<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
Commission File No. 0-21935
----------------
Modem Media . Poppe Tyson, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1464807
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
230 East Avenue
Norwalk, CT 06855
(203) 299-7000
(Address of principal executive offices and zip code)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 5,448,595 shares of the Registrant's Class A Common Stock, $.001
par value, and 5,641,024 shares of the Registrant's Class B Common Stock,
$.001 par value, outstanding as of May 5, 1999.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
----------- ----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998.................................................. 1
Condensed Consolidated Statements of Operations for the three months
ended
March 31, 1999 and 1998............................................ 2
Condensed Consolidated Statements of Cash Flows for the three months
ended
March 31, 1999 and 1998............................................ 3
Notes to Condensed Consolidated Financial Statements................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations................................................... 8
PART II. OTHER INFORMATION
</TABLE>
<TABLE>
<S> <C>
Item 1. Legal Proceedings................................................. 15
Item 2. Changes in Securities and Use of Proceeds......................... 15
Item 3. Defaults Upon Senior Securities................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Signatures............................................................ 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 47,539,000 $ 7,824,000
Accounts receivable, net.............................. 8,574,000 13,619,000
Unbilled revenues..................................... 1,792,000 1,261,000
True North note receivable............................ -- 4,500,000
Other current assets.................................. 2,744,000 2,263,000
------------ -----------
Total current assets................................ 60,649,000 29,467,000
Noncurrent assets:
Property and equipment, net........................... 6,895,000 6,826,000
Goodwill, net......................................... 51,068,000 33,139,000
Other assets, including deferred offering costs in
1998................................................. 254,000 1,854,000
------------ -----------
Total noncurrent assets............................. 58,217,000 41,819,000
------------ -----------
Total assets........................................ $118,866,000 $71,286,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,613,000 $ 4,522,000
Pre-billed media...................................... 5,625,000 6,914,000
Advance billings...................................... 2,063,000 2,164,000
Deferred revenues..................................... 4,643,000 5,484,000
Due to True North..................................... 625,000 1,797,000
Note payable to True North............................ -- 6,000,000
Accrued expenses and other current liabilities........ 7,172,000 8,503,000
------------ -----------
Total current liabilities........................... 22,741,000 35,384,000
Other liabilities....................................... 297,000 342,000
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued and outstanding.............. -- --
Common stock, Class A, $.001 par value, 39,351,376
shares authorized, 5,452,495 and 2,424,135 shares
issued............................................... 5,000 2,000
Common stock, Class B, $.001 par value, 5,648,624
shares authorized, 5,641,024 and 5,648,624 shares
issued............................................... 6,000 6,000
Paid-in capital....................................... 108,116,000 47,211,000
Accumulated deficit................................... (12,086,000) (11,613,000)
Treasury stock, 9,555 shares of Class A common stock,
at cost.............................................. (176,000) --
Accumulated other comprehensive income................ (37,000) (46,000)
------------ -----------
Total stockholders' equity.......................... 95,828,000 35,560,000
------------ -----------
Total liabilities and stockholders' equity.......... $118,866,000 $71,286,000
============ ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
1
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
Revenues......................................... $12,383,000 $9,016,000
Costs and expenses:
Salaries and benefits.......................... 8,484,000 5,920,000
Office and general............................. 3,923,000 2,474,000
Amortization of goodwill....................... 590,000 417,000
Operating losses of True North Units Held for
Transfer...................................... -- 81,000
----------- ----------
Total costs and expenses..................... 12,997,000 8,892,000
----------- ----------
Operating (loss) income.......................... (614,000) 124,000
Interest income (expense), net................... 337,000 (1,000)
----------- ----------
(Loss) income before income taxes................ (277,000) 123,000
Provision for income taxes....................... 196,000 317,000
----------- ----------
Net loss......................................... $ (473,000) $ (194,000)
=========== ==========
Basic and diluted net loss per share............. $ (0.05) $ (0.03)
=========== ==========
Basic and diluted weighted-average number of
common shares outstanding....................... 9,655,000 7,263,000
=========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (473,000) $ (194,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 742,000 310,000
Amortization of goodwill......................... 590,000 417,000
Provision for doubtful accounts.................. 108,000 70,000
Loss on disposal of equipment.................... 75,000 --
Changes in assets and liabilities:
Accounts receivable............................ 4,937,000 (1,058,000)
Unbilled revenues.............................. (531,000) (199,000)
Other current assets........................... (481,000) (368,000)
Accounts payable, accrued expenses and other
current liabilities........................... (3,196,000) 373,000
Pre-billed media............................... (1,289,000) (1,194,000)
Advance billings............................... (101,000) 170,000
Deferred revenues.............................. (841,000) (24,000)
Other, net..................................... 203,000 141,000
Net assets of True North Units Held for
Transfer...................................... -- 89,000
----------- -----------
Net cash used in operating activities........ (257,000) (1,467,000)
Cash flows from investing activities:
Purchase of property and equipment................. (881,000) (346,000)
----------- -----------
Net cash used in investing activities........ (881,000) (346,000)
Cash flows from financing activities:
Proceeds from initial public offering.............. 43,459,000 --
Funding (to) from True North....................... (2,672,000) 997,000
Principal payments made under capital lease
obligations....................................... (96,000) (85,000)
Other, net......................................... 162,000 --
----------- -----------
Net cash provided by financing activities.... 40,853,000 912,000
----------- -----------
Net increase (decrease) in cash...................... 39,715,000 (901,000)
Cash, at beginning of the period..................... 7,824,000 7,056,000
----------- -----------
Cash, at end of the period........................... $47,539,000 $ 6,155,000
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations--Modem Media . Poppe Tyson, Inc. ("Modem Media" or the
"Company") is a subsidiary of True North Communications Inc. ("True North")
and has been a leading provider of digital interactive marketing solutions
since 1987. By developing internet marketing programs that incorporate
advanced communication technologies, the Company enables its clients to
attract, acquire and retain customers. 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 data collection and 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, with an affiliate office in Brazil.
Basis of Presentation--The condensed consolidated balance sheet as of March
31, 1999, and the condensed consolidated statements of operations and cash
flows for the three months ended March 31, 1999 and 1998, are unaudited. The
unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments), that are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position and results of operations. The operating results for the three months
ended March 31, 1999 and 1998 are not necessarily indicative of the results to
be expected for any other interim period or any future fiscal year.
Reclassifications--Certain reclassifications have been made in the prior
period condensed consolidated financial statements to conform to the current
period presentation.
Income Taxes--The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. The Company's 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 the Company sold back to True North
effective October 1, 1998 (see Note 2) and losses of certain foreign
subsidiaries on which the Company did not recognize a tax benefit.
Cash and cash equivalents--The Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.
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. The Company had a net loss for all periods presented herein; as a
result, none of the options outstanding during each of the periods presented
were included in the computations of diluted net loss per share because they
were antidilutive.
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 its acquisition of the strategic interactive marketing
operations of Poppe Tyson, Inc. from True North, which occurred on February 3,
1999 (see Notes 2 and 3). Accordingly, all historical weighted-average share
and per-share amounts have been restated to reflect the reverse stock split.
4
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
On December 31, 1996, True North, through the Company, acquired a 64%
interest in Modem Media Advertising Limited Partnership (the "Modem
Partnership"). In addition to the consideration initially paid, True North was
obligated to make cash payments of up to $19,000,000 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 the Company's
common stock. The acquisition agreement also required additional payments
contingent on future earnings to be made in the event that an initial public
offering had not occurred, which payments would thereby reduce the
aforementioned $19,000,000 obligation. Pursuant to the agreement, payments
aggregating $4,413,000 were made to the former owners through December 31,
1998. On February 10, 1999, the Company completed an initial public offering
of its common stock (see Note 3). As a result, True North paid $14,587,000 in
cash and issued $3,931,000 in True North common stock to the former owners of
the Modem Partnership, thereby resulting in corresponding increases in
goodwill recorded on the books of the Company. Such amounts are being
amortized over the remainder of the original 20-year amortization period
beginning in February 1999, and will result in approximately $1,000,000 of
additional amortization of goodwill per year over the next 18 years.
On February 3, 1999, the Company signed a definitive agreement with True
North to purchase the strategic interactive marketing operations of Poppe
Tyson, Inc. effective October 1, 1998 in exchange for (i) the net assets of
non-strategic digital interactive marketing businesses originally contributed
by True North to the Company in 1996 and (ii) 809,514 shares of Class B common
stock of the Company. In conjunction with this transaction, True North forgave
$5,763,000 of intercompany borrowings and transferred $1,624,000 of fixed
assets to the Company.
3. Equity
Change in Authorized Shares/Reverse Stock Split--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. On that date, the Board of Directors also approved a 0.95-for-1
reverse split of both classes of the Company's outstanding common stock
effective upon completion of the acquisition of the strategic interactive
marketing operations of Poppe Tyson, Inc., which occurred on February 3, 1999
(see Note 2). Accordingly, all historical share and per-share amounts have
been restated to reflect the changes in authorized shares and the reverse
stock split.
Initial Public Offering--On February 10, 1999, the Company completed an
initial public offering of 2,990,000 shares of its Class A common stock at an
initial public offering price of $16.00 per share. Total net proceeds from the
offering were approximately $42,051,000. The Company used a portion of these
proceeds to settle a $6,000,000 note payable to True North that became due and
payable upon consummation of the offering. The Company expects to use the
remaining net proceeds for general corporate purposes and global expansion.
Pending the use of the net proceeds for the above purposes, the Company has
invested such funds in short-term, interest-bearing, investment grade
obligations that are reflected as cash equivalents in the accompanying
condensed consolidated balance sheet as of March 31, 1999.
Treasury Stock--The Company accounts for treasury stock purchases at cost.
4. Comprehensive Income
The Company reflects its comprehensive income, such as unrealized gains and
losses on the Company's foreign currency translation adjustments, as a
separate component of stockholders' equity as required by SFAS
5
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No. 130, Reporting Comprehensive Income. Total comprehensive income for the
three months ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss........................................... $(473,000) $(194,000)
Foreign currency translation adjustment............ 9,000 19,000
--------- ---------
Total comprehensive income....................... $(464,000) $(175,000)
========= =========
</TABLE>
5. Stock Purchase Plan
In February 1999, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") under which a total of 950,000 shares of Class A common
stock have been made available for sale. Employees are eligible to participate
in the Purchase Plan if the Company employs them 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, as
defined, subject to certain limitations. The purchase price of each share of
Class A common stock under this plan will be equal to 85% of the fair market
value per share of Class A common stock on the first or last day of the
offering period, whichever is lower. The Purchase Plan will be implemented in
a series of consecutive, overlapping offering periods, each approximately six
months in duration. However, the first offering period shall be a period of 24
months commencing on February 15, 1999 and terminating on February 14, 2001.
Employees may modify or end their participation in the offering at any time
during the offering period, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate in 2009 unless sooner terminated by the Company's Board of
Directors.
6. Related Party Transactions
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,
which bore interest at 5.75% per annum. Such agreement was amended on November
24, 1998 to increase the availability under such facility to $10,000,000. The
outstanding balance under this facility was $4,500,000 as of December 31, 1998
and is reflected as "True North note receivable" in the accompanying condensed
consolidated balance sheet. In February 1999, True North repaid all amounts
outstanding under this note.
Due to True North--On December 31, 1996, the Company and True North entered
into a one-year agreement, whereby True North agreed to provide advances to
the Company from time-to-time, as requested. This agreement has been extended
indefinitely beyond the initial one-year term by mutual consent and, in 1998,
True North ceased charging interest to the Company under this facility. The
outstanding balances under this facility were $625,000 and $1,797,000 as of
March 31, 1999 and December 31, 1998, respectively. In April 1999, the Company
repaid the outstanding balance of $625,000 to True North.
Note Payable to True North--The Company's $6,000,000 note payable to True
North was repaid in February 1999 with a portion of the Company's net proceeds
from its initial public offering (see Note 3).
The Company believes that all of the transactions set forth above were made
on terms equivalent to those that the Company could have 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 equivalent to those that the Company could obtain from
unaffiliated third parties.
6
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies
Other--In September 1998, the Company executed a letter of intent relating
to an investment of up to $5,000,000 in a company that provides media
placement on the Internet. This letter of intent was terminated during the
current quarter.
8. Geographic Information
Information about the Company's operations in different geographic regions
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Revenues:
Domestic......................................... $10,779,000 $7,885,000
International.................................... 1,604,000 1,131,000
----------- ----------
$12,383,000 $9,016,000
=========== ==========
(Loss) income before income taxes:
Domestic......................................... $ 121,000 $ 254,000
International.................................... (398,000) (50,000)
True North Units Held for Transfer............... -- (81,000)
----------- ----------
$ (277,000) $ 123,000
=========== ==========
Net loss:
Domestic......................................... $ (192,000) $ (37,000)
International.................................... (281,000) (68,000)
True North Units Held for Transfer............... -- (89,000)
----------- ----------
$ (473,000) $ (194,000)
=========== ==========
9. Supplemental Cash Flow Data
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Interest paid...................................... $ 48,000 $ 35,000
Taxes paid......................................... $ -- $ 111,000
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements herein constitute "forward-looking statements" within the
meaning of Section 21E(i)(1) of the Securities and Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results of Modem Media to be
materially different from any future results expressed or implied by these
statements. Such factors include, among other things, the following: a history
of operating losses, dependence on a limited number of clients, variability of
operating results, the ability to integrate acquired companies, the ability to
estimate costs in fixed-fee assignments, the extent to which the interests of
Modem Media's controlling stockholder, True North, conflict with Modem Media's
interests, the ability to manage future growth, dependence on key management
personnel, exclusivity arrangements with clients that may limit the ability to
provide services to others, dependence on technology, dependence on the
continued growth of the Internet, and changes in government regulation. In
light of these and other uncertainties, the forward-looking statements
included in this document should not be regarded as a representation by Modem
Media that its plans and objectives will be achieved.
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 clients 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 periodically 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.
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, utilities, depreciation, amortization of software,
professional and consulting fees, travel, telephone and other related
expenses.
8
<PAGE>
Modem Media has experienced operating losses as well as net losses on both a
historical and pro forma basis, as defined below, in nine of the thirteen
quarters from January 1, 1996 through March 31, 1999. 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, including the
effect of amortization of goodwill, Modem Media expects to continue to incur
operating losses through 1999 and beyond. There can be no assurance that Modem
Media will achieve or sustain profitability.
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.
In the past, Modem Media has experienced revenue declines during the first
quarter of the year 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.
Pro Forma Results of Operations
The following table sets forth certain pro forma statements of operations
data of Modem Media for the three months ended March 31, 1999 and 1998. The
pro forma results of operations data of Modem Media presented below assume
that the disposition of the non-strategic digital interactive marketing
operations that Modem Media sold back to True North effective October 1, 1998
occurred on January 1, 1998. 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 disposition of the non-strategic digital
interactive marketing operations occurred on January 1, 1998, or of the
results of operations that may be obtained by Modem Media in the future.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------- ------------
(unaudited, in thousands)
<S> <C> <C>
Revenues.................................... $ 12,383 $ 9,016
Salaries and benefits....................... 8,484 5,920
Office and general.......................... 3,923 2,474
Amortization of goodwill.................... 590 417
------------- ------------
Operating (loss) income..................... (614) 205
Interest income (expense), net.............. 337 (1)
Provision for income taxes.................. 196 309
------------- ------------
Net loss.................................... $ (473) $ (105)
============= ============
</TABLE>
9
<PAGE>
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>
Three Months Ended
March 31,
---------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Revenues........................................ 100.0% 100.0%
Salaries and benefits........................... 68.5 65.7
Office and general.............................. 31.7 27.4
Amortization of goodwill........................ 4.8 4.6
--------- ---------
Operating (loss) income......................... (5.0) 2.3
Interest income (expense), net.................. 2.7 --
Provision for income taxes...................... 1.5 3.4
--------- ---------
Net loss........................................ (3.8)% (1.1)%
========= =========
</TABLE>
Pro Forma Three Months Ended March 31, 1999 Compared to Pro Forma Three Months
Ended March 31, 1998
Revenues. Pro forma revenues increased $3.4 million, or 37.3%, to $12.4
million for the three months ended March 31, 1999 from $9.0 million for the
three months ended March 31, 1998. Pro forma revenues increased primarily as a
result of increased services provided to existing clients, as well as the
addition of new clients.
Salaries and Benefits. Pro forma salaries and benefits increased $2.6
million, or 43.3%, to $8.5 million for the three months ended March 31, 1999
from $5.9 million for the three months ended March 31, 1998. Pro forma
salaries and benefits represented 68.5% and 65.7% of pro forma revenues for
the three months ended March 31, 1999 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 $1.4 million, or
58.6%, to $3.9 million for the three months ended March 31, 1999 from $2.5
million for the three months ended March 31, 1998. Pro forma office and
general represented 31.7% and 27.4% of pro forma revenues for the three months
ended March 31, 1999 and 1998, respectively. Both the dollar and percentage
increases in pro forma office and general were primarily due to increased
occupancy and office support expenses incurred in connection with increases in
headcount.
Amortization of Goodwill. Pro forma amortization of goodwill increased by
$0.2 million, or 41.5%, to $0.6 million for the three months ended March 31,
1999 from $0.4 million for the three months ended March 31, 1998. The increase
is a result of payments of additional purchase price for Modem Media
Advertising Limited Partnership (the "Modem Partnership") by True North to the
former owners of the Modem Partnership. True North made total payments of $3.3
million and $18.5 million in May 1998 and February 1999, respectively (see
Note 2 of Notes to Condensed Consolidated Financial Statements of Modem Media
. Poppe Tyson, Inc. and Subsidiaries). Goodwill originated from the
combination of Modem Media with the Modem Partnership in December 1996 and is
being amortized by Modem Media over a 20-year period.
Interest. Pro forma interest income, net increased to $0.3 million during
the three months ended March 31, 1999. The increase is principally
attributable to interest income earned on investments purchased with the
proceeds from Modem Media's initial public offering.
10
<PAGE>
Income Taxes. Modem Media had a provision for income taxes of $0.2 million
on a pro forma pre-tax loss of $0.3 million for the three months ended March
31, 1999, as compared to a provision for income taxes of $0.3 million on pro
forma pre-tax income of $0.2 million for the three months ended March 31,
1998. On a pro forma basis, the effective income tax rates for the three
months ended March 31, 1999 and 1998 were 70.8% and 151.5%, respectively. The
effective tax rates differ from the federal statutory rate primarily due to
the effect of non-deductible goodwill amortization and losses of certain
foreign subsidiaries on which Modem Media did not recognize a tax benefit.
Historical Results of Operations
The following table sets forth certain items from Modem Media's statements
of operations data included elsewhere in this Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------------- ------------
(unaudited, in thousands)
<S> <C> <C>
Revenues................................. $ 12,383 $ 9,016
Salaries and benefits.................... 8,484 5,920
Office and general....................... 3,923 2,474
Amortization of goodwill................. 590 417
Operating losses of True North Units Held
for Transfer............................ -- 81
------------- ------------
Operating (loss) income.................. (614) 124
Interest income (expense), net........... 337 (1)
Provision for income taxes............... 196 317
------------- ------------
Net loss................................. $ (473) $ (194)
============= ============
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:
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Revenues................................. 100.0% 100.0%
Salaries and benefits.................... 68.5 65.7
Office and general....................... 31.7 27.4
Amortization of goodwill................. 4.8 4.6
Operating losses of True North Units Held
for Transfer............................ -- 0.9
------------- ------------
Operating (loss) income.................. (5.0) 1.4
Interest income (expense), net........... 2.7 --
Provision for income taxes............... 1.5 3.5
------------- ------------
Net loss................................. (3.8)% (2.1)%
============= ============
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenues. Revenues increased $3.4 million, or 37.3%, to $12.4 million for
the three months ended March 31, 1999 from $9.0 million for the three months
ended March 31, 1998. Revenues increased primarily as a result of increased
services provided to existing clients, as well as the addition of new clients.
11
<PAGE>
Salaries and Benefits. Salaries and benefits increased $2.6 million, or
43.3%, to $8.5 million for the three months ended March 31, 1999 from $5.9
million for the three months ended March 31, 1998. Salaries and benefits
represented 68.5% and 65.7% of revenues for the three months ended March 31,
1999 and 1998, respectively. Both the dollar and percentage increases in
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. Office and general increased $1.4 million, or 58.6%, to
$3.9 million for the three months ended March 31, 1999 from $2.5 million for
the three months ended March 31, 1998. Office and general represented 31.7%
and 27.4% of revenues for the three months ended March 31, 1999 and 1998,
respectively. Both the dollar and percentage increases in office and general
were primarily due to increased occupancy and office support expenses incurred
in connection with increases in headcount.
Amortization of Goodwill. Amortization of goodwill increased by $0.2
million, or 41.5%, to $0.6 million for the three months ended March 31, 1999
from $0.4 million for the three months ended March 31, 1998. The increase is a
result of payments of additional purchase price for Modem Partnership by True
North to the former owners of the Modem Partnership of $3.3 million and $18.5
million in May 1998 and February 1999, respectively (see Note 2 of Notes to
Condensed Consolidated Financial Statements of Modem Media . Poppe Tyson, Inc.
and Subsidiaries). Goodwill originated from the combination of Modem Media
with the Modem Partnership in December 1996 and is being amortized by Modem
Media over a 20-year period.
Operating Losses of True North Units Held for Transfer. The non-strategic
digital interactive marketing operations were sold to True North effective
October 1, 1998. Accordingly, the operating results of such entities are not a
part of the Company's operating results for the three months ended March 31,
1999.
Interest. Interest income, net increased to $0.3 million during the three
months ended March 31, 1999. The increase is principally attributable to
interest income earned on investments purchased with the proceeds from Modem
Media's initial public offering.
Income Taxes. Modem Media had a provision for income taxes of $0.2 million
on a pre-tax loss of $0.3 million for the three months ended March 31, 1999,
as compared to a provision for income taxes of $0.3 million on pre-tax income
of $0.1 million for the three months ended March 31, 1998. The effective
income tax rates for the three months ended March 31, 1999 and 1998 were 70.8%
and 257.7%, respectively. The effective tax rates differ from the federal
statutory rate primarily due to the effect of non-deductible goodwill
amortization and losses of certain foreign subsidiaries on which Modem Media
did not recognize a tax benefit.
Liquidity and Capital Resources
Modem Media historically has financed its operations primarily from funds
generated from operations and borrowings from True North. At December 31,
1998, Modem Media had a non-interest bearing intercompany note payable to True
North of $6.0 million, which was repaid in February 1999 from the net proceeds
of Modem Media's initial public offering. Pursuant to agreements between True
North and its lenders, Modem Media is subject to limitations on indebtedness
that could adversely affect Modem Media's ability to secure debt financing in
the future.
Net cash used in operating activities was $0.3 million and $1.5 million for
the three months ended March 31, 1999 and 1998, respectively. The investment
in working capital was partially offset by depreciation expense and goodwill
amortization, which totaled $1.3 million and $0.7 million for the three months
ended March 31, 1999 and 1998, respectively.
Net cash used in investing activities was $0.9 million and $0.3 million for
the three months ended March 31, 1999 and 1998, respectively. Investing
activities reflect capital expenditures to purchase and install enterprise
software in 1999, and to purchase other computer software, computer hardware,
furniture and office equipment in both periods.
12
<PAGE>
Net cash provided by financing activities was $40.9 million and $0.9 million
for the three months ended March 31, 1999 and 1998, respectively. The primary
sources of cash flows from financing activities were proceeds from Modem
Media's initial public offering of $43.5 million in 1999 and borrowings from
True North of $1.0 million during the three months ended March 31, 1998.
Modem Media's short-term capital commitments include lease payments over the
next 12 months aggregating approximately $3.4 million and payments of
approximately $0.4 million to complete a new financial accounting system. 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.
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 in
February 2001, or upon 60 days advance notice if True North's voting control
in the Modem Media falls below 50% of total voting power.
Modem Media believes that the net proceeds from its initial public offering,
together with funds available from operations, if any, will be sufficient to
meet its capital needs for at least the next twelve months. A portion of the
net proceeds from the 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
The following Year 2000 statement is a Year 2000 Readiness Disclosure made
pursuant to Section 7(b) of the Year 2000 Information and Readiness Disclosure
Act.
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 during the
year, and does not believe that the cost of 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 the systems of its clients. Modem Media is in the
process of confirming 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
substantially reduce 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.
13
<PAGE>
In addition, True North has agreed to provide legal, tax preparation,
insurance, treasury, financing and debt and lease guaranty services to Modem
Media. 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 services provided; and
. The systems used generally consist of off-the-shelf software that is
readily replaceable.
Modem Media is in the process of developing contingency plans to be used in
the event of a failure of its information technology systems, even though it
expects to have its material systems in place by the third quarter of 1999. In
connection with Modem Media's assessment of third party readiness during 1999,
Modem Media is evaluating the extent to which contingency plans are needed
based on the level of uncertainty regarding such readiness. In the event Modem
Media's clients, intermediaries or vendors do not expect to be Year 2000
compliant, Modem Media's contingency plans 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Modem Media is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 1999, the Securities and Exchange Commission declared Modem
Media's Registration Statement on Form S-1 (No. 333-68057) effective. On
February 10, 1999, Modem Media completed an initial public offering of an
aggregate of 2,990,000 shares of Modem Media's Class A Common Stock at an
offering price of $16.00 per share. The managing underwriters for the offering
were BancBoston Robertson Stephens, NationsBanc Montgomery Securities LLC and
Bear, Stearns & Co. Inc. Net proceeds to Modem Media, after deducting
underwriting discounts and commissions of $3,349,000 and offering expenses of
$2,440,000 were $42,051,000. None of the expenses incurred in the offering
were direct or indirect payments to directors, officers, or general partners
of the issuer or their associates, to persons owning ten percent or more of
any class of equity securities of the issuer or to affiliates of the issuer.
Modem Media used $6,000,000 of these proceeds to settle an intercompany note
payable to its parent, True North Communications Inc. Modem Media has invested
the remainder of the net proceeds in short-term, interest-bearing, investment
grade obligations pending their use.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--27.1 Financial Data Schedule
(b) Reports on Form 8-K
--None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Norwalk, State of Connecticut, on this 13th day of May, 1999.
Modem Media . Poppe Tyson, Inc.
/s/ Gerald M. O'Connell
By: _________________________________
Gerald M. O'Connell
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Gerald M.
O'Connell and Steven C. Roberts, and each of them, as attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this report, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
/s/ Gerald M. O'Connell Chief Executive May 13, 1999
- ------------------------------------- Officer and Director
Gerald M. O'Connell (Principal Executive
Officer)
/s/ Steven C. Roberts Chief Financial May 13, 1999
- ------------------------------------- Officer (Principal
Steven C. Roberts Financial and
Accounting Officer)
/s/ Robert C. Allen, II Director May 13, 1999
- -------------------------------------
Robert C. Allen, II
/s/ Robert H. Beeby Director May 13, 1999
- -------------------------------------
Robert H. Beeby
/s/ Donald M. Elliman, Jr. Director May 13, 1999
- -------------------------------------
Donald M. Elliman, Jr.
/s/ Don Peppers Director May 13, 1999
- -------------------------------------
Don Peppers
/s/ Donald L. Seeley Director May 13, 1999
- -------------------------------------
Donald L. Seeley
/s/ Theodore J. Theophilos Director May 13, 1999
- -------------------------------------
Theodore J. Theophilos
/s/ Joseph R. Zimmel Director May 13, 1999
- -------------------------------------
Joseph R. Zimmel
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 47,539
<SECURITIES> 0
<RECEIVABLES> 9,606
<ALLOWANCES> (1,032)
<INVENTORY> 0
<CURRENT-ASSETS> 60,649
<PP&E> 10,409
<DEPRECIATION> (3,514)
<TOTAL-ASSETS> 118,866
<CURRENT-LIABILITIES> 22,741
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 95,817
<TOTAL-LIABILITY-AND-EQUITY> 118,866
<SALES> 12,383
<TOTAL-REVENUES> 12,383
<CGS> 0
<TOTAL-COSTS> 12,997
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (337)
<INCOME-PRETAX> (277)
<INCOME-TAX> 196
<INCOME-CONTINUING> (473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (473)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
