<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 June 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 24,509,147 shares of the Registrant's Common Stock, $.001 par
value, outstanding as of July 31, 2000.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Description Page
----------- ----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999........... 2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 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........................................... 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........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures.................................................. 17
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODEM MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 30,565,000 $ 30,265,000
Short-term investments........................... 226,000 16,859,000
Accounts receivable, net......................... 26,199,000 18,090,000
Unbilled revenues................................ 2,416,000 2,066,000
Deferred income taxes............................ 1,533,000 1,004,000
Other current assets............................. 3,927,000 2,967,000
------------ ------------
Total current assets........................... 64,866,000 71,251,000
Noncurrent assets:
Property and equipment, net...................... 17,809,000 14,192,000
Goodwill, net.................................... 113,369,000 55,742,000
Deferred income taxes............................ 5,183,000 602,000
Other assets..................................... 6,381,000 3,945,000
------------ ------------
Total noncurrent assets........................ 142,742,000 74,481,000
------------ ------------
Total assets................................... $207,608,000 $145,732,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 3,867,000 $ 5,346,000
Pre-billed media................................. 5,023,000 6,639,000
Advance billings................................. 4,797,000 2,736,000
Deferred revenues................................ 8,021,000 4,125,000
Accrued expenses and other current liabilities... 19,499,000 14,718,000
------------ ------------
Total current liabilities...................... 41,207,000 33,564,000
Other liabilities.................................. 2,422,000 692,000
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, 24,672,164 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.................................. 182,970,000 121,151,000
Accumulated deficit.............................. (17,326,000) (8,604,000)
Treasury stock, 195,005 and 184,834 shares of
common stock, at cost, respectively............. (1,175,000) (1,118,000)
Accumulated other comprehensive income........... (515,000) 24,000
------------ ------------
Total stockholders' equity..................... 163,979,000 111,476,000
------------ ------------
Total liabilities and stockholders' equity..... $207,608,000 $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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues.................... $32,825,000 $16,042,000 $61,362,000 $28,425,000
Cost of revenues............ 17,835,000 6,811,000 32,151,000 13,317,000
----------- ----------- ----------- -----------
Gross profit................ 14,990,000 9,231,000 29,211,000 15,108,000
Operating expenses:
Sales and marketing....... 1,944,000 430,000 3,182,000 777,000
General and
administrative........... 13,983,000 6,773,000 26,801,000 12,327,000
Write-off of offering-
related costs............ 722,000 -- 722,000 --
Amortization of goodwill.. 4,109,000 719,000 7,138,000 1,309,000
----------- ----------- ----------- -----------
Total operating
expenses............... 20,758,000 7,922,000 37,843,000 14,413,000
----------- ----------- ----------- -----------
Operating (loss) income..... (5,768,000) 1,309,000 (8,632,000) 695,000
Interest income, net........ 437,000 504,000 981,000 841,000
----------- ----------- ----------- -----------
(Loss) income before income
taxes...................... (5,331,000) 1,813,000 (7,651,000) 1,536,000
Provision for income taxes.. 424,000 1,232,000 1,071,000 1,428,000
----------- ----------- ----------- -----------
Net (loss) income........... $(5,755,000) $ 581,000 $(8,722,000) $ 108,000
=========== =========== =========== ===========
Net (loss) income per share:
Basic..................... $ (0.24) $ 0.03 $ (0.36) $ 0.01
=========== =========== =========== ===========
Diluted................... $ (0.24) $ 0.03 $ (0.36) $ 0.00
=========== =========== =========== ===========
Weighted-average number of
common shares outstanding:
Basic..................... 24,356,000 22,184,000 23,972,000 20,538,000
=========== =========== =========== ===========
Diluted................... 24,356,000 23,370,000 23,972,000 21,680,000
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................. $ (8,722,000) $ 108,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation...................................... 2,626,000 1,691,000
Amortization of goodwill.......................... 7,138,000 1,309,000
Provision for doubtful accounts................... 639,000 167,000
Loss on disposal of equipment..................... 201,000 170,000
Other, net........................................ 927,000 --
Changes in assets and liabilities:
Accounts receivable.............................. (7,882,000) (1,544,000)
Unbilled revenues................................ (394,000) (1,514,000)
Other current assets............................. (732,000) (576,000)
Accounts payable, accrued expenses and other
current liabilities............................. (368,000) 2,173,000
Pre-billed media................................. (1,576,000) (509,000)
Advance billings................................. 2,069,000 379,000
Deferred revenues................................ 3,909,000 (81,000)
Other, net....................................... (347,000) (725,000)
------------ -----------
Net cash (used in) provided by operating
activities..................................... (2,512,000) 1,048,000
Cash flows from investing activities:
Purchases of property and equipment............... (5,580,000) (4,001,000)
Acquisitions, net of cash acquired................ (11,374,000) (1,419,000)
Purchases of short-term investments............... (209,000) --
Maturities of short-term investments.............. 16,859,000 --
------------ -----------
Net cash used in investing activities........... (304,000) (5,420,000)
Cash flows from financing activities:
Proceeds from initial public offering............. -- 43,459,000
Funding to True North............................. (14,000) (3,297,000)
Purchases of treasury stock....................... (57,000) (428,000)
Principal payments made under capital lease
obligations...................................... (172,000) (195,000)
Exercises of stock options........................ 3,180,000 707,000
------------ -----------
Net cash provided by financing activities....... 2,937,000 40,246,000
------------ -----------
Effect of exchange rates on cash and cash
equivalents........................................ 179,000 --
------------ -----------
Net increase in cash and cash equivalents........... 300,000 35,874,000
Cash and cash equivalents, beginning of the period.. 30,265,000 7,824,000
------------ -----------
Cash and cash equivalents, end of the period........ $ 30,565,000 $43,698,000
============ ===========
</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"),
formerly Modem Media . Poppe Tyson, Inc., is a leading Internet professional
services firm focused on conceiving, developing and distributing customer-
focused Internet solutions for Global 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 June
30, 2000, the condensed consolidated statements of operations for the three
and six months ended June 30, 2000 and 1999 and the condensed consolidated
statements of cash flows for the six months ended June 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 six months ended June 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 six months
ended June 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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic weighted-average number of
common shares outstanding........ 24,356,000 22,184,000 23,972,000 20,538,000
Dilutive effect of stock options
and warrants..................... -- 1,186,000 -- 1,142,000
---------- ---------- ---------- ----------
Diluted weighted-average number of
common shares outstanding........ 24,356,000 23,370,000 23,972,000 21,680,000
========== ========== ========== ==========
</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 June 2000, the Financial
Accounting Standards Board ("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 is a professional services company, with approximately 100
employees, that provides 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 Modem Media
common stock (446,010 shares, of which 139,706 will 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
5
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 from a minority interest holder in exchange for a
$2,550,000 note payable. Such note is payable in 24 equal monthly
installments, the first of which was paid during the quarter, and bears
interest at a rate of 9.5% per annum.
3. Equity
On March 1, 2000, the Company effected a 2-for-1 stock split, paid in the
form of a stock dividend, of all classes 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 three
months ended June 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 is no longer 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).
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 six
months ended June 30, 2000 and 1999 is as follows:
6
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net (loss) income....... $(5,755,000) $ 581,000 $ (8,722,000) $ 108,000
Foreign currency
translation
adjustment............. (255,000) (9,000) (539,000) --
----------- ----------- ------------ ------------
Total comprehensive
(loss) income........ $(6,010,000) $ 572,000 $ (9,261,000) $ 108,000
=========== =========== ============ ============
6. Geographic Information
Information about the Company's operations in different geographic regions
is as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Domestic.............. $26,634,000 $13,978,000 $ 49,037,000 $ 24,757,000
International......... 6,191,000 2,064,000 12,325,000 3,668,000
----------- ----------- ------------ ------------
$32,825,000 $16,042,000 $ 61,362,000 $ 28,425,000
=========== =========== ============ ============
Earnings before
interest, taxes and
amortization of
goodwill:
Domestic.............. $ 211,000 $ 2,296,000 $ 1,042,000 $ 2,654,000
International......... (1,870,000) (268,000) (2,536,000) (650,000)
----------- ----------- ------------ ------------
$(1,659,000) $ 2,028,000 $ (1,494,000) $ 2,004,000
=========== =========== ============ ============
(Loss) income before
income taxes:
Domestic.............. $(3,215,000) $ 2,075,000 $ (4,641,000) $ 2,196,000
International......... (2,116,000) (262,000) (3,010,000) (660,000)
----------- ----------- ------------ ------------
$(5,331,000) $ 1,813,000 $ (7,651,000) $ 1,536,000
=========== =========== ============ ============
Net (loss) income:
Domestic.............. $(3,531,000) $ 889,000 $ (5,568,000) $ 697,000
International......... (2,224,000) (308,000) (3,154,000) (589,000)
----------- ----------- ------------ ------------
$(5,755,000) $ 581,000 $ (8,722,000) $ 108,000
=========== =========== ============ ============
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C> <C> <C>
Identifiable assets:
Domestic...................................... $185,904,000 $126,521,000
International................................. 21,704,000 19,211,000
------------ ------------
$207,608,000 $145,732,000
============ ============
</TABLE>
7. Supplemental Cash Flow Information
The Company incurred non-cash capital lease obligations of approximately
$392,000 in connection with the purchase of new equipment during the six
months ended June 30, 2000.
A note payable of $2,550,000 was issued in connection with the Company's
additional investment in CentrPort in June 2000 (see Note 2).
7
<PAGE>
MODEM MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's non-cash activity related to acquisitions
during the six months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Fair value of assets acquired, net of cash
acquired.......................................... $ 69,374,000 $ 1,419,000
Liabilities assumed................................ (4,600,000) --
Common stock issued................................ (14,400,000) --
Stock-based compensation obligations assumed....... (39,000,000) --
------------ ------------
Acquisitions, net of cash acquired................. $ 11,374,000 $ 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 and timing of
international expansion;
. dependence on a limited number of
clients; . the ability to manage future
growth, if any;
. variability of operating results;
. dependence on key management
personnel;
. the ability to accurately
estimate costs in fixed-fee
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 . dependence on technology;
introduce and expand the Me-
business Network and CentrPort
technology;
. dependence on the continued
growth of the Internet; and
. the ability to integrate acquired . changes in government regulation
companies; including regulation of privacy
issues.
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 Global 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
customer data generated through the Me-business Network's 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.
9
<PAGE>
Since our inception in 1987, we have established and maintained
relationships with Global 500 and select online businesses. Our clients
include Citibank, General Motors, Delta Air Lines, General Electric, IBM and
JCPenney. We service our clients through a global network of offices in North
America, Latin America, Europe and Asia with our staff of over 950 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 CentrPort and the Me-business
Network will generate transactional fees in addition to those generated on a
fixed-fee, retainer or time-and-material basis.
Once a project is completed, there can be no assurance that a client will
engage us for future services. As a result, a client that generates
substantial revenues for us in one period may not be a substantial source of
revenues in a subsequent period. In addition, our clients generally have the
right to terminate their relationships with us without penalty and with
relatively short or no notice. The termination of our business relationships
with any of our significant clients, or a material reduction in the use of our
services by any such clients, could adversely affect our business, financial
condition or results of operations.
Cost 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. During 2000, we substantially increased our
spending on marketing and advertising on a global basis to promote the Modem
Media brand. In addition, we have increased our sales personnel to expand new
business efforts.
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 eleven of the fourteen
quarters from January 1, 1997 through June 30, 2000. Although we have
experienced revenue growth in recent periods, these growth rates may not be
sustainable or indicative of future operating results. In addition, we have
incurred substantial costs to expand and integrate our operations and intend
to continue to invest in ongoing expansion and integration efforts, as well as
infrastructure development. As a result of these increased costs, and the
amortization of goodwill related to the acquisition of Vivid, we expect to
incur net losses for the foreseeable future.
During the first half of 2000, 79.9% of our revenues were domestic and 20.1%
were international. We anticipate that our domestic operations will experience
declines in margins as we hire strategy and technology personnel in
anticipation of new engagements and the further development of the CentrPort
technology platform. We intend to increase hiring internationally to meet
demand and provide full-service capabilities in each office. 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, higher benefit 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,
10
<PAGE>
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.
Results of Operations
The following table sets forth certain items from our statements of
operations for the three and six months ended June 30, 2000 and 1999 included
elsewhere in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues........................... $32,825,000 100.0% $16,042,000 100.0%
Cost of revenues................... 17,835,000 54.3 6,811,000 42.5
----------- ----- ----------- -----
Gross profit....................... 14,990,000 45.7 9,231,000 57.5
Sales and marketing................ 1,944,000 5.9 430,000 2.7
General and administrative......... 13,983,000 42.6 6,773,000 42.2
Write-off of offering-related
costs............................. 722,000 2.2 -- --
Amortization of goodwill........... 4,109,000 12.6 719,000 4.4
----------- ----- ----------- -----
Operating (loss) income............ (5,768,000) (17.6) 1,309,000 8.2
Interest income, net............... 437,000 1.3 504,000 3.1
Provision for income taxes......... 424,000 1.3 1,232,000 7.7
----------- ----- ----------- -----
Net (loss) income.................. $(5,775,000) (17.6)% $ 581,000 3.6%
=========== ===== =========== =====
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C> <C> <C>
Revenues........................... $61,362,000 100.0% $28,425,000 100.0%
Cost of revenues................... 32,151,000 52.4 13,317,000 46.9
----------- ----- ----------- -----
Gross profit....................... 29,211,000 47.6 15,108,000 53.1
Sales and marketing................ 3,182,000 5.2 777,000 2.7
General and administrative......... 26,801,000 43.7 12,327,000 43.4
Write-off of offering-related
costs............................. 722,000 1.2 -- --
Amortization of goodwill........... 7,138,000 11.6 1,309,000 4.6
----------- ----- ----------- -----
Operating (loss) income............ (8,632,000) (14.1) 695,000 2.4
Interest income, net............... 981,000 1.6 841,000 3.0
Provision for income taxes......... 1,071,000 1.7 1,428,000 5.0
----------- ----- ----------- -----
Net (loss) income.................. $(8,722,000) (14.2)% $ 108,000 0.4%
=========== ===== =========== =====
</TABLE>
Results of Operations--Three Months Ended June 30, 2000 Compared to Three
Months Ended June 30, 1999
Revenues. Revenues increased $16.8 million, or 104.6%, to $32.8 million for
the three months ended June 30, 2000 from $16.0 million for the three months
ended June 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.
Cost of Revenues and Gross Profit. Cost of revenues increased $11.0 million,
or 161.9%, to $17.8 million for the three months ended June 30, 2000 from $6.8
million for the three months ended June 30, 1999. Gross
11
<PAGE>
margin declined to 45.7% of consolidated revenues for the second quarter of
2000 from 57.5% for the second 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 Tokyo, Munich,
Paris, Sao Paulo and San Francisco. The decrease in gross margin in the second
quarter of 2000 compared to the second quarter of 1999 was primarily due to
lower utilization, as well as a significant decrease in revenues from our
Tokyo office due to a reduction in client spending.
Sales and Marketing. Sales and marketing increased $1.5 million, or 352.1%
to $1.9 million for the three months ended June 30, 2000 compared to $0.4
million for the three months ended June 30, 1999. Sales and marketing
represented 5.9% of revenues for the second quarter of 2000 and 2.7% for the
second quarter of 1999. The dollar and percentage increases in sales and
marketing were primarily attributable to increased advertising to promote 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 $7.2
million, or 106.5%, to 14.0 million for the three months ended June 30, 2000
from $6.8 million for the three months ended June 30, 1999. General and
administrative represented 42.6% of revenues for the second quarter of 2000
and 42.2% for the second 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.
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 three months ended June 30, 2000,
$722,000 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 $3.4
million, or 471.5%, to $4.1 million for the three months ended June 30, 2000
from $0.7 million for the three months ended June 30, 1999. The increase is
primarily a result of our acquisition of Vivid, as well as certain
international offices.
Income Taxes. We recorded a provision for income taxes of $0.4 million on a
pre-tax loss of $5.3 million for the three months ended June 30, 2000, as
compared to a provision for income taxes of $1.2 million on pre-tax income of
$1.8 million for the three months ended June 30, 1999. The effective income
tax rate was 8.0% for the three months ended June 30, 2000 as compared to
68.0% for the three months ended June 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--Six Months Ended June 30, 2000 Compared to Six Months
Ended June 30, 1999
Revenues. Revenues increased $32.9 million, or 115.9%, to $61.4 million for
the six months ended June 30, 2000 from $28.4 million for the six months ended
June 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.
Cost of Revenues and Gross Profit. Cost of revenues increased $18.8 million,
or 141.4%, to $32.2 million for the six months ended June 30, 2000 from $13.3
million for the six months ended June 30, 1999. Gross margin declined to 47.6%
of consolidated revenues for the first six months of 2000 from 53.1% for the
first six 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 six months of 2000
compared to the first six months of 1999 was primarily due to lower
utilization, as well as a significant decrease in revenues from our Tokyo
office due to a reduction in client spending.
12
<PAGE>
Sales and Marketing. Sales and marketing increased $2.4 million, or 309.5%
to $3.2 million for the six months ended June 30, 2000 compared to $0.8
million for the six months ended June 30, 1999. Sales and marketing
represented 5.2% of revenues for the first six months of 2000 and 2.7% for the
first six months of 1999. The dollar and percentage increases in sales and
marketing were primarily attributable to increased advertising to promote 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 $14.5
million, or 117.4%, to 26.8 million for the six months ended June 30, 2000
from $12.3 million for the six months ended June 30, 1999. For the first six
months of 2000, general and administrative increased to 43.7% of revenues from
43.4% of revenues for the first six 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 six months ended June 30, 2000,
$722,000 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 $5.8
million, or 445.3%, to $7.1 million for the six months ended June 30, 2000
from $1.3 million for the six months ended June 30, 1999. The increase is
primarily a result of our acquisition of Vivid, as well as certain
international offices.
Income Taxes. We recorded a provision for income taxes of $1.1 million on a
pre-tax loss of $7.7 million for the six months ended June 30, 2000, as
compared to a provision for income taxes of $1.4 million on pre-tax income of
$1.5 million for the six months ended June 30, 1999. The effective income tax
rate was 14.0% for the six months ended June 30, 2000 as compared to 93.0% for
the six months ended June 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 $(2.5) million and
$1.0 million for the six months ended June 30, 2000 and 1999, respectively.
Net cash used in investing activities was $0.3 million and $5.4 million for
the six months ended June 30, 2000 and 1999, respectively. Investing
activities reflect our acquisitions, as well as the maturities of short-term
investments in 2000 and purchases of property and equipment in both periods.
Net cash provided by financing activities was $2.9 million and $40.2 million
for the six months ended June 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 $9.0 million and the funding of certain
international operations which 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 expand our personnel and infrastructure to accommodate growth, as well as
the rate at which 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 maintain
and expand our operations.
13
<PAGE>
We believe that our cash on hand and short-term investments, 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 expansion plans.
14
<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 $24,000,000 to acquire and fund
the operations of complementary businesses in Tokyo, Munich, Paris, Sao Paulo
and San Francisco. 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
(a) The Company's Annual Meeting of Shareholders was held on June 5, 2000 at
the Merritt 7 Corporate Park at 301 Merritt 7 in Norwalk, Connecticut and
began at 9:30 a.m.
(b) At the Annual Meeting, the Company's shareholders elected eight
directors each to serve for the following year and until their successors are
duly appointed, as follows:
<TABLE>
<CAPTION>
Votes
-------------------
For Withheld
---------- --------
<S> <C> <C>
Robert C. Allen, II...................................... 21,889,964 286,129
Robert H. Beeby.......................................... 21,988,776 187,317
Donald M. Elliman, Jr. .................................. 21,989,770 186,323
G.M. O'Connell........................................... 21,886,849 289,244
Terry D. Peigh........................................... 21,892,660 283,433
Don Peppers.............................................. 21,989,820 186,273
Donald L. Seeley......................................... 21,892,660 283,433
Joseph R. Zimmel......................................... 21,767,695 408,398
</TABLE>
Each of these directors held office as directors prior to the Annual
Meeting.
(c) In addition to the election of Directors, at the Annual Meeting, the
Company's shareholders:
(i) Ratified the appointment of Arthur Andersen LLP as the Company's
independent auditors for 2000; and
<TABLE>
<CAPTION>
Votes
------------------------------------------------------------------------------------
For Against Abstain
---------- ------- -------
<S> <C> <C>
22,122,219 1,679 52,195
</TABLE>
15
<PAGE>
(ii) Approved the proposed Amendment and Restatement of the Company's
Certificate of Incorporation. The amendment and restatement effected the
following changes to the previous certificate of incorporation of the
Company:
(a) a change in the name of the Company to Modem Media, Inc. from
Modem Media . Poppe Tyson, Inc.;
(b) an increase in the shares of common stock authorized for issuance
to 145,000,000 shares;
(c) change in the number of directors to a range of not less than
five nor more than ten; and
(d) elimination of references to Class B Common Stock and
reclassification of Class A Common Stock as Common Stock.
<TABLE>
<CAPTION>
Votes
-----------------------------------------------------------------------------------
For Against Abstain
---------- --------- -------
<S> <C> <C>
21,029,280 1,005,558 141,255
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, effective as of June 5, 2000
3.2 Amended and Restated Bylaws of the Company, effective as of June
5, 2000
10.2(n) Employment Letter Agreement by and between the Company and William
Zierolf, dated May 4, 2000
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On April 27, 2000, Modem Media filed a Form 8-K reporting that on April 26,
2000, True North and its subsidiaries converted all of their shares of Class B
common stock of Modem Media into shares of Class A common stock of Modem
Media.
On May 5, 2000, Modem Media filed a Form 8-K/A (amending the April 27, 2000
Form 8-K) reporting a correction to True North's percentage ownership of Modem
Media's outstanding shares as a result of the aforementioned conversion.
16
<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: August 10, 2000
/s/ Gerald M. O'Connell
By: _________________________________
Gerald M. O'Connell
Chief Executive Officer
(Principal Executive Officer)
/s/ Steven C. Roberts
By: _________________________________
Steven C. Roberts
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
