<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 September 30, 2000
Commission File No. 0-21935
----------------
Modem Media, 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) has 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 24,881,005 shares of the Registrant's Common Stock, $.001 par
value, outstanding as of October 31, 2000.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Description Page
----------- ----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999........................................ 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999............ 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999..................... 3
Notes to Condensed Consolidated Financial Statements.......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities and Use of Proceeds..................... 14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures.................................................... 15
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODEM MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September
30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 26,444,000 $ 30,265,000
Short-term investments........................... 143,000 16,859,000
Accounts receivable, net......................... 27,220,000 18,090,000
Unbilled revenues................................ 6,613,000 2,066,000
Deferred income taxes............................ 1,423,000 1,004,000
Prepaid expenses and other current assets........ 5,309,000 2,967,000
------------ ------------
Total current assets........................... 67,152,000 71,251,000
Noncurrent assets:
Property and equipment, net...................... 21,925,000 14,192,000
Goodwill, net.................................... 108,799,000 55,742,000
Deferred income taxes............................ 4,296,000 602,000
Other assets..................................... 6,367,000 3,945,000
------------ ------------
Total noncurrent assets........................ 141,387,000 74,481,000
------------ ------------
Total assets................................... $208,539,000 $145,732,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 6,141,000 $ 5,346,000
Pre-billed media................................. 7,134,000 6,639,000
Advance billings................................. 4,760,000 2,736,000
Deferred revenues................................ 5,137,000 4,125,000
Accrued expenses and other current liabilities... 21,074,000 14,718,000
------------ ------------
Total current liabilities...................... 44,246,000 33,564,000
Other liabilities.................................. 2,345,000 692,000
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding.. -- --
Common stock, $.001 par value, 145,000,000 shares
authorized, 25,061,309 and 12,115,970 shares
issued, respectively............................ 25,000 12,000
Common stock, Class B, $.001 par value, -0- and
11,116,326 shares authorized, -0- and 11,116,326
shares issued and outstanding, respectively..... -- 11,000
Paid-in capital.................................. 185,325,000 121,151,000
Accumulated deficit.............................. (21,121,000) (8,604,000)
Treasury stock, 197,849 and 184,834 shares of
common stock, at cost, respectively............. (1,191,000) (1,118,000)
Accumulated other comprehensive income........... (1,090,000) 24,000
------------ ------------
Total stockholders' equity..................... 161,948,000 111,476,000
------------ ------------
Total liabilities and stockholders' equity..... $208,539,000 $145,732,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................... $37,788,000 $21,121,000 $ 99,150,000 $49,546,000
Cost of revenues........... 19,187,000 9,063,000 51,338,000 22,380,000
----------- ----------- ------------ -----------
Gross profit............... 18,601,000 12,058,000 47,812,000 27,166,000
Operating expenses:
Sales and marketing...... 1,304,000 421,000 4,486,000 1,198,000
General and
administrative.......... 15,790,000 7,992,000 42,591,000 20,319,000
Write-off of offering-
related costs........... -- -- 722,000 --
Amortization of
goodwill................ 4,136,000 756,000 11,274,000 2,065,000
----------- ----------- ------------ -----------
Total operating
expenses.............. 21,230,000 9,169,000 59,073,000 23,582,000
----------- ----------- ------------ -----------
Operating (loss) income.... (2,629,000) 2,889,000 (11,261,000) 3,584,000
Interest income, net....... 427,000 565,000 1,408,000 1,406,000
----------- ----------- ------------ -----------
(Loss) income before income
taxes..................... (2,202,000) 3,454,000 (9,853,000) 4,990,000
Provision for income
taxes..................... 1,593,000 2,146,000 2,664,000 3,574,000
----------- ----------- ------------ -----------
Net (loss) income.......... $(3,795,000) $ 1,308,000 $(12,517,000) $ 1,416,000
=========== =========== ============ ===========
Net (loss) income per
share:
Basic.................... $ (0.15) $ 0.06 $ (0.52) $ 0.07
=========== =========== ============ ===========
Diluted.................. $ (0.15) $ 0.06 $ (0.52) $ 0.06
=========== =========== ============ ===========
Weighted-average number of
common shares outstanding:
Basic.................... 24,652,000 22,340,000 24,266,000 21,138,000
=========== =========== ============ ===========
Diluted.................. 24,652,000 23,624,000 24,266,000 22,344,000
=========== =========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(12,517,000) $ 1,416,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation..................................... 4,239,000 2,589,000
Amortization of goodwill......................... 11,274,000 2,065,000
Provision for doubtful accounts.................. 833,000 240,000
Loss on disposal of equipment.................... 226,000 201,000
Other, net....................................... 2,516,000 --
Changes in assets and liabilities:
Accounts receivable............................. (9,285,000) (421,000)
Unbilled revenues............................... (4,655,000) (2,875,000)
Other current assets............................ (2,078,000) (741,000)
Accounts payable, accrued expenses and other
current liabilities............................ 3,213,000 3,154,000
Pre-billed media................................ 555,000 (1,361,000)
Advance billings................................ 2,044,000 368,000
Deferred revenues............................... 1,048,000 (2,229,000)
Other, net...................................... 28,000 (2,042,000)
------------ ------------
Net cash (used in) provided by operating
activities.................................... (2,559,000) 364,000
Cash flows from investing activities:
Purchases of property and equipment.............. (11,199,000) (6,285,000)
Acquisitions, net of cash acquired............... (11,162,000) (1,419,000)
Purchases of short-term investments.............. (127,000) (14,800,000)
Maturities of short-term investments............. 16,859,000 --
------------ ------------
Net cash used in investing activities.......... (5,629,000) (22,504,000)
Cash flows from financing activities:
Proceeds from initial public offering............ -- 43,459,000
Funding to True North............................ (15,000) (3,297,000)
Repayments of note payable....................... (508,000) --
Purchases of treasury stock...................... (73,000) (759,000)
Principal payments made under capital lease
obligations..................................... (274,000) (295,000)
Exercises of stock options....................... 5,129,000 4,207,000
------------ ------------
Net cash provided by financing activities...... 4,259,000 43,315,000
------------ ------------
Effect of exchange rates on cash and cash
equivalents....................................... 108,000 (84,000)
------------ ------------
Net (decrease) increase in cash and cash
equivalents....................................... (3,821,000) 21,091,000
Cash and cash equivalents, beginning of the
period............................................ 30,265,000 7,824,000
------------ ------------
Cash and cash equivalents, end of the period....... $ 26,444,000 $ 28,915,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations--Modem Media, Inc. ("Modem Media" or the "Company") is
a leading Internet professional services firm focused on conceiving,
developing and distributing customer-focused Internet solutions for Fortune
500 and select online businesses. Headquartered in Norwalk, CT, the Company
has offices in New York City, San Francisco, Toronto, London, Paris, Munich,
Tokyo, Hong Kong and Sao Paulo.
Basis of Presentation--The condensed consolidated balance sheet as of
September 30, 2000, the condensed consolidated statements of operations for
the three and nine months ended September 30, 2000 and 1999 and the condensed
consolidated statements of cash flows for the nine months ended September 30,
2000 and 1999, 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 and nine months ended September 30, 2000
and 1999 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.
Reclassifications--Certain reclassifications have been made in the prior
period condensed consolidated financial statements to conform to the current
period presentation.
Business Combinations--Business combinations that have been accounted for
under the purchase method of accounting include the results of operations of
the acquired businesses from the dates of their respective acquisition. Net
assets of acquired companies are recorded at their fair value to the Company
at the date of acquisition unless any such company was acquired in a
transaction between entities under common control, in which case the assets of
such company are recorded at historical cost.
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 and losses of certain foreign subsidiaries on which the
Company did not recognize tax benefits.
Cash, Cash Equivalents and Short-Term Investments--The Company's short-term
investments reflected in the accompanying condensed consolidated balance
sheets have been classified as held-to-maturity securities and are carried at
amortized cost, which approximates market, since management has the positive
intent and ability to hold such investments to maturity. Short-term
investments principally consist of commercial paper maturing less than six
months from the date of purchase.
Earnings Per Share--In accordance with SFAS No. 128, Earnings Per Share,
basic net (loss) income per share is computed using the weighted-average
number of common shares outstanding during each period. Diluted net (loss)
income per share gives effect to all dilutive securities that were outstanding
during each period. The Company had net losses for the three and nine months
ended September 30, 2000; as a result, none of the options or warrants
outstanding during those periods were included in the computations of diluted
net loss per share since they were antidilutive. The following table sets
forth the computation of the weighted-average number of common shares
outstanding on a diluted basis:
4
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic weighted-average number of
common shares outstanding........ 24,652,000 22,340,000 24,266,000 21,138,000
Dilutive effect of stock options
and warrants..................... -- 1,284,000 -- 1,206,000
---------- ---------- ---------- ----------
Diluted weighted-average number of
common shares outstanding........ 24,652,000 23,624,000 24,266,000 22,344,000
========== ========== ========== ==========
</TABLE>
All historical share and per-share amounts have been restated to reflect the
2-for-1 stock split effected by the Company on March 1, 2000 (see Note 3).
Recently Issued Accounting Pronouncements--In September 2000, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a Replacement of Statement No. 125, which replaces SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 140 revises criteria for accounting for
securitizations, other financial asset transfers and collateral, and
introduces certain new disclosures, but otherwise carries forward most of the
provisions of SFAS No. 125 without amendment. SFAS No. 140 has an immediate
impact with respect to the collateral provisions of SFAS No. 125, which must
be applied for fiscal years ending after December 15, 2000. The other
provisions of SFAS No. 140 apply prospectively to transfers of financial
assets and extinguishments of liabilities occurring after March 31, 2001,
except for transfers of assets required by commitments made before March 31,
2001, to transferees or beneficial interest holders other than the transferor,
its affiliates, or its agents. Management does not believe that the adoption
of SFAS No. 140 will have a material impact on the Company's results of
operations.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which amends the
accounting and reporting standards of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, for certain derivative instruments and
hedging activities. SFAS No. 133 was previously amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, which deferred the effective date of
SFAS No. 133 to fiscal years commencing after June 15, 2000. The Company will
adopt SFAS No. 138 concurrently with SFAS No. 133, however, management does
not believe that such adoptions will have a material impact on the Company's
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, which provides guidance on applying generally accepted accounting
principles to revenue recognition based on the interpretations and practices
of the SEC. In June 2000, the SEC issued SAB No. 101B, Second Amendment:
Revenue Recognition in Financial Statements, which delays the implementation
date of SAB 101 until the fourth quarter of fiscal years beginning after
December 15, 1999, or, in the case of the Company, the fourth quarter of 2000.
Management does not believe that the adoption of SAB 101 will have a material
impact on the Company's results of operations.
2. Acquisitions
In February 2000, the Company acquired 100% of the outstanding capital stock
of Vivid Holdings, Inc. and its majority-owned subsidiary, Vivid Publishing,
Inc. (collectively hereinafter referred to as "Vivid") for approximately
$63,600,000. Vivid was a professional services company, with approximately 100
employees, that provided strategic interactive marketing services for Fortune
500 companies and Internet start-ups. The consideration was comprised of
approximately $10,200,000 in cash, approximately $14,400,000 in
5
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Modem Media common stock (446,010 shares, of which 139,706 remain in escrow as
security for the indemnification obligations of the sellers), and
approximately $39,000,000 in value related to employee stock options that were
converted to Modem Media stock options. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the operating
results of Vivid have been included in the Company's financial statements from
the date of its acquisition. The preliminary allocation of the excess of
purchase price over the fair value of net assets acquired of approximately
$64,500,000 is being amortized over a five-year period and is subject to final
determination.
In February 2000, the Company acquired substantially all of the assets of
Eurokapi Multimedia S.A. ("Eurokapi"), a builder and marketer of e-businesses
in Paris, France, for approximately $450,000 in cash. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
operating results of Eurokapi have been included in the Company's financial
statements from the date of its acquisition. The excess of purchase price over
the net assets acquired of approximately $500,000 is being amortized over a
five-year period.
In March 2000, the Company purchased its affiliate office in Sao Paulo,
Brazil ("Modem Media Brazil") from its former parent, True North
Communications Inc. ("True North"), for $135,000 in cash. Because the
transaction occurred among True North and majority-owned, controlled
subsidiaries, the transaction was recorded at historical cost. The acquisition
has been accounted for under the purchase method of accounting and,
accordingly, the operating results of Modem Media Brazil have been included in
the Company's financial statements from the date of its acquisition.
3. Equity
On March 1, 2000, the Company effected a 2-for-1 stock split, paid in the
form of a stock dividend, of its outstanding common stock. All historical
share and per-share amounts have been restated to reflect the stock split.
On March 15, 2000, the Company filed a registration statement with the SEC
relating to a proposed public offering of its common stock. This offering was
subsequently cancelled due to adverse market conditions. During the nine
months ended September 30, 2000, $722,000 in offering-related costs were
charged to operations by the Company and are reflected in the accompanying
condensed consolidated statements of operations.
On April 26, 2000, True North and its subsidiaries converted all of their
shares of the Company's Class B common stock into shares of the Company's
Class A common stock. As a result, True North and its subsidiaries' combined
voting power in the Company was reduced below 50% of total voting power. As a
result of such reduction, the Company no longer is subject to restrictions on
its indebtedness. The conversion was originally scheduled to occur on June 30,
2000.
On June 5, 2000, the shareholders of the Company approved an amendment to
the Company's certificate of incorporation to (a) eliminate references to the
Company's Class B common stock, (b) reclassify the Company's Class A common
stock as common stock and (c) increase the number of shares of common stock
authorized for issuance to 145,000,000. At the time of the amendment, no
shares of Class B common stock were outstanding.
4. Related Party Transactions
In the normal course of business, the Company and True North have from time-
to-time entered into various business transactions and agreements, and may
enter into additional transactions in the future (see Notes 2 and 3).
6
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2000, the Company entered into an agreement that obligates it to
purchase, prior to December 1, 2000, approximately 8.5% of the common
interests of CentrPort, LLC ("CentrPort"), a majority-owned subsidiary of the
Company, from a minority interest holder in exchange for a $2,550,000 note
payable. Such note is payable in 24 equal monthly installments and bears
interest at a rate of 9.5% per annum. The aforementioned agreement will result
in an increase of the Company's direct and indirect ownership in the common
interests of CentrPort to an aggregate of approximately 58.9%. In addition,
upon CentrPort's attainment of certain technological and operational
performance milestones, Modem Media will purchase up to an additional 6.1% of
the common interests of CentrPort from certain minority interest holders in
exchange for Modem Media common stock.
5. Comprehensive Income
The Company reflects its comprehensive income, such as unrealized gains and
losses on its foreign currency translation adjustments, as a separate
component of stockholders' equity as required by SFAS No. 130, Reporting
Comprehensive Income. Total comprehensive (loss) income for the three and nine
months ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net (loss) income........ $(3,795,000) $ 1,308,000 $(12,517,000) $ 1,416,000
Foreign currency
translation adjustment.. (575,000) 212,000 (1,114,000) 212,000
----------- ----------- ------------ -----------
Total comprehensive
(loss) income......... $(4,370,000) $ 1,520,000 $(13,631,000) $ 1,628,000
=========== =========== ============ ===========
6. Geographic Information
Information about the Company's operations in different geographic regions
is as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Domestic............... $30,357,000 $17,607,000 $ 79,394,000 $42,364,000
International.......... 7,431,000 3,514,000 19,756,000 7,182,000
----------- ----------- ------------ -----------
$37,788,000 $21,121,000 $ 99,150,000 $49,546,000
=========== =========== ============ ===========
Earnings before interest,
taxes and amortization
of goodwill:
Domestic............... $ 3,304,000 $ 4,240,000 $ 4,346,000 $ 6,894,000
International.......... (1,797,000) (595,000) (4,333,000) (1,245,000)
----------- ----------- ------------ -----------
$ 1,507,000 $ 3,645,000 $ 13,000 $ 5,649,000
=========== =========== ============ ===========
(Loss) income before
income taxes:
Domestic............... $ (160,000) $ 4,077,000 $ (4,801,000) $ 6,273,000
International.......... (2,042,000) (623,000) (5,052,000) (1,283,000)
----------- ----------- ------------ -----------
$(2,202,000) $ 3,454,000 $ (9,853,000) $ 4,990,000
=========== =========== ============ ===========
Net (loss) income:
Domestic............... $(1,800,000) $ 1,994,000 $ (7,368,000) $ 2,691,000
International.......... (1,995,000) (686,000) (5,149,000) (1,275,000)
----------- ----------- ------------ -----------
$(3,795,000) $ 1,308,000 $(12,517,000) $ 1,416,000
=========== =========== ============ ===========
</TABLE>
7
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
September
30, December 31,
2000 1999
------------ ------------
<S> <C> <C> <C> <C>
Identifiable
assets:
Domestic....... $186,428,000 $126,521,000
International.. 22,111,000 19,211,000
------------ ------------
$208,539,000 $145,732,000
============ ============
</TABLE>
7. Supplemental Cash Flow Information
The Company incurred non-cash capital lease obligations of approximately
$630,000 in connection with the purchase of new equipment during the nine
months ended September 30, 2000.
In June 2000, a note payable of $2,550,000 was issued in connection with the
Company's agreement to purchase an additional interest in CentrPort prior to
December 1, 2000 (see Note 4).
Information about the Company's non-cash activity related to acquisitions
during the nine months ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Fair value of assets acquired, net of cash
acquired.......................................... $ 66,824,000 $ 1,419,000
Liabilities assumed................................ (2,262,000) --
Common stock issued................................ (14,400,000) --
Stock-based compensation obligations assumed....... (39,000,000) --
------------ ------------
Acquisitions, net of cash acquired................. $ 11,162,000 $ 1,419,000
============ ============
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis 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, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results 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;
. the cost of funding our
. dependence on a limited number of international operations;
clients;
. the ability to manage future
. variability of operating results; growth, if any;
. the ability to accurately . dependence on key management
estimate costs in fixed-fee personnel;
engagements;
. exclusivity arrangements with
clients that may limit our
ability to provide services to
others;
. the ability to attract and retain
qualified professionals;
. the ability to successfully
introduce and expand the Me- . dependence on technology;
business Network and CentrPort
technology;
. dependence on the continued
growth of the Internet; and
. the cost of funding the
operations of CentrPort; . changes in government regulation
including regulation of privacy
issues.
. the ability to integrate acquired
companies;
In light of these and other uncertainties, the forward-looking statements
included in this document should not be regarded as a representation by us
that our plans and objectives will be achieved.
Overview
We are a leading Internet professional services firm focused on conceiving,
developing and distributing customer-focused Internet solutions for Fortune
500 and select online businesses. Our customer-focused approach combines
technology-driven solutions with a deep understanding of the customer's unique
needs to create e-business solutions that are more rewarding for both our
clients and their customers. We combine our experience in business strategy,
creative design, technology and marketing to deliver to our clients, on a
global basis, an integrated service offering that includes:
. strategic consulting and customer research;
. design, development and implementation of e-business websites;
. distribution and marketing of customized services across multiple
Internet-enabled communication channels; and
. collection and analysis of customer data and measurement of the
effectiveness of our e-business solutions.
We call this comprehensive approach, focused on building enduring, mutually
beneficial client-customer relationships, Me-business SM, since in the eyes of
the customer, the company that best answers "my" needs will get "my" business.
We established the Me-business Network to enhance the distribution of our
Me-business solutions to our clients' customers. The network is designed to
seamlessly deliver services across multiple Internet-enabled communication
channels including websites, e-mail, wireless devices and call centers by
deploying the functionality of best-of-breed vendors on each channel. Through
CentrPort SM, our proprietary data and distribution management platform, we
provide clients an outsourced service to identify, accumulate and analyze
9
<PAGE>
customer data generated through various communication channels. By enabling a
cross-channel understanding of individual customer needs, we can continuously
tailor new services for our clients' customers and deliver them appropriately.
Since our inception in 1987, we have established and maintained
relationships with Fortune 500 and select online businesses, and have created
customer-focused Internet solutions for global brands such as Avon, Citibank,
Delta Air Lines, Friends Provident, General Motors, IBM, JCPenney, Kraft,
Philips and Weight Watchers. We service our clients through a global network
of offices in North America, Latin America, Europe and Asia with our staff of
over 1,000 employees.
Clients generally hire us on a fixed-fee, retainer or time-and-material
basis. A majority of our revenues are derived from fixed-fee engagements. We
recognize revenues as services are rendered. We reassess our estimated costs
on fixed-fee engagements periodically and losses are accrued, on a project-by-
project basis, to the extent that costs incurred and anticipated costs to
complete projects exceed anticipated billings. Provisions for losses on
uncompleted fixed-fee contracts are recognized in the period in which such
losses are determined. We anticipate that the Me-business Network will
continue to generate transactional fees in addition to those generated on a
fixed-fee, retainer or time-and-material basis.
Costs of revenues consists of salaries, employee benefits and incentive
compensation for our professional services staff, costs for temporary
employees that we use to provide professional services, costs associated with
the CentrPort technology and certain other direct costs. Sales and marketing
consists of salaries, employee benefits and incentive compensation of new
business and other sales and marketing personnel, as well as certain other
marketing costs. General and administrative includes salaries, employee
benefits and incentive compensation of administrative and other nonbillable
employees, as well as office rent, utilities, depreciation, amortization of
software, professional and consulting fees, travel, telephone and other
related expenses.
We have experienced operating losses or net losses in twelve of the fifteen
quarters from January 1, 1997 through September 30, 2000. Although we have
experienced revenue growth in recent periods, these growth rates may not be
sustainable or indicative of future operating results, especially in light of
declining revenue growth rates in our industry. This industry softness,
coupled with industry pricing pressures, may cause us to experience a pressure
on our margins. In addition, we have incurred substantial costs to expand and
integrate our operations. We expect to incur net losses in the foreseeable
future due to our continued investment in CentrPort, our international
operations and infrastructure, and the amortization of goodwill related to our
acquisition of Vivid.
During the first nine months of 2000, 80.0% of our revenues were domestic
and 20.0% were international. International revenues are expected to grow at a
faster rate than domestic operations. International margins will continue to
be lower than domestic margins due to competitive pricing, lower utilization
rates, high benefits costs and higher occupancy and infrastructure costs.
Factors Affecting Operating Results
Our 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
offices, our relative mix of business, changes in our pricing strategies or
those of our competitors, employee utilization rates, changes in personnel and
other factors that are outside of our control. In addition, we have
experienced some variation in operating results throughout the year resulting
in part from the Internet professional services spending patterns and business
cycles of our clients. As a result, period-to-period comparisons of our
operating results cannot be relied upon as indicators of future performance.
10
<PAGE>
Results of Operations
The following table sets forth certain items from our statements of
operations for the three and nine months ended September 30, 2000 and 1999
included elsewhere in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
September September
30, 30,
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 50.8 42.9 51.8 45.2
----- ----- ----- -----
Gross profit................................... 49.2 57.1 48.2 54.8
Sales and marketing............................ 3.4 2.0 4.5 2.4
General and administrative..................... 41.8 37.8 43.0 41.0
Write-off of offering-related costs............ -- -- 0.7 --
Amortization of goodwill....................... 10.9 3.6 11.4 4.2
----- ----- ----- -----
Operating (loss) income........................ (6.9) 13.7 (11.4) 7.2
Interest income, net........................... 1.1 2.7 1.4 2.8
Provision for income taxes..................... 4.2 10.2 2.6 7.2
----- ----- ----- -----
Net (loss) income.............................. (10.0)% 6.2% (12.6)% 2.8%
===== ===== ===== =====
</TABLE>
Results of Operations--Three Months Ended September 30, 2000 Compared to Three
Months Ended September 30, 1999
Revenues. Revenues increased $16.7 million, or 78.9%, to $37.8 million for
the three months ended September 30, 2000 from $21.1 million for the three
months ended September 30, 1999. Revenues increased primarily as a result of
increased services provided to existing clients and the addition of new
clients, as well as our domestic and international acquisitions, which
accounted for approximately $4.1 million of the increase in revenues.
Cost of Revenues and Gross Profit. Cost of revenues increased $10.1 million,
or 111.7%, to $19.2 million for the three months ended September 30, 2000 from
$9.1 million for the three months ended September 30, 1999. Gross margin
declined to 49.2% of consolidated revenues for the third quarter of 2000 from
57.1% for the third quarter of 1999. The increase in cost of revenues was
primarily due to a company-wide increase in headcount due to internal
recruiting efforts and our acquisitions of offices in Munich, Paris, Sao Paulo
and San Francisco. The decrease in gross margin in the third quarter of 2000
compared to the third quarter of 1999 was primarily due to lower utilization.
Sales and Marketing. Sales and marketing increased $0.9 million, or 209.7%
to $1.3 million for the three months ended September 30, 2000 compared to $0.4
million for the three months ended September 30, 1999. Sales and marketing
represented 3.4% of consolidated revenues for the third quarter of 2000 and
2.0% for the third quarter of 1999. The dollar and percentage increases in
sales and marketing were primarily attributable to increased advertising of
the Modem Media brand, as well as salaries, benefits and incentive
compensation associated with an increase in headcount.
General and Administrative. General and administrative increased $7.8
million, or 97.6%, to $15.8 million for the three months ended September 30,
2000 from $8.0 million for the three months ended September 30, 1999. General
and administrative represented 41.8% of consolidated revenues for the third
quarter of 2000 and 37.8% for the third quarter of 1999. The dollar and
percentage increases in general and administrative were primarily the result
of increased occupancy, office support and personnel costs of administrative
and other nonbillable employees incurred in connection with an increase in
headcount.
Amortization of Goodwill. Amortization of goodwill increased by $3.4
million, or 447.1%, to $4.1 million for the three months ended September 30,
2000 from $0.8 million for the three months ended September 30, 1999. The
increase is primarily a result of our acquisition of Vivid.
11
<PAGE>
Income Taxes. We recorded a provision for income taxes of $1.6 million on a
pre-tax loss of $2.2 million for the three months ended September 30, 2000, as
compared to a provision for income taxes of $2.1 million on pre-tax income of
$3.5 million for the three months ended September 30, 1999. The effective
income tax rate was 72.3% for the three months ended September 30, 2000 as
compared to 62.1% for the three months ended September 30, 1999. 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 we did not recognize tax benefits.
Results of Operations--Nine Months Ended September 30, 2000 Compared to Nine
Months Ended September 30, 1999
Revenues. Revenues increased $49.6 million, or 100.1%, to $99.2 million for
the nine months ended September 30, 2000 from $49.5 million for the nine
months ended September 30, 1999. Revenues increased primarily as a result of
increased services provided to existing clients and the addition of new
clients, as well as our domestic and international acquisitions, which
accounted for approximately $10.4 million of the increase in revenues.
Cost of Revenues and Gross Profit. Cost of revenues increased $29.0 million,
or 129.4%, to $51.3 million for the nine months ended September 30, 2000 from
$22.4 million for the nine months ended September 30, 1999. Gross margin
declined to 48.2% of consolidated revenues for the first nine months of 2000
from 54.8% for the first nine months of 1999. The increase in cost of revenues
was primarily due to a company-wide increase in headcount due to internal
recruiting efforts and our acquisitions of offices in Tokyo, Munich, Paris,
Sao Paulo and San Francisco. The decrease in gross margin during the first
nine months of 2000 compared to the first nine months of 1999 was primarily
due to lower utilization.
Sales and Marketing. Sales and marketing increased $3.3 million, or 274.5%
to $4.5 million for the nine months ended September 30, 2000 compared to $1.2
million for the nine months ended September 30, 1999. Sales and marketing
represented 4.5% of consolidated revenues for the first nine months of 2000
and 2.4% for the first nine months of 1999. The dollar and percentage
increases in sales and marketing were primarily attributable to increased
advertising of the Modem Media brand, as well as salaries, benefits and
incentive compensation associated with an increase in headcount.
General and Administrative. General and administrative increased $22.3
million, or 109.6%, to $42.6 million for the nine months ended September 30,
2000 from $20.3 million for the nine months ended September 30, 1999. For the
first nine months of 2000, general and administrative increased to 43.0% of
consolidated revenues from 41.0% for the first nine months of 1999. The dollar
and percentage increases in general and administrative were primarily the
result of increased occupancy, office support and personnel costs of
administrative and other nonbillable employees incurred in connection with an
increase in overall headcount.
Write-off of Offering-Related Costs. In March 2000, we filed a registration
statement with the Securities and Exchange Commission relating to a proposed
public offering of our common stock. This offering was subsequently cancelled
due to adverse market conditions. During the nine months ended September 30,
2000, $0.7 million in offering-related costs were charged to operations and
are included in the accompanying condensed consolidated statements of
operations.
Amortization of Goodwill. Amortization of goodwill increased by $9.2
million, or 446.0%, to $11.3 million for the nine months ended September 30,
2000 from $2.1 million for the nine months ended September 30, 1999. The
increase is primarily a result of our acquisition of Vivid.
Income Taxes. We recorded a provision for income taxes of $2.7 million on a
pre-tax loss of $9.9 million for the nine months ended September 30, 2000, as
compared to a provision for income taxes of $3.6 million on pre-tax income of
$5.0 million for the nine months ended September 30, 1999. The effective
income tax rate
12
<PAGE>
was 27.0% for the nine months ended September 30, 2000 as compared to 71.6%
for the nine months ended September 30, 1999. 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 we
did not recognize tax benefits.
Liquidity and Capital Resources
We historically have financed our operations from funds generated from
operations and proceeds from our initial public offering.
Net cash (used in) provided by operating activities was $(2.6) million and
$0.4 million for the nine months ended September 30, 2000 and 1999,
respectively.
Net cash used in investing activities was $5.6 million and $22.5 million for
the nine months ended September 30, 2000 and 1999, respectively. Investing
activities reflect our acquisitions, as well as the maturities of short-term
investments in 2000, purchases of short-term investments in 1999, and
purchases of property and equipment in both periods.
Net cash provided by financing activities was $4.3 million and $43.3 million
for the nine months ended September 30, 2000 and 1999, respectively. The
primary sources of cash flows from financing activities in 2000 and 1999 are
proceeds from the exercise of employee stock options and our initial public
offering, respectively.
Our short-term capital commitments include lease payments over the next 12
months aggregating approximately $11.1 million and the funding of certain
international operations that are not expected to be self-sufficient in the
near-term. Our long-term capital needs will depend on numerous factors,
including the rates at which we are able to obtain new business from clients
and, if needed, expand our personnel and infrastructure to accommodate such
clients, as well as whether we choose to invest in new technologies and
additional global expansion. We have ongoing needs for capital, including
working capital for operations, project development costs and capital
expenditures to build out our infrastructure.
In addition to the aforementioned capital commitments, we continue to invest
in CentrPort. We are currently exploring alternative options for its funding,
including the possibility of securing third party financing. We remain
consistent in our belief that there are opportunities to secure this financing
that would enable us to improve CentrPort's products, maximize our own
investment in this subsidiary, and make our resources available for other
initiatives.
We believe that our cash and cash equivalents on hand, together with funds
available from operations, will be sufficient to meet our capital needs for at
least the next twelve months. In order to accelerate the development of our
business, we may need additional funds, which we may seek through public or
private financings or other sources. There can be no assurance that additional
funds will be available or on terms favorable to us. If additional funds are
raised through the issuance of equity securities, our existing shareholders
may experience significant dilution. If we are not able to raise additional
capital, we may need to limit our development plans.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are 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 our
registration statement on Form S-1 (No. 333-68057) effective. On February 10,
1999, we completed an initial public offering of an aggregate of 5,980,000
shares of our Class A common stock at an offering price of $8.00 per share.
The managing underwriters for the offering were BancBoston Robertson Stephens,
NationsBanc Montgomery Securities LLC and Bear, Stearns & Co. Inc. Net
proceeds to us, 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 our
directors, officers, or general partners or their associates, to persons
owning ten percent or more of any class of our equity securities or to our
affiliates. We used $6,000,000 of these proceeds to settle an intercompany
note payable to True North and approximately $30,200,000 to acquire and fund
the operations of complementary businesses in Tokyo, Munich, Paris, Sao Paulo
and San Francisco, as well as to fund the operations of CentrPort. We have
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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.2(o) Employment Letter Agreement by and between the Company and Melissa
Viglielmo, dated July 19, 2000
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MODEM MEDIA, INC.
Date: November 13, 2000
/s/ Gerald M. O'Connell
By: _________________________________
Gerald M. O'Connell
Chief Executive Officer
(Principal Executive Officer)
/s/ Keryn M. Cerbone
By: _________________________________
Keryn M. Cerbone
VP, Controller and Acting Chief
Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.2(o) Employment Letter Agreement by and between the Company and Melissa
Viglielmo, dated July 19, 2000
27.1 Financial Data Schedule
</TABLE>
