... $ 21,000 $258,000 $ (17,000) $262,000
Year Ended December 31,
1996..................... $262,000 $394,000 $(248,000) $408,000
</TABLE>
3. Lease Commitments
The Modem Partnership leases office space in Westport and Norwalk,
Connecticut and equipment under capital and operating leases expiring in
various years through 2001. Rent expense related to operating leases totaled
$296,000 and $494,000 for the years ended December 31, 1995 and 1996,
respectively.
Minimum future lease payments under noncancelable capital and operating
leases with lease terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------
Capital Operating
-------- ----------
<S> <C> <C>
1997................................................... $ 94,000 $ 547,000
1998................................................... 74,000 524,000
1999................................................... 74,000 500,000
2000................................................... 55,000 291,000
2001................................................... 9,000 --
Thereafter............................................. -- --
-------- ----------
306,000 $1,862,000
==========
Less: amount representing interest................... (37,000)
--------
$269,000
========
</TABLE>
F-31
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Assets under capital leases are included in the consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Computers and software................................... $ 55,000 $ 12,000
Furniture and other...................................... 247,000 263,000
-------- --------
302,000 275,000
Less: accumulated depreciation and amortization.......... (44,000) (81,000)
-------- --------
Total assets under capital leases........................ $258,000 $194,000
======== ========
</TABLE>
The Modem Partnership's obligations under the lease for office space in
Westport, Connecticut were guaranteed as of December 31, 1996 by a $160,000
standby letter of credit secured by accounts receivable and other assets. In
April 1996, the Company obtained an additional $100,000 standby letter of
credit to guarantee certain vendor payables.
The Modem Partnership entered into two sublease agreements relative to the
Norwalk, Connecticut locations in October 1995 and May 1996. Total revenues to
be received in future years pursuant to these sublease agreements, which will
offset the Modem Partnership's obligation, approximate $58,000 at December 31,
1996.
4. Retirement Benefit Plan
Since January 1, 1994, the Modem Partnership has maintained a profit-sharing
plan with a 401(k) feature for the benefit of eligible employees. No minimum
length of service is required to participate in the plan and employees of the
Company are eligible to begin participation on designated quarterly enrollment
dates provided that they have reached 21 years of age. The Modem Partnership
made discretionary matching contributions of $60,000 and $74,000 during the
years ended December 31, 1995 and 1996, respectively.
5. Line of Credit
At December 31, 1996, the Company had a $1,000,000 bank line of credit
secured by accounts receivable and other assets. No borrowings were outstanding
under such line of credit as of the balance sheet date.
6. Transactions with Partners
Partner Compensation--The Modem Partnership's partners are also employees of
the Modem Partnership and their compensation is included in the accompanying
statements of income as "Guaranteed payments to partners." Distributions of the
Modem Partnership's net income to the partners are included in the financial
statements as "Distributions."
Due to Partners--In December 1996, the partners of the Modem Partnership
declared a distribution of $1,564,000, which was paid in cash on January 2,
1997.
F-32
<PAGE>
MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. 1996 Option Plan
In October 1996, the Modem Partnership established the Modem Media
Advertising Limited Partnership 1996 Option Plan and granted fully vested
options to certain employees to purchase interests in the Modem Partnership.
These options resulted in a pre-tax, one-time, non-cash charge against income
in the fourth quarter of 1996 of $3,045,000. The options have an exercise price
of $0.61 per share and vest upon issuance. The compensation expense was
calculated based upon the fair market value of the Modem Partnership's
ownership interests of approximately $9.00 per share which is derived from the
acquisition of the Modem Partnership by True North in December 1996.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To True North Communications Inc.:
We have audited the accompanying balance sheets of the Poppe Tyson Strategic
Interactive Marketing Operations as of December 31, 1996 and 1997, and the
related statements of operations, changes in equity (deficit) and cash flows
for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the management of the Poppe
Tyson Strategic Interactive Marketing Operations. Our responsibility is to
express an opinion on these 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 audits 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 the Poppe Tyson Strategic
Interactive Marketing Operations as of December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
November 16, 1998
F-34
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 332,000 $ 147,000
Accounts receivable, net of bad debt reserve of $0
and $16,000, respectively........................... 137,000 777,000
Unbilled charges..................................... -- 46,000
Prepaid expenses and other current assets............ 21,000 60,000
--------- -----------
Total current assets............................. 490,000 1,030,000
Property and Equipment:
Leasehold improvements............................... -- 7,000
Furniture, computers and software.................... 24,000 693,000
--------- -----------
Total property and equipment..................... 24,000 700,000
Less: accumulated depreciation and amortization...... (3,000) (168,000)
--------- -----------
Total property and equipment, net................ 21,000 532,000
Other Assets........................................... 5,000 3,000
--------- -----------
Total assets..................................... $ 516,000 $ 1,565,000
========= ===========
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable..................................... $ 72,000 $ 366,000
Current portion of capital lease obligations......... -- 139,000
Accrued liabilities.................................. 233,000 608,000
--------- -----------
Total current liabilities........................ 305,000 1,113,000
Noncurrent Liabilities:
Due to Bozell, non-interest bearing.................. 724,000 3,346,000
Capital lease obligations, less current portion...... -- 120,000
Equity (Deficit):
Accumulated deficit.................................. (480,000) (2,980,000)
Accumulated other comprehensive income............... (33,000) (34,000)
--------- -----------
Total equity (deficit)........................... (513,000) (3,014,000)
--------- -----------
Total liabilities and equity (deficit)........... $ 516,000 $ 1,565,000
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-35
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
Revenues............................................. $ 126,000 $ 3,925,000
Costs and Expenses:
Salaries and benefits.............................. 429,000 3,350,000
Office and general................................. 177,000 3,177,000
---------- ------------
Total costs and expenses......................... 606,000 6,527,000
Operating Loss....................................... (480,000) (2,602,000)
Interest Expense, Net................................ -- (46,000)
---------- ------------
Loss before Income Taxes............................. (480,000) (2,648,000)
Benefit for Income Taxes............................. -- (148,000)
---------- ------------
Net Loss............................................. $ (480,000) $ (2,500,000)
========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-36
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Other
Accumulated Comprehensive Total
Deficit Income Equity (Deficit)
------------ ------------- ----------------
<S> <C> <C> <C>
Balance as of December 31, 1995... $ -- $ -- $ --
Comprehensive income:
Net loss.......................... (480,000) -- (480,000)
Foreign currency translation
adjustment..................... -- (33,000) (33,000)
------------
Total comprehensive income.... (513,000)
------------ --------- ------------
Balance as of December 31, 1996... (480,000) (33,000) (513,000)
Comprehensive income:
Net loss........................ (2,500,000) -- (2,500,000)
Foreign currency translation
adjustment..................... -- (1,000) (1,000)
------------
Total comprehensive income.... (2,501,000)
------------ --------- ------------
Balance as of December 31, 1997... $ (2,980,000) $ (34,000) $ (3,014,000)
============ ========= ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-37
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (480,000) $ (2,500,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 3,000 165,000
Provision for doubtful accounts................... -- 16,000
Changes in assets and liabilities:
Accounts receivable.............................. (137,000) (656,000)
Unbilled charges................................. -- (46,000)
Prepaid expenses and other current assets........ (21,000) (39,000)
Accounts payable................................. 72,000 294,000
Accrued liabilities.............................. 233,000 375,000
Other, net....................................... (38,000) 1,000
---------- ------------
Net cash used in operating activities........... (368,000) (2,390,000)
Cash flows from investing activities:
Purchase of property and equipment.................. (24,000) (289,000)
---------- ------------
Net cash used in investing activities........... (24,000) (289,000)
Cash flows from financing activities:
Funding from parent company......................... 724,000 2,622,000
Principal payments made under capital lease
obligations........................................ -- (128,000)
---------- ------------
Net cash provided by financing activities....... 724,000 2,494,000
---------- ------------
Net increase (decrease) in cash...................... 332,000 (185,000)
Cash, at beginning of period......................... -- 332,000
---------- ------------
Cash, at end of period............................... $ 332,000 $ 147,000
========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ -- $ 46,000
========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-38
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
NOTES TO FINANCIAL STATEMENTS
1. Business and Significant Accounting Policies
Description of business--Poppe Tyson, Inc. ("Poppe Tyson") was formed in
December 1985 as a subsidiary of Bozell, Jacobs, Kenyon & Eckhardt, Inc.
("Bozell"), which was acquired by True North Communications Inc ("True North")
in December 1997 in a business combination accounted for under the pooling-of-
interests method. Poppe Tyson includes the strategic interactive marketing
operations and web site production and maintenance businesses of Bozell.
The strategic interactive marketing operations of Poppe Tyson (the "Poppe
Tyson Strategic Interactive Marketing Operations" or the "Company") consist of
Poppe Tyson's strategic interactive marketing operations in the United Kingdom,
Hong Kong and the U.S., and certain fixed assets. The operations in the United
Kingdom commenced operations in the fourth quarter of 1996 and the operations
in Hong Kong and the United States commenced in 1997.
Effective October 1, 1998, the Poppe Tyson Strategic Interactive Marketing
Operations were purchased by Modem Media . Poppe Tyson, Inc. ("Modem Media"),
formerly TN Technologies, Inc. This transaction is further discussed in Notes 1
and 3 to the consolidated financial statements of Modem Media appearing
elsewhere in this registration statement.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition--Revenues are recognized as services are rendered.
Unbilled charges represent production and other client reimbursable out-of-
pocket costs in excess of billings. Revenue is reported net of such
reimbursable costs. Amounts billed to clients in excess of revenues recognized
to date are classified as deferred revenues. Provisions for estimated losses on
uncompleted projects are made in the period in which such losses are
determinable.
Business Concentration and Credit Risk--The Company's services have been
provided to a limited number of clients in a variety of industries. Three
customers accounted for 75.0% and one customer accounted for 42.4% of the
Company's revenues during the years ended December 31, 1996 and 1997,
respectively.
Four customers accounted for the entire accounts receivable balance as of
December 31, 1996 and two customers accounted for 34.7% of accounts receivable
as of December 31, 1997.
Property and equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three years for computers and software, and five to seven years
for furniture and other. Leasehold improvements are amortized over the lesser
of their estimated useful lives or the remaining lease term. The Company
reviews its recorded fixed assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and provides currently for any identified impairments.
F-39
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes--The Company and Bozell have certain tax-sharing arrangements as
described in Note 4. The Company accounts for income taxes under the liability
method in accordance with SFAS No. 109, Accounting for Income Taxes. In
accordance with such standard, the provision for income taxes includes deferred
income taxes resulting from items reported in different periods for income tax
and financial statement purposes. Deferred tax assets and liabilities represent
the expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effects of changes in tax rates on deferred tax
assets and liabilities are recognized in the period that includes the enactment
date.
Foreign Currency Translation--The Company's financial statements were
prepared in accordance with the requirements of SFAS No. 52, Foreign Currency
Translation. Under this method, net foreign currency transaction gains (losses)
are included in the accompanying statements of operations. Such gains (losses)
were immaterial for the years ended December 31, 1996 and 1997.
Fair value of financial instruments--The carrying value of the Company's
current assets and current liabilities approximate their fair values due to the
short maturities of these financial instruments.
2. Lease Commitments
The Company leases office space in the United Kingdom and Hong Kong and
equipment under capital and operating leases expiring in various years through
2002. Rent expense related to operating leases totaled $35,000 and $231,000 for
the years ended December 31, 1996 and 1997, respectively.
Minimum future lease payments under noncancellable capital and operating
leases with lease terms in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
1998..................................................... $185,000 $287,000
1999..................................................... 143,000 253,000
2000..................................................... 15,000 125,000
2001..................................................... -- 125,000
2002..................................................... -- 32,000
Thereafter............................................... -- --
-------- --------
343,000 $822,000
========
Less: amount representing interest..................... (84,000)
--------
$259,000
========
</TABLE>
Assets under capital leases are included in the 1997 balance sheet as
follows:
<TABLE>
<S> <C>
Furniture, computers and software.................................. $387,000
Less: accumulated depreciation and amortization.................... (55,000)
--------
Total assets under capital leases................................ $332,000
========
</TABLE>
F-40
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Related Party Transactions
Due to Bozell--Amounts remitted to, and borrowed from, Bozell to fund
operations are non-interest bearing. Amounts owed to Bozell as of the effective
date of the sale of the Company to Modem Media (see Note 1) will be contributed
to paid-in capital. Accordingly, the balances outstanding as of December 31,
1996 and 1997 have been reflected as noncurrent liabilities in the accompanying
balance sheets.
The average amount outstanding for the year ended December 31, 1997 was
approximately $60,000. The amount was incurred ratably over the year as
advances to fund operations.
Parent Company Allocations--Bozell charges each of its operating units for
general corporate expenses incurred at the parent company level, including
costs to administer certain employee benefit plans; legal, accounting and
treasury services; use of office facilities; and other services for certain
operations. These charges amounted to approximately $0 and $115,000 for the
years ended December 31, 1996 and 1997, respectively, and are included in
office and general expenses in the statements of operations. The Company
believes that the method used to allocate these general corporate expenses
(based on revenue) is reasonable and that the expenses that would have been
incurred on a stand-alone basis would not be materially different.
4. Income Taxes
The Company operates under a tax sharing agreement with its parent, Bozell,
and until October 1, 1998, the effective date of the sale of the Company to
Modem Media will continue to be, for federal income tax purposes, included in
Bozell's consolidated returns.
The components of loss before income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
Domestic........................................... $ -- $ (352,000)
International...................................... (480,000) (2,296,000)
---------- ------------
$ (480,000) $ (2,648,000)
========== ============
The benefit for income taxes consists of the following:
<CAPTION>
Year Ended
December 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
Current benefit:
Federal.......................................... $ -- $ (110,000)
Foreign.......................................... -- --
State............................................ -- (38,000)
---------- ------------
Total benefit...................................... $ -- $ (148,000)
========== ============
</TABLE>
The Company's effective income tax rates and the U.S. statutory rate of 35.0%
differ principally because the Company has not recognized tax benefits on the
losses of its international operations.
F-41
<PAGE>
POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Subsequent Events
Effective October 1, 1998, the Poppe Tyson Strategic Interactive Marketing
Operations were purchased by Modem Media, formerly TN Technologies, Inc. This
transaction is further discussed in Notes 1 and 3 to the consolidated financial
statements of Modem Media appearing elsewhere in this registration statement.
F-42
