U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-25525
ABOUT.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-4034015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
220 EAST 42ND STREET, 24TH FLOOR
NEW YORK, NEW YORK 10017
(Address of Principal Executive Officer and Zip Code)
(212) 849-2000
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 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 |_|
As of October 31, 1999, there were 15,348,431 shares of the
registrant's common stock outstanding.
<PAGE>
ABOUT.COM, INC.
FORM 10-Q
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 ............................. 3
Unaudited Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 ......... 5
Notes to Unaudited Interim Condensed Consolidated
Financial Statements .......................................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 14
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk .... 31
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings ............................................. 31
ITEM 2: Changes in Securities and Use of Proceeds ..................... 31
ITEM 3: Defaults Upon Senior Securities ............................... 31
ITEM 4: Submission of Matters to a Vote of Security Holders ........... 32
ITEM 5: Other Information ............................................. 32
ITEM 6: Exhibits and Reports on Form 8-K .............................. 32
ITEM 7: Signatures .................................................... 32
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements:
About.com, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 47,766,900 $ 10,644,300
Accounts receivable, net 5,648,500 917,300
Prepaid and other current assets 1,196,200 100,000
------------- -------------
Total current assets 54,611,600 11,661,600
------------- -------------
Property and equipment, net 7,682,600 3,302,000
Goodwill, net 2,235,900 --
Deferred offering costs -- 568,700
Other assets, net 1,027,800 125,400
------------- -------------
Total assets $ 65,557,900 $ 15,657,700
============= =============
<CAPTION>
Liabilities and Stockholders' Equity (Deficit)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 12,472,400 $ 6,413,200
Accrued compensation 623,900 181,700
Guide fees payable 650,500 462,400
Deferred revenue 447,500 --
ESPP deductions withheld 532,100 --
Current portion of notes payable 398,500 154,000
Current installments of obligations under capital leases 183,400 219,000
------------- -------------
Total current liabilities 15,308,300 7,430,300
------------- -------------
Notes payable, excluding current portion 562,300 620,600
Deferred rent 28,300 47,700
Obligations under capital leases, excluding current installments 26,200 149,400
Redeemable convertible preferred stock -- 32,071,700
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.001 par value; 50,000,000 shares authorized,
12,228,418 and 2,202,558 shares isssued and outstanding at
September 30, 1999 and December 31, 1998, respectively 12,300 2,200
Additional paid-in capital 125,207,100 3,231,000
Deferred compensation (3,143,000) (1,238,900)
Accumulated deficit (72,443,600) (26,656,300)
------------- -------------
Total stockholders' equity (deficit) 49,632,800 (24,662,000)
------------- -------------
Commitments and contingencies -- --
Total liabilities and stockholders' equity (deficit) $ 65,557,900 $ 15,657,700
============= =============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
3
<PAGE>
About.com, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 7,884,200 $ 1,030,000 $ 13,958,200 $ 1,577,700
Cost of revenues 4,090,500 1,228,900 9,336,100 2,514,500
Non-cash compensation 4,600 3,000 3,625,900 23,000
------------ ------------ ------------ ------------
Gross profit (loss) 3,789,100 (201,900) 996,200 (959,800)
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 12,505,900 2,331,600 36,289,700 3,708,900
General and administrative 2,430,100 792,700 5,703,700 1,897,100
Product development 2,257,800 864,600 5,191,500 2,048,200
Amortization of goodwill 206,400 -- 240,100 --
Non-cash compensation 241,600 94,000 857,200 325,000
------------ ------------ ------------ ------------
Total operating expenses 17,641,800 4,082,900 48,282,200 7,979,200
------------ ------------ ------------ ------------
Loss from operations (13,852,700) (4,284,800) (47,286,000) (8,939,000)
------------ ------------ ------------ ------------
Other income (expense), net 680,000 (70,000) 1,498,700 (640,800)
------------ ------------ ------------ ------------
Net loss (13,172,700) (4,354,800) (45,787,300) (9,579,800)
------------ ------------ ------------ ------------
Cummulative dividends and accretion -- (392,000) (659,600) (655,000)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $(13,172,700) $ (4,746,800) $(46,446,900) $(10,234,800)
============ ============ ============ ============
Net loss per common share - basic
and diluted $ (1.08) $ (2.69) $ (5.08) $ (5.95)
============ ============ ============ ============
Weighted average shares outstanding 12,205,151 1,786,723 9,139,091 1,721,033
============ ============ ============ ============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
About.com, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(45,787,300) $ (9,579,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,190,700 325,600
Amortization of debt discount and issuance costs -- 236,400
Non-cash compensation expense 4,483,100 348,000
Deferred interest on debt -- 393,800
Other (19,400) 1,500
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable, net (4,731,300) (550,800)
Other assets (1,388,200) (90,300)
Accounts payable and accrued expenses 6,059,200 1,206,600
Accrued compensation 442,200 41,000
Guide fees payable 188,100 113,000
Deferred revenue 447,500 (74,600)
ESPP deductions withheld 532,100 --
------------ ------------
Net cash used in operating activities (37,583,300) (7,629,600)
------------ ------------
Cash flows used in investing activities:
VantageNet acquisition, net (586,600) --
Purchase of intangible assets (651,600) --
Capital expenditures (6,279,900) (448,300)
------------ ------------
Net cash used in investing activities (7,518,100) (448,300)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock related to initial
public offering and concurrent placement, net 81,049,000 --
Proceeds from issuance of redeemable preferred stock -- 6,854,500
Proceeds from issuance of loans payable -- 1,800,000
Proceeds from issuance of common stock in connection with
the exercise of options 237,400 69,900
Proceeds from secured credit facility 781,300 507,700
Principal payments under secured credit facility (253,600) (47,000)
Principal payments under capital leases (158,800) (169,100)
Deferred offering/financing costs 568,700 --
------------ ------------
Net cash provided by financing activities 82,224,000 9,016,000
------------ ------------
Net increase in cash and cash equivalents 37,122,600 938,100
Cash and cash equivalents at beginning of period 10,644,300 303,200
------------ ------------
Cash and cash equivalents at end of period $ 47,766,900 $ 1,241,300
============ ============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
5
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
About.com, Inc. ("About.com") was incorporated in New York on June 27,
1996 (inception) as General Internet Inc. and commenced operations on that date.
In December 1998, General Internet Inc. changed its corporate name to
MiningCo.com, Inc. and reincorporated in Delaware. In May 1999, MiningCo.com,
Inc. changed its corporate name to About.com, Inc. About.com's Internet service,
About.com, is an Internet news, information and entertainment service comprised
of a network of niche vertical sites for users and marketers. The Company
conducts its business within one industry segment.
The Company's unaudited interim financial statements as of September 30,
1999 and for the three and nine month periods ended September 30, 1999 include
the consolidated accounts of About.com and its wholly-owned subsidiary,
VantageNet, Inc., from June 14, 1999 (date of acquisition). All significant
intercompany balances and transactions have been eliminated in consolidation.
(2) Summary of Operations and Significant Accounting Policies
(a) Initial Public Offering and Concurrent Placement
On February 23, 1999, About.com and Comcast Interactive Investments, Inc.
("Comcast") entered into a common stock purchase agreement pursuant to which
About.com agreed to sell $2,500,000 of common stock to Comcast. These common
shares were purchased directly from About.com in a private placement transaction
at a price of 93% of the initial public offering price per share (or $23.25 per
share). The underwriters did not receive any discount or commission related to
this transaction. The closing of the concurrent placement was contingent upon
the closing of About.com's initial public offering ("IPO").
On March 24, 1999, About.com completed its IPO which resulted in the
issuance of 3,450,000 shares of common stock at $25.00 per share (which included
450,000 shares in connection with the exercise of the underwriters'
over-allotment option) and the concurrent placement of 107,527 shares to Comcast
at $23.25 per share. In addition, upon the closing of the IPO, 3,346,715,
6,597,596 and 7,301,811 shares of Series A, B and C convertible preferred stock,
respectively, converted into 6,139,640 shares of common stock and $341,300 in
unsecured promissory notes payable was forgiven. Net proceeds from the offering
and concurrent placement, after underwriting and placement agent fees of $6.0
million and offering costs of $1.7 million were approximately $81.0 million.
6
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(b) Unaudited Interim Financial Information
The accompanying interim unaudited condensed consolidated balance sheets
and statements of operations and cash flows reflect all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial position of About.com at September 30, 1999, and
the results of operations and cash flows for the interim periods ended September
30, 1999 and 1998. The results of operations for any interim period are not
necessarily indicative of About.com's results of operations for any other future
interim period or for a full fiscal year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited interim
condensed financial statements be read in conjunction with About.com's audited
financial statements and notes thereto for the year ended December 31, 1998 as
included in About.com's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission in March 1999 and October 1999.
About.com has made certain reclassifications within its financial
statements to more accurately present the financial results of the Company.
Accordingly, certain prior period balances have been reclassified to conform to
the current period presentation.
(c) 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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
About.com considers all highly liquid securities with original maturities
of three months or less to be cash equivalents, which principally consist of
money market accounts.
7
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(e) Revenue and Expense Recognition
Revenue Recognition
To date, substantially all of About.com's revenues have been derived from
the sale of advertisements on About.com. About.com offers numerous sizes and
types of advertising placement, including banner advertisements, button
advertisements, text links and sponsorship programs. Advertising revenues are
derived principally from short-term advertising contracts in which About.com
typically guarantees a minimum number of impressions to advertisers over a
specified period of time for a fixed fee. Revenues from advertising sales are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant About.com obligations remain, at the lesser of the
ratio of impressions delivered over total guaranteed impressions or the straight
line basis over the term of the contract, and collection of the resulting
receivable is probable. Payments received from advertisers prior to displaying
their advertisements on About.com are recorded as deferred revenue and are
recognized as revenue ratably as the advertisements are displayed. Pursuant to
its agreements with advertisers, About.com generally guarantees a minimum number
of impressions (times that an advertisement appears in pages viewed by the users
of About.com) to be delivered over a specified period of time for a fixed fee.
To the extent minimum guaranteed impression levels are not met ratably over the
contract period, About.com defers recognition of the corresponding pro-rata
portion of the revenues relating to such unfulfilled obligations until the
guaranteed impression levels are achieved. When there is no guarantee of a
minimum number of impressions, About.com recognizes revenues in the period in
which the advertisement is displayed. About.com's short-term advertising
agreements are generally terminable by either party upon relatively short
notice. In certain cases, these agreements entitle About.com to a share of
revenues generated by sales resulting from direct links from About.com. To date,
About.com has recognized minimal revenue from these revenue sharing agreements.
About.com's revenue derived from these revenue sharing agreements will be
recognized by About.com upon notification from its advertisers and electronic
commerce partners of sales attributable to About.com.
A portion of About.com's revenues are from barter advertisements
(agreements whereby About.com trades advertisements on About.com in exchange for
advertisements on third-party web sites). Barter advertising revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more determinable in the circumstances. Revenue from barter
advertising transactions is recognized as income when advertisements are
delivered on About.com. Barter expense is recognized when About.com's
advertisements are run on third-party web sites, which is typically in the same
period when barter revenue is recognized. Barter expense is included as a
component of cost of revenues. Barter advertising revenues and expenses were 10%
or less of revenue for all periods presented.
A portion of About.com's revenues are from production and development
fees. Production and development fees represent HTML design services, graphic
services, engineering and database development and related services. About.com
charges clients for these services on either a fixed price or time and materials
basis. Revenue is recognized as these services are performed. These revenues
fluctuate based on the number of new programs initiated, types of services and
scope and complexity of each program. These revenues accounted for less than 10%
of revenue for the nine months ended September 30, 1999.
8
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At September 30, 1999, accounts receivable included approximately $696,100
of unbilled receivables, $254,600 of which have been subsequently billed. Such
unbilled receivables represent the recognized sales value of short term
advertising contracts that were earned but not billable to customers at
September 30, 1999. The terms of the related advertising contracts typically
require billing at the end of 30, 60 or 90 days from the signing of the
contract.
(f) Basic and Diluted Net Loss Per Common Share
About.com adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. In accordance with SFAS No. 128 and the
SEC Staff Accounting Bulletin No. 98, basic earnings (loss) per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the conversion of the
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the Treasury Stock
method); common equivalent shares are excluded from the calculation if their
effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, all
options, warrants or other potentially dilutive instruments issued for nominal
consideration, prior to the anticipated effective date of an initial public
offering (including the IPO), are required to be included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented. As a result, About.com has included 218,890 shares of common
stock in the calculation of basic and diluted net loss per common share for the
three and nine month periods ended September 30, 1998 which relate to certain
investor warrants issued for nominal consideration, all of which were exercised
in December 1998 when About.com exercised its right to call those warrants.
Diluted net loss per common share for the periods ended September 30, 1999
and 1998, does not include the effect of options to purchase 2,810,123 and
1,055,340 shares of common stock and 65,860 and 736,341 warrants to purchase
common stock, respectively.
(g) Recent Accounting Pronouncements
As of January 1, 1998, About.com adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this standard has had no impact on
About.com's financial statements. Accordingly, About.com's comprehensive net
loss is equal to its net loss for all periods presented.
9
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which establishes standards for the way
that a public enterprise reports information about operating segments in annual
financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
About.com has determined that it does not have any separately reportable
business segments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. About.com does not expect the adoption
of SOP 98-1 to have a material effect on its capitalization policy.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133", which amends the
effective date of FASB 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. This statement is not expected to affect About.com as
About.com currently does not engage or plan to engage in derivative instruments
or hedging activities.
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited)
------------------ -----------------
<S> <C> <C>
Equipment and computer hardware, including
assets under capital leases of $664,700 $ 9,731,200 $ 4,062,200
Leasehold improvements 367,800 32,400
Furniture and fixtures 303,500 17,800
------------ ------------
10,402,500 4,112,400
Less accumulated depreciation and amortization, including
assets under capital leases of $418,500, and $239,900,
respectively (2,719,900) (810,400)
------------ ------------
Total $ 7,682,600 $ 3,302,000
============ ============
</TABLE>
10
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) Concentration of Credit Risk
Financial instruments which subject About.com to concentrations of credit
risk consist primarily of cash and cash equivalents, short term investments and
accounts receivable. About.com maintains cash and cash equivalents with various
domestic financial institutions. About.com performs periodic evaluations of the
relative credit standing of these institutions. From time to time, About.com's
cash balances with any one financial institution may exceed Federal Deposit
Insurance Corporation insurance limits.
About.com's customers are concentrated in the United States. About.com
performs ongoing credit evaluations and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the nine months ended September 30, 1999 and 1998, no customer
accounted for more than 10% of revenue generated by About.com and zero and one
customer, respectively, accounted for more than 10% of gross receivables.
(5) Non-cash Compensation
In March 1999, About.com recorded a non-cash charge of $3.6 million for
guide compensation. About.com has granted fully vested, non-qualified stock
options to purchase 199,500 shares of common stock at an exercise price of
$25.00 per share to a substantial majority of its guides. The options have a two
year term. Accordingly, such amount was recorded as a non-cash compensation
expense in About.com's statement of operations for the three months ended March
31, 1999 with an offsetting increase in additional paid in capital.
(6) Lease Line of Credit
During the first quarter of 1999, About.com entered into a lease line of
credit for $781,300 to finance capital equipment. Payments due are $241,600 in
1999, $254,900 in 2000, $271,400 in 2001 and $13,400 in 2002. The effective rate
of the credit facility is 16%.
(7) Acquisition
On June 14, 1999, About.com formed About.com Acquisition Corp. ("AAC"), a
Delaware corporation and a wholly-owned susidiary of About.com. AAC was merged
with and into VantageNet, Inc., a Minnesota corporation ("VantageNet"), with
VantageNet as the surviving corporation. The merger was effected pursuant to the
Agreement and Plan of Reorganization, dated June 14, 1999, by and among
About.com, AAC, VantageNet and certain stockholders thereof. As a result of the
merger, VantageNet became a wholly-owned subsidiary of About.com. VantageNet is
an Internet marketing company which utilizes electronic surveys and/or polling
tools.
11
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The consideration paid by About.com in connection with the merger
consisted of $550,000 in cash and 65,550 newly issued shares of common stock,
par value $0.001, of About.com. The total purchase price for this transaction
was approximately $2.5 million. The difference between the fair market value of
VantageNet's net tangible assets and the purchase price has been accounted for
as goodwill and other purchased intangible assets and is being amortized over
the expected period of benefit of three years.
Acquired Effective Acquisition Net Tangible Intangibles/
Company Date Costs Assets Goodwill
- --------------------------------------------------------------------------------
VantageNet June 14, 1999 $51,000 $24,000 $2,476,000
The following unaudited pro forma consolidated amounts give effect to the
acquisition as if it had occurred on January 1, 1998, by consolidating the
results of operations of VantageNet with the results of About.com for the three
and nine month periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $7,884,200 $1,044,700 $14,016,500 $1,577,700
Net loss attributable to
common stockholders ($13,172,700) ($4,940,300) ($46,800,800) ($10,830,300)
Net loss per common share ($1.08) ($2.70) ($5.10) ($6.06)
Weighted average shares used in net
loss per common share calculation (1) 12,205,151 1,832,273 9,179,149 1,786,583
</TABLE>
(1) The Company computes net loss per share in accordance with provisions of
FAS No. 128, "Earnings Per Share". Basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of
common shares outstanding during the period. The weighted average common
shares used to compute pro forma basic net loss per share includes the
actual weighted average common shares outstanding for the historical three
and nine month periods ended September 30, 1999 and 1998, respectively,
plus the common shares issued in connection with the acquisition of
VantageNet from January 1, 1998. The common stock issued in connection
with the acquisition of VantageNet was 65,550 shares, which was adjusted
for the weighted average period such shares were considered to be
outstanding during 1999. In addition, diluted net loss per share is equal
to basic net loss per share as common stock issuable upon exercise of the
Company's employee stock options and upon exercise of outstanding warrants
are not included because they are antidilutive. In future periods, the
weighted average shares used to compute diluted earnings per share will
include the incremental shares of common stock relating to outstanding
options and warrants to the extent such incremental shares are dilutive.
12
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The unaudited pro forma consolidated amounts are not necessarily indicative of
the operating results that would have been achieved had the transactions been in
effect as of the beginning of the periods presented and should not be construed
as being representative of future operating results.
(8) Supplemental Cash Flow Information
The amount of cash paid for interest was $121,800 and $60,800 for the nine
months ended September 30, 1999 and 1998, respectively.
In March 1999, About.com converted all outstanding shares of convertible
preferred stock into 6,139,640 shares of common stock and $341,300 of unsecured
promissory notes payable was forgiven.
(9) Subsequent Event
In October 1999, About.com completed an offering of 3,000,000 shares of
its Common Stock in a secondary public offering at an offering price of $49.875
per share. Net proceeds to About.com totaled approximately $140.6 million, after
underwriting discounts of $8.3 million and offering costs of approximately $0.7
million.
13
<PAGE>
ABOUT.COM, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ABOUT.COM CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS AND THE FUTURE PERFORMANCE OF ABOUT.COM WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1993, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. ABOUT.COM'S ACTUAL RESULTS AND
TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS"
AND ELSEWHERE IN THIS REPORT AND IN ABOUT.COM'S OTHER PUBLIC FILINGS MADE WITH
THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
For the period from our incorporation on June 27, 1996 through April 1997,
our operating activities related primarily to the initial development of
About.com, recruitment of employees and guides, and the establishment of our
organizational and technical infrastructure. Since the launch of our network in
April 1997, revenues and operating expenses have increased as we enhanced our
network of guides, expanded our editorial and operating staff, improved
About.com's functions and features and promoted About.com to increase brand
awareness. As part of our marketing efforts, we have conducted online campaigns
and, beginning in June 1998, an offline campaign consisting of a national trade
magazine print campaign, and outdoor and radio advertisements in selected
cities. In the second quarter of 1999, we conducted a significant offline
campaign consisting of a national print and television advertising campaign in
connection with the launch of the About.com brand.
To date, we have derived substantially all of our revenues from the sale
of advertisements on About.com. We expect to derive our revenues principally
from the sale of advertising on About.com for the foreseeable future. We
currently offer advertisers numerous sizes and types of advertising placements,
including banner advertisements, button advertisements and text links. We also
offer sponsorship programs and other promotional opportunities to build brand
awareness and drive user traffic to an advertiser's web site. To date, sales of
advertisements on About.com have been generated primarily by our internal
advertising sales organization.
Advertisers on About.com enter into agreements of typically between two
months and two years in duration. Pursuant to these agreements, we generally
guarantee a minimum number of impressions, or the number of times that an
advertisement is delivered to users of About.com, to be delivered over a
specified period of time at a fixed rate. Revenues from advertising sales are
recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations, at the lesser of the
ratio of impressions delivered over total guaranteed impressions or the straight
line basis over the term of the contract, and collection of the resulting
receivable is probable. Payments received from advertisers prior to displaying
their advertisements on About.com are recorded as deferred revenues and are
recognized
14
<PAGE>
as revenues ratably as the advertisements are displayed. To the extent these
minimum guaranteed impression levels are not met ratably over the contract
period, we defer recognition of the corresponding pro rata portion of the
revenues related to such unfulfilled obligation until the guaranteed impression
levels are achieved. When there is no guarantee that we deliver a minimum number
of impressions over a specified period, we recognize revenue in the period in
which the impressions are delivered.
Some agreements with advertisers entitle us to a share of revenues
generated by sales of merchandise and services resulting from direct links from
About.com. Through September 30, 1999, we had not recognized any material
revenues from these revenue sharing agreements. Any revenues we derive from
these revenue sharing agreements will be recognized upon notification from our
advertisers of sales attributable to About.com.
Our agreements with our channel partners are typically at least 12 months
in duration and generally require our partners to make payments to us for
development, placement and advertising payments. We recognize any development
fees as the services are provided. We recognize any placement fees ratably over
the term of the agreement.
For all periods presented, 10% or less of our revenues were generated by
agreements where we traded advertisements on About.com in exchange for
advertisements on third-party web sites without receiving any cash payment. The
corresponding expenses from these barter arrangements, which equal the amount of
the barter revenues from these arrangements, are included as a component of cost
of revenues. We anticipate that barter revenues will continue to account for
less than 10% of our total annual revenues.
Guide compensation is included as a component of cost of revenues. We
currently compensate guides at an amount equal to the greater of a monthly
minimum guarantee or a percentage of net advertising revenues generated in the
About.com network. This revenue is distributed among the guides based on the
user traffic on their respective topic-specific sites as a percentage of traffic
for the whole network. Guides are also currently entitled to share a percentage
of net transaction revenues and net syndication revenues.
In connection with our initial public offering, we granted fully vested,
non-qualified stock options to purchase 199,500 shares of common stock to a
substantial majority of our guides. The exercise price per share of these
options was $25.00 and the options have two-year terms. Since the guides are
independent contractors, we recorded non-cash compensation expense of
approximately $3.6 million during the quarter ended March 31, 1999, representing
the fair market value of the options at the date of grant. This amount is
presented in a separate line item above the gross profit (loss) line.
Through September 30, 1999, we had recorded deferred compensation expense
of approximately $4.5 million in connection with the grant of stock options to
employees and directors, representing the difference between the deemed value of
the common stock at the date of grant for accounting purposes and the exercise
price of the related options. We amortize this non-cash expense over the vesting
period, typically four years, of the applicable options. Amortization of
deferred compensation expense was $478,000 for the year ended December 31, 1998
and $871,000 for the nine months ended September 30, 1999, of which $14,000 is
related to deferred compensation expense for the grant of options to operations
personnel and has been included in the non-cash compensation expense line item
appearing above the gross profit (loss) line. We currently expect to amortize
the following amounts of deferred compensation expense annually: 1999-$1.1
million; 2000-$1.0 million; 2001-$1.0 million; and 2002-$0.9 million.
15
<PAGE>
In June 1999, we acquired VantageNet, Inc. In connection with this
acquisition, we recorded goodwill and purchased intangibles of $2.5 million. We
are amortizing the goodwill and purchased intangibles related to this
acquisition over the expected period of benefit of 3 years.
Results of Operations
Revenues
Revenues consist primarily of advertising revenues on About.com. Revenues
increased to $7.9 million for the three months ended September 30, 1999 from
$1.0 million for the three months ended September 30 1998. For the nine months
ended September 30, 1999 and 1998, revenue increased to $14.0 million from $1.6
million. This period-to-period growth was primarily attributable to an increase
in (1) the number of advertisers and the average commitment per advertiser, (2)
user traffic on About.com and (3) the number of our sales people. We anticipate
that revenues from advertising will continue to account for substantially all of
our revenues for the foreseeable future.
Cost of Revenues
Since the launch of About.com in April 1997, cost of revenues has
consisted primarily of guide compensation, third party Internet advertising
sales organization fees, salaries of operations personnel, site hosting and
depreciation costs, barter advertising expenses, and other product costs. Cost
of revenues increased to $4.1 million for the three months ended September 30,
1999 from $1.2 million for the three months ended September 30, 1998. For the
nine months ended September 30, 1999 and 1998, cost of revenues increased to
$9.3 million from $2.5 million. The increase in cost of revenues was due to an
increase in guide compensation and site hosting costs to support the increase in
web site traffic, as well as an increase in equipment costs, depreciation and
staff costs required to support the expansion of our site and services.
Non-Cash Compensation Expense
For the nine months ended September 30, 1999 and 1998, non-cash
compensation expense increased to $3.6 million from $23,000. Non-cash
compensation expense included amortization of deferred compensation relating to
the grant of options to operations personnel in the amounts of $5,000 for the
three months ended September 30, 1999 and $3,000 for the three months ended
September 30, 1998. Non-cash compensation expense for the nine months ended
September 30, 1999 also included a charge in the amount of $3.6 million relating
to our grant of stock options to the guides upon the closing of our initial
public offering.
16
<PAGE>
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of online and offline
advertising costs, salaries and commissions of internal sales and marketing
personnel, public relations costs, payment to third-party Internet companies to
drive user traffic to About.com and other marketing related expenses. Sales and
marketing expenses were $12.5 million for the three months ended September 30,
1999 and $2.3 million for the three months ended September 30, 1998. For the
nine months ended September 30, 1999 and 1998, sales and marketing expenses
increased to $36.3 million from $3.7 million. These period-to-period increases
were primarily attributable to the launch of our national branding and marketing
campaigns. The increase was also attributable to the expansion of About.com's
online advertising efforts as well as increased sales and marketing personnel
and related expenses.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, accounting,
facilities and professional services. General and administrative expenses were
$2.4 million for the three months ended September 30, 1999 and $793,000 for the
three months ended September 30, 1998. For the nine months ended September 30,
1999 and 1998, general and administrative expenses increased to $5.7 million
from $1.9 million. These period-to-period increases were primarily attributable
to increased salaries and related expenses associated with hiring additional
personnel, facility-related expenses and costs relating to our operation as a
public company. We expect that we will incur additional general and
administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business and our operation as a public
company, including directors' and officers' liability insurance, investor
relations programs and professional service fees.
Product Development
Product development expenses include personnel and consulting costs
associated with the design, development and testing of About.com and our systems
and editorial personnel costs. We expense our product development costs as
incurred. Product development expenses were $2.3 million and $865,000 for the
three months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999, product development expenses increased to $5.7
million from $1.9 million. These period-to-period increases were primarily
attributable to increased staffing levels to support our growth and development.
We believe that timely deployment of new and enhanced features and technology
are critical to attaining our strategic objectives. Accordingly, we intend to
continue recruiting and hiring experienced product development personnel and to
make additional investments in product development.
Non-cash Compensation Expense
For the three months ended September 30, 1999 and 1998, amortization of
deferred compensation expense relating to the grant of options to non-operations
personnel increased to $242,000 from $94,000, respectively. For the nine months
ended September 30, 1999, amortization of deferred compensation expense
increased to $857,000 from $325,000 for the nine months ended September 30,
1998.
17
<PAGE>
Goodwill
For the three and nine month periods ended September 30, 1999,
amortization of goodwill related to our acquisition of VantageNet in June 1999,
amounted to $206,000 and $240,000, respectively.
Other Income (Expense), Net
Other income (expense), net includes interest expense related to our debt
and capital lease obligations, net of interest income from our cash and cash
equivalents. Other income (expense), net was $680,000 for the three months ended
September 30, 1999 and $(70,000) for the three months ended September 30, 1998.
For the nine months ended September 30, 1999 and 1998, other income (expense),
net increased to $1.5 million from $(641,000). The increase in other income was
primarily attributable to the interest income generated by the increase in cash
and cash equivalents from our IPO.
Cumulative Dividends and Accretion of Convertible Preferred Stock
Cumulative dividends on About.com's convertible preferred stock and
accretion of costs associated with the convertible preferred stock issuance
amounted to $660,000 and $655,000 for the nine months ended September 30, 1999
and 1998, respectively. Up to the date of the IPO, each share of convertible
preferred stock was entitled to a cumulative dividend at a rate of $0.135,
$0.162 and $0.176 per share per annum for the Series A, B and C convertible
preferred stock, respectively. Upon the close of the IPO, 3,346,715, 6,597,596
and 7,301,811 shares of Series A, B and C convertible preferred stock,
respectively, converted into an aggregate of 6,139,640 shares of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, About.com has financed its operations primarily
through the private placement of equity securities, the incurrence of
indebtedness and more recently, from its public offerings and concurrent
placement. In March 1999, About.com received net proceeds of approximately $81.0
million from its initial public offering and concurrent private placement of
shares of About.com's common stock. In October 1999, About.com completed a
follow-on offering of common stock. Net proceeds to About.com from this offering
were approximately $141.3 million.
Net cash used in operating activities was $37.6 million for the nine
months ended September 30, 1999 and $7.6 million for the nine months ended
September 30, 1998. Net cash used in operating activities for these periods was
primarily attributable to About.com's net losses during these periods, adjusted
for certain non-cash items, and a higher level of accounts receivable resulting
from an increase in About.com's revenues, which was offset by increases in
accounts payable, accrued expenses and deferred revenues.
18
<PAGE>
Net cash used in investing activities was $7.5 million for the nine months
ended September 30, 1999 and $448,300 for the nine months ended September 30,
1998. For the nine months ended September 30, 1999, net cash used in investing
activities related to $6.3 million of capital expenditures, primarily for the
acquisition of equipment, $587,000 related to the acquisition of VantageNet and
$652,000 related to the purchase of certain intangible assets. For the nine
months ended September 30, 1998, all net cash used in investing activities
related to capital expenditures.
Net cash provided by financing activities was $82.2 million for the nine
months ended September 30, 1999 and $9.0 million for the nine months ended
September 30, 1998. Net cash provided by financing activities for the nine
months ended September 30, 1999 consisted primarily of approximately $81.0
million in net proceeds received by About.com in connection with the closing of
its initial public offering and concurrent placement in March 1999 and $781,000
of proceeds from a secured credit facility. Net cash provided by financing
activities for the nine months ended September 30, 1998 consisted primarily of
$8.7 million of net proceeds received by About.com from the issuance of loans
payable and preferred stock and to a lesser extent, proceeds from a secured
credit facility related to equipment financing.
As of September 30, 1999, About.com had $47.8 million of cash and cash
equivalents. About.com's principal commitments consist of obligations
outstanding under capital and operating leases and notes payable. Although
About.com has no material commitments for capital expenditures, management
anticipates that it will experience a substantial increase in its capital
expenditures and lease commitments consistent with its anticipated growth in
operations, infrastructure and personnel. About.com currently anticipates that
it will continue to experience significant growth in its operating expenses for
the foreseeable future and that its operating expenses will be a material use of
About.com's cash resources. About.com believes that the existing cash and cash
equivalents and short-term investments will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months.
About.com's ability to generate significant revenues is uncertain.
About.com has incurred substantial costs to create, launch and enhance About.com
and to grow its business. At September 30, 1999, About.com had an accumulated
deficit of $72.4 million. About.com expects losses from operations and negative
cash flow to continue for the foreseeable future as a result of its expansion
plans and its expectation that its operating expenses, particularly sales and
marketing expenses, will increase significantly in the next several years.
Although About.com has experienced revenue growth in recent periods, About.com's
revenues may not remain at their current level or increase in the future. If
About.com's revenues do not increase substantially, About.com may not achieve
profitability, which would have a material adverse effect on About.com's
business, results of operations and financial condition. Even if About.com
achieves profitability, it may not sustain or increase profitability on a
quarterly or annual basis in the future.
19
<PAGE>
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two-digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
About.com is exposed to the risk that the systems on which it depends to
conduct its operations are not Year 2000 compliant.
State of Readiness. About.com has completed the process of determining the
Year 2000 readiness of its information technology systems, which includes the
hardware and software necessary to provide and deliver About.com and its
non-information technology systems, including telephone systems and other office
equipment used internally. About.com's assessment plan consisted of the
following steps:
o evaluating About.com's date dependent code, software and hardware
and evaluating external dependencies
o quality assurance testing of About.com's internally-developed
proprietary software and systems incorporated in About.com
o contacting third-party vendors and licensors of material hardware,
software and services that are related to the delivery of About.com
o contacting vendors of material non-information technology systems
used by About.com
To date, About.com's assessment has determined the following:
o Internally developed software and systems have been checked for date
dependent code, and all material files and systems are Year 2000
compliant.
o About.com has been informed by vendors of material hardware and
software components of its information technology systems that the
products used by About.com are currently Year 2000 compliant.
o About.com's hosting service, Frontier Global Center, has certified
that its systems are Year 2000 compliant.
o Commercial software upon which About.com is dependent is either Year
2000 compliant or will be upgraded to be compliant in the normal
course of business through upgrades or installation of software
patches.
o Substantially all hardware used in About.com's network operations
and all of the hardware used in its office operations has been
certified as Year 2000 compliant by its vendors.
20
<PAGE>
o About.com's telephone system, fax machines and mail systems have
been certified as Year 2000 compliant.
o About.com's landlords and third-party advertising sales
representative and servicing organizations have not yet provided
About.com with information regarding their Year 2000 compliance.
Costs. About.com anticipates that no additional costs will be incurred for
its Year 2000 compliance efforts.
Risks. Although About.com has received compliance information from its
material third-party vendors, it has not received compliance information from
all of its third-party vendors. In addition, it is possible that About.com's
third-party vendors were untruthful or mistaken in certifying that their systems
and products are Year 2000 compliant. Being required to fix or replace material
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, damage to our reputation, systems
failures and other business interruptions, any of which could have a material
adverse effect on About.com's business, results of operations and financial
condition.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside About.com's control will be Year 2000 compliant. The failure by those
entities to be Year 2000 compliant could result in a systemic failure beyond the
control of About.com, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent About.com from delivering
About.com, decrease the use of the Internet or prevent users from accessing
About.com, any of which would have a material adverse effect on About.com's
business, results of operations and financial condition.
Contingency Plan. Based on the results of the Year 2000 assessment,
About.com has determined that it is not necessary to develope a contingency plan
to address the worst-case scenario that might occur if technologies it is
dependent upon actually are not Year 2000 compliant.
21
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS
AND THE FUTURE PERFORMANCE OF ABOUT.COM WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1993, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. STOCKHOLDERS ARE CAUTIONED THAT SUCH STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. ABOUT.COM'S ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS REPORT AND IN ABOUT.COM'S OTHER PUBLIC
FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
Because we have only been in business for a short period of time, there is
limited information upon which you can evaluate our business.
We were incorporated in June 1996 and launched our network in April 1997.
Accordingly, you can only evaluate our business based on our limited operating
history. As a young company, we face risks and uncertainties relating to our
ability to successfully implement our business plan. If we are unsuccessful in
addressing these risks and uncertainties, our business, results of operations
and financial condition will be materially adversely affected.
We have lost money every quarter and every year, and we expect to lose money in
the future.
If our revenues do not increase substantially, we may never become
profitable. We have not generated enough revenues to exceed the substantial
amounts we have spent to create, launch and enhance About.com and to grow our
business. Even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future.
A portion of our historical revenues have been derived from barter
agreements. Approximately 10% of our revenues in 1998 and approximately 9% of
our revenues in the first nine months of 1999 were derived from agreements where
we traded advertisements on About.com in exchange for advertisements on other
web sites without receiving any cash payments. We expect that these barter
revenues will account for less than 10% of our total annual revenues in the
future.
Our costs of revenues combined with our operating expenses have exceeded
our revenues for all quarters. We have historically funded our operations by
selling our stock and not by generating income from our business. At September
30, 1999, our accumulated deficit was $72.4 million. We expect to continue to
lose money for the foreseeable future because we plan to continue to incur
significant expenses.
Fluctuations in our operating results may negatively impact our stock price.
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors that could affect our revenues or our expenses in
any particular quarter. It is possible that in some future periods our results
of operations may be below the expectations of public market analysts and
investors. In this event, the price of our common stock is likely to fall.
22
<PAGE>
You should not rely on our results of operations during any particular
quarter as an indication of our results for a full year or any other quarter.
Factors that may affect our quarterly results include:
o the demand for advertising on About.com;
o the number of Internet users on, and the frequency of their use of,
About.com, since our advertising revenues are typically based on
user traffic;
o our ability to attract and retain advertisers and electronic
commerce partners;
o fees we may pay for distribution or content or other costs we may
incur as we expand our operations;
o our ability to meet the minimum number of advertisements that we are
required to deliver to users by many of our advertising contracts,
since our failure to do this would result in our deferring
recognition of the related revenues and would reduce our available
advertising inventory in subsequent periods;
o changes in rates paid for advertising on About.com; and
o the timing and amount of our costs related to advertising sales and
marketing efforts.
Our operating expenses are based in part on our expectations of our future
revenues and are relatively fixed in the short term. Given our limited operating
history and our difficulties in accurately estimating the user traffic
historically experienced on our website, user traffic on our website is
difficult to forecast accurately. Consequently, since revenues from Internet
advertising will make up a significant amount of our revenues for the
foreseeable future, our revenues are difficult to forecast accurately. In
particular, we intend to continue to expend significant amounts to build and
enhance brand awareness of About.com. We may be unable to adjust spending
quickly enough to offset any unexpected revenue shortfall. If we have a
shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our results of operations and financial condition would
be materially adversely affected.
We will only be able to execute our business plan if Internet usage grows.
Our business would be adversely affected if Internet usage does not grow.
Internet usage may be inhibited for any of the following reasons:
o the Internet infrastructure may not be able to support the demands
placed on it, and its performance and reliability may decline as
usage grows;
o security and authentication concerns with respect to the
transmission over the Internet of confidential information, such as
credit card numbers, and attempts by unauthorized computer users,
so-called hackers, to penetrate online security systems; and
o privacy concerns, including those related to the ability of web
sites to gather user information without the user's knowledge or
consent.
23
<PAGE>
We will only be able to execute our business plan if Internet advertising
increases.
Our business, results of operations and financial condition would be
materially adversely affected if the Internet advertising market develops more
slowly than we expect or if we are unsuccessful in increasing our advertising
revenues. Revenues from Internet advertising will make up a significant amount
of our revenues for the foreseeable future. Since the Internet advertising
market is new and rapidly evolving, we cannot yet gauge its effectiveness as
compared to traditional advertising media.
The adoption of Internet advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied
upon other advertising media may be reluctant to advertise on the Internet.
These businesses may find Internet advertising to be less effective than
traditional advertising media for promoting their products and services. Many
potential advertising and electronic commerce partners have little or no
experience using the Internet for advertising purposes. Consequently, they may
allocate only limited portions of their advertising budgets to Internet
advertising.
Advertisers and electronic commerce marketers may not advertise on
About.com or may pay less for advertising on About.com if they do not believe
that they can reliably measure the effectiveness of Internet advertising or the
demographics of the user viewing their advertisements. We use both internal
measurements and measurements provided to us by third parties. If these third
parties are unable to continue to provide these services, we would have to
perform them ourselves or obtain them from another provider. This could cause us
to incur additional costs or cause interruptions in our business while we are
replacing these services. In addition, we are implementing additional systems
designed to record demographic data on our customers. If we do not implement
these systems successfully, we may not be able to accurately evaluate the
demographic characteristics of our customers. Moreover, "filter" software
programs that limit or prevent advertising from being delivered to an Internet
user's computer are available. Widespread adoption of this software could
adversely affect the commercial viability of Internet advertising.
To the extent that minimum guaranteed impression levels are not met over
the contract period, we defer recognition of the corresponding pro rata portion
of the revenues related to such unfulfilled obligation until the guaranteed
impression levels are achieved. Advertising based on impressions, or the number
of times an advertisement is delivered to users, represents substantially all of
our current revenues. To the extent that minimum impression levels are not
achieved for any reason, we may be required to provide additional impressions
after the contract term, which would reduce our advertising inventory.
Our revenues could be adversely affected if we are unable to adapt to
other Internet advertising pricing models if they are adopted. It is difficult
to predict which, if any, pricing models for Internet advertising will emerge as
industry standards. This makes it difficult to project our future advertising
rates and revenues.
We may not be able to adapt as Internet technologies and customer demands
continue to evolve.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing About.com and introducing new services to address our
users' changing demands. We could incur substantial costs if we need to modify
our services or infrastructure in order to adapt to changes affecting providers
of Internet services. Our business, results of operations and financial
condition could be materially adversely affected if we incurred significant
costs to adapt, or cannot adapt, to these changes.
24
<PAGE>
The development of our brand is essential to our future success.
If our brand marketing efforts are unsuccessful, our business, financial
condition and results of operations would be materially adversely affected. In
order to build our brand awareness, we must succeed in our brand marketing
efforts, provide high-quality services and increase user traffic on About.com.
These efforts have required, and will continue to require, significant expenses.
We may not be able to compete successfully.
Competition could result in less user traffic to About.com, price
reductions for our advertising inventory, reduced margins or loss of market
share, any of which would have a material adverse effect on our business,
results of operations and financial condition. We face intense competition for
users and for advertisers. We expect this competition to increase because there
are no substantial barriers to entry in our market. Competition may also
increase as a result of industry consolidation. We may not be able to compete
successfully.
We compete for users and advertisers with the following:
o Internet "portal" companies, including Excite, Lycos and Yahoo!;
o Internet retrieval and directories companies, including AskJeeves
and LookSmart;
o online content web sites, including C-net, ESPN.com and ZDNet.com;
o online community web sites, including iVillage;
o online personal homepage services, including GeoCities and
theglobe.com;
o publishers and distributors of television, radio and print,
including CBS, Disney, NBC and Time Warner;
o general purpose consumer online services, including America Online
and Microsoft Network; and
o web sites maintained by Internet service providers, including AT&T
Worldnet, Earthlink and MindSpring.
Our ability to compete depends on many factors, many of which are outside
of our control. These factors include the quality of content provided by us and
by our competitors, the ease of use of services developed either by us or by our
competitors, the timing and market acceptance of new and enhanced services
developed either by us or by our competitors, and sales and marketing efforts by
us and our competitors.
We believe that many of our existing competitors, as well as potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. This may allow them to devote greater resources than we
can to the development and promotion of their services. These competitors may
also engage in more extensive research and development, adopt more aggressive
pricing policies and make more attractive offers to existing and potential
employees, guides, distribution partners and advertisers. Our competitors may
develop services that are equal or superior to About.com or that achieve greater
market acceptance than About.com.
25
<PAGE>
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of advertisers and electronic
commerce marketers. As a result, it is possible that new competitors may emerge
and rapidly acquire significant market share.
We depend on relationships with third parties.
Our business, results of operations and financial condition could be
materially adversely affected if we do not establish and maintain distribution
relationships on commercially reasonable terms or if any of our distribution
relationships do not result in increased user traffic on About.com. A portion of
the users who come to About.com come from third-party web sites with which we
have non-exclusive, short-term distribution relationships. Since these web sites
may not attract significant numbers of users themselves, About.com may not
receive a significant number of additional users from these relationships.
Moreover, we may have to pay significant fees to establish additional
relationships or maintain existing relationships in the future.
We have entered into, and may continue to enter into, agreements with
advertisers or other third-party web sites that require us to exclusively
feature these parties for certain aspects of About.com. These exclusivity
agreements may limit our ability to enter into other advertising or sponsorship
agreements or other strategic relationships. Many companies we may pursue for
strategic relationships also offer competing services. As a result, these
competitors may be reluctant to enter into strategic relationships with us.
We may not effectively manage our growth.
In order to execute our business plan, we must grow significantly. This
growth will place a significant strain on our personnel, management systems and
resources. If we do not manage growth effectively, our business, results of
operations and financial condition would be materially adversely affected. We
expect that the number of our employees, including management-level employees,
will continue to increase for the foreseeable future. In addition, we expect
that the number of guides will continue to increase as new topic-specific sites
are established. We must continue to improve our operational and financial
systems and managerial controls and procedures, and we will need to continue to
expand, train and manage our workforce. We must also maintain close coordination
among our technical, accounting, finance, marketing, sales and editorial
organizations.
Regulatory and legal uncertainties could harm our business.
Any new law or regulation pertaining to the Internet, or the application
or interpretation of existing laws, could decrease the demand for our network,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition. There are, and
will be, an increasing number of laws and regulations pertaining to the
Internet. These laws or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing.
We may be liable for the content we make available on the Internet.
We make content available on About.com and on the web sites of our
advertisers and distribution and syndication partners. The availability of this
content could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement. Other claims
26
<PAGE>
may be brought based on the nature, publication and distribution of our content
or based on errors or false or misleading information provided on About.com,
including information deemed to constitute professional advice such as legal,
medical, financial or investment advice. We could also be exposed to liability
for third-party content accessed through About.com's links to other websites or
posted by users in chat rooms or bulletin boards offered on our topic-specific
sites. Our financial condition could be materially adversely affected if we were
found liable for information that we make available. Implementing measures to
reduce our exposure to this liability may require us to spend substantial
resources and limit the attractiveness of our services to customers.
If we are unable to successfully integrate future acquisitions into our
operation, there could be an adverse effect on our business and results of
operations.
We may acquire complementary businesses, products and technologies in the
future. Some of the risks attendant to these acquisitions are:
o difficulties and expenses of integrating the operations and
personnel of acquired companies into our operations while preserving
the goodwill of the acquired entity;
o the additional financial resources that may be needed to fund the
operations of acquired companies;
o the potential disruption of our business;
o our management's ability to maximize our financial and strategic
position by incorporating acquired technology or businesses;
o the difficulty of maintaining uniform standards, controls,
procedures and policies;
o the potential loss of key employees of acquired companies;
o the impairment of relationships with employees and customers as a
result of changes in management; and
o increasing competition with other entities for desirable acquisition
targets.
Any of the above risks could prevent us from realizing significant
benefits from our acquisitions. In addition, the issuance of our common stock in
acquisitions will dilute our stockholder interests, while the use of cash will
deplete our cash reserves. Finally, if we are unable to account for our
acquisitions under the "pooling of interests" method of accounting, we may incur
significant, one-time write-offs and amortization charges. These write-offs and
charges could decrease our future earnings or increase our future losses.
We would be unable to provide content without the efforts of our network of
guides.
Our business, results of operations and financial condition would be
materially adversely affected if our guides fail to provide us with adequate
content or if we fail to successfully replace former guides on a timely basis.
We are substantially dependent on our network of guides for providing in-depth,
high-quality, up-to-date content that covers thousands of subjects. Our guides
may not continue to provide us with a sufficient amount of high-quality content
covering a broad enough range of subjects. Furthermore, any number of guides may
discontinue their relationship with us. In addition, since the guides are
independent contractors, we have less control over the content production
process than if the guides were our employees.
27
<PAGE>
We could incur significant withholding taxes and employee benefits expenses if
the guides were deemed to be our employees rather than independent contractors.
One or more jurisdictions or taxing authorities, including the Internal
Revenue Service, may seek to treat the guides as our employees rather than
independent contractors. As a result, they may seek to impose taxes, interest or
penalties on us. In addition, employees are generally entitled to healthcare and
other benefits that are typically unavailable to independent contractors. Since
we believe that the guides are independent contractors, we would vigorously
oppose any claim to the contrary. However, our efforts to do so might not be
successful. We are not able to estimate accurately the quantitative effect that
these taxes or employee benefit costs would have on us if the guides were deemed
to be employees. Our business, results of operations and financial condition
would be materially adversely affected if these claims are made and we do not
prevail or if we are required to treat the guides as employees for tax or
employee benefit purposes or otherwise.
We depend on our key executives and will need additional personnel to grow our
business.
Our future success depends, in part, on the continued service of our key
management personnel, particularly Mr. Scott P. Kurnit, our President and Chief
Executive Officer, and Mr. William C. Day, our Chief Operating Officer. Although
we are the beneficiary of a key person life insurance policy on Mr. Kurnit's
life, the loss of his services, or the services of other key employees, would
have a material adverse effect on our business, results of operations and
financial condition. Our future success also depends on our ability to attract,
retain and motivate highly skilled employees, including advertising sales
personnel. Competition for employees in our industry is intense. We may be
unable to attract, assimilate or retain other highly qualified employees in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
The performance of About.com is critical to our business and to our reputation.
Any system failure, including network, software or hardware failure, that
causes an interruption in our network or a decrease in responsiveness of
About.com could result in reduced user traffic on About.com and reduced revenue.
About.com has in the past experienced slower response times and interruptions in
service for a variety of reasons. About.com could also be affected by computer
viruses, electronic break-ins or other similar disruptions. Our insurance
policies have low coverage limits and therefore our insurance may not adequately
compensate us for any losses that may occur due to any interruptions to our
network.
In January 1998, we entered into an Internet-hosting agreement with
GlobalCenter, Inc. to maintain all of our production servers at GlobalCenter's
Manhattan Data Center. This agreement was extended in January 1999 and is
terminable by either party upon 90 days' notice. Our operations depend on
GlobalCenter's ability to protect its and our systems against damage from fire,
power loss, water damage, telecommunications failures, vandalism and other
malicious acts, and similar unexpected adverse events. Any disruption in the
Internet access provided by GlobalCenter could have a material adverse effect on
our business, results of operations and financial condition.
Our users and our guides depend on Internet service providers, online
service providers and other web site operators for access to About.com. Each of
these providers has experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
28
<PAGE>
We may be unable to protect our intellectual property and we may be liable for
infringing the intellectual property rights of others.
Third parties may infringe or misappropriate our patents, trademarks or
other intellectual property, which could have a material adverse effect on our
business, results of operations or financial condition. While we enter into
confidentiality agreements with our material employees, guides, consultants and
strategic partners, and generally control access to and distribution of our
proprietary information, the steps we have taken to protect our intellectual
property may not prevent misappropriation. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is still evolving.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. These claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages. In addition, even if we prevail, litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
Seasonal factors may affect our quarterly operating results.
Seasonality of user traffic on About.com and our advertising revenues may
cause our total revenues to fluctuate. User traffic on web sites has typically
declined during the summer and year-end vacation and holiday periods. We believe
that advertising sales in traditional media, such as television and radio,
generally are lower in the first and third calendar quarters of each year.
Similar seasonal or other patterns may develop in our business.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not Year 2000 compliant.
The failure of our internal systems, or any material third-party systems,
to be Year 2000 compliant would have a material adverse effect on our business,
results of operations and financial condition. Although we have received
compliance information from our material third-party vendors, we have not
received compliance information from all of our third-party vendors. It is also
possible that our third-party vendors were mistaken in certifying that their
systems are Year 2000 compliant. As a result, we cannot be sure that our
internal system, as a whole, is Year 2000 compliant. In addition, there can be
no assurance that governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control will
be Year 2000 compliant. The failure by those entities to be Year 2000 compliant
could result in a systemic failure beyond our control, as a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering About.com, decrease the use of the Internet or prevent customers from
accessing About.com, any of which could have a material adverse effect on our
business, results of operations and financial condition. Based on the results of
our Year 2000 assessment, we have determined that it is not necessary to develop
a Year 2000 contingency plan.
29
<PAGE>
We cannot predict our future capital needs and we may not be able to secure
additional financing.
We may need to raise additional funds in the future in order to fund more
aggressive brand promotion or more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions. Any
required additional financing may not be available on terms favorable to us, or
at all. If adequate funds are not available on acceptable terms, we may be
unable to fund our expansion, successfully promote our brand, or take advantage
of acquisition opportunities, develop or enhance services, respond to
competitive pressures or take advantage of acquisition opportunities, any of
which could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised by our
issuing equity securities, stockholders may experience dilution of their
ownership interest and the newly issued securities may have rights superior to
those of the common stock. If additional funds are raised by our issuing debt,
we may be subject to limitations on our operations, including limitations on the
payment of dividends. We currently anticipate that the net proceeds from our
latest offering, together with currently available funds, will be sufficient to
meet our anticipated needs through at least 2000.
Future sales of common stock by our existing stockholders could adversely affect
our stock price.
Sales of a substantial number of shares of our common stock in the public
market could cause the market price of our common stock to decline and could
impair our ability to raise additional capital through the sale of equity
securities.
Our officers and directors still control us.
Our executive officers and directors, in the aggregate, beneficially own
approximately 28.1% of the common stock. These stockholders may be able to
exercise control over all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of us, which could have a material
adverse effect on our stock price.
Our stock price has been and may continue to be volatile.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the Nasdaq National Market, where most publicly held
Internet companies are traded, has experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation often has been instituted against that company. Litigation
like this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Rate Fluctuations. About.com's results of operations, financial
position and cash flows are not materially affected by changes in the relative
values of non-U.S. currencies to the U.S. dollar. About.com does not use
derivative financial instruments to limit its foreign currency risk exposure.
Market Risk. About.com's accounts receivables are subject, in the normal
course of business, to collection risks. About.com regularly assesses these
risks and has established policies and business practices to protect against the
adverse effects of collection risks. As a result, About.com does not anticipate
any material losses in this area.
Interest Rate Risk. About.com's investments are classified as cash and
cash equivalents with original maturities of three months or less. Therefore,
changes in the market's interest rates do not affect the value of the
investments as recorded by About.com.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
NONE
(b) Use of Proceeds
On March 29, 1999, About.com consummated the initial public offering of
3,450,000 shares of its common stock and a concurrent private placement of
107,527 shares of its common stock (collectively, the "Offering"). Net proceeds
to About.com from the Offering were approximately $81.0 million.
From March 31, 1999 to September 30, 1999, About.com used approximately
$37.3 million of the proceeds from the Offering for general corporate purposes,
equipment purchases, marketing expenditures related to the national marketing
and branding campaigns and the payment of debt obligations, and cash paid in
connection with the acquisition of VantageNet.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
31
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 ABOUT.COM, INC.
By: /s/ Todd B. Sloan
-----------------------------
Todd B. Sloan
Chief Financial Officer
(Principal Financial Officer)
32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-30-1999 DEC-30-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 47,766,900 1,241,300
<SECURITIES> 0 0
<RECEIVABLES> 5,984,100 765,100
<ALLOWANCES> 335,600 96,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 54,611,600 1,985,800
<PP&E> 10,402,500 1,618,800
<DEPRECIATION> 2,719,900 568,400
<TOTAL-ASSETS> 65,557,900 3,140,500
<CURRENT-LIABILITIES> 15,308,300 3,689,500
<BONDS> 588,500 2,631,300
0 0
0 0
<COMMON> 12,300 1,500
<OTHER-SE> 49,620,500 (20,529,700)
<TOTAL-LIABILITY-AND-EQUITY> 65,557,900 3,140,500
<SALES> 0 0
<TOTAL-REVENUES> 13,958,200 1,577,700
<CGS> 0 0
<TOTAL-COSTS> 61,244,200 10,516,700
<OTHER-EXPENSES> 659,600 655,000
<LOSS-PROVISION> 335,600 96,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (45,787,300) (9,579,800)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (45,787,300) (9,579,800)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (46,446,900) (10,234,800)
<EPS-BASIC> (5.08) (5.95)
<EPS-DILUTED> (5.08) (5.95)
</TABLE>
