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 JUNE 30, 2000
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 August 4, 2000, there were 18,051,701 shares of the registrant's
common stock outstanding.
<PAGE>
ABOUT.COM, INC.
FORM 10-Q
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
ITEM 1: Consolidated Condensed Interim Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 .............................. 3
Unaudited Consolidated Condensed Statements of Operations for
the three and six months ended June 30, 2000 and 1999 ............ 4
Unaudited Consolidated Condensed Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 .................. 5
Notes to Unaudited Consolidated Condensed Interim
Financial Statements ............................................. 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 11
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk ....... 25
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings ................................................ 25
ITEM 2: Changes in Securities and Use of Proceeds ........................ 25
ITEM 3: Defaults Upon Senior Securities .................................. 26
ITEM 4: Submission of Matters to a Vote of Security Holders .............. 26
ITEM 5: Other Information ................................................ 27
ITEM 6: Exhibits and Reports on Form 8-K ................................. 27
ITEM 7: Signatures ....................................................... 27
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: Consolidated Condensed Financial Statements:
About.com, Inc.
Unaudited Consolidated Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,413 $ 74,780
Short-term investments in marketable securities 102,157 86,937
Accounts receivable, less allowance for doubtful accounts
of $1,250 and $780, respectively 13,513 11,067
Note receivable 5,000 --
Prepaid and other current assets 3,375 1,354
--------- ---------
Total current assets 151,458 174,138
--------- ---------
Property and equipment, net 17,423 9,401
Goodwill and other intangibles, net 106,511 39,183
Long-term investments in marketable securities 13,942 14,197
Equity investment 932 --
Other assets, net 5,231 5,162
--------- ---------
Total assets $ 295,497 $ 242,081
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 10,030 $ 13,421
Guide fees payable 919 1,187
Deferred revenue 3,501 1,018
Current portion of notes payable 449 412
Current installments of obligations under capital leases 71 157
--------- ---------
Total current liabilities 14,970 16,195
--------- ---------
Notes payable, excluding current portion 218 695
Deferred rent 7 21
Obligations under capital leases, excluding current installments -- 10
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.001 par value; 100,000,000 shares authorized,
18,027,379 and 16,175,367 shares isssued and outstanding 18 16
Additional paid-in capital 395,487 309,755
Deferred compensation (1,448) (2,859)
Accumulated deficit (113,755) (81,752)
--------- ---------
Total stockholders' equity 280,302 225,160
--------- ---------
Total liabilities and stockholders' equity $ 295,497 $ 242,081
========= =========
</TABLE>
See accompanying notes to unaudited consolidated
condensed interim financial statements.
3
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About.com, Inc.
Unaudited Consolidated Condensed Statements of Operations
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 20,129 $ 3,707 $ 35,936 $ 6,074
Cost of revenues 7,139 2,923 13,139 5,246
Non-cash compensation 3,039 5 3,044 3,621
------------ ------------ ------------ ------------
Gross profit (loss) 9,951 779 19,753 (2,793)
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 11,348 18,346 22,334 23,784
Product development 4,808 1,780 9,466 2,934
General and administrative 4,991 1,870 8,983 3,273
Amortization of goodwill 9,714 34 15,217 34
Non-cash compensation 235 242 381 616
------------ ------------ ------------ ------------
Total operating expenses 31,096 22,272 56,381 30,641
------------ ------------ ------------ ------------
Loss from operations (21,145) (21,493) (36,628) (33,434)
------------ ------------ ------------ ------------
Other income, net 2,276 800 4,633 819
------------ ------------ ------------ ------------
Net loss (18,869) (20,693) (31,995) (32,615)
------------ ------------ ------------ ------------
Cummulative dividends and accretion -- -- -- (660)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (18,869) $ (20,693) $ (31,995) $ (33,275)
============ ============ ============ ============
Net loss per common share $ (1.06) $ (1.71) $ (1.84) $ (4.38)
============ ============ ============ ============
Weighted average shares outstanding 17,877,262 12,083,097 17,383,012 7,589,028
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated
condensed interim financial statements.
4
<PAGE>
About.com, Inc.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (31,995) $ (32,615)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 17,985 1,137
Non-cash compensation expense 3,425 4,237
Other (15) (13)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (2,141) (2,119)
Other assets (1,943) (216)
Accounts payable and accrued expenses (3,560) 3,800
Guide fees payable (268) 145
Deferred revenue 2,478 160
--------- ---------
Net cash used in operating activities (16,034) (25,484)
--------- ---------
Cash flows used in investing activities:
Cash paid for acquisitions, net of cash acquired 567 (587)
Purchase of marketable securities (315,673) --
Sale of marketable securities 300,708 --
Note receivable (5,000) --
Equity investment (938) --
Purchase of intangible assets (72) (488)
Capital expenditures (9,376) (4,846)
--------- ---------
Net cash used in investing activities (29,784) (5,921)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock related to initial
public offering and concurrent placement, net -- 81,049
Proceeds from issuance of common stock in connection with
the exercise of options and warrants 3,122 132
Proceeds from secured credit facility -- 781
Repayment of acquisition bridge loans (2,871) --
Repayment of capital lease (1,152) --
Principal payments under secured credit facility (552) (162)
Principal payments under capital leases (96) (102)
Deferred offering/financing costs -- 569
--------- ---------
Net cash (used in) provided by financing activities (1,549) 82,267
--------- ---------
Net (decrease) increase in cash and cash equivalents (47,367) 50,862
Cash and cash equivalents at beginning of period 74,780 10,644
--------- ---------
Cash and cash equivalents at end of period $ 27,413 $ 61,506
========= =========
</TABLE>
See accompanying notes to unaudited consolidated
condensed interim financial statements.
5
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED INTERIM FINANCIAL
STATEMENTS
(1) ORGANIZATION AND BUSINESS
About.com, Inc.'s ("About" or the "Company") Internet service, About.com,
is a platform comprised of a network of more than 700 highly-targeted,
topic-specific web sites. About's primary source of revenue is from the sale of
advertising, which is conducted within one industry segment.
The Company's business is characterized by rapid technological change, new
product and service development and evolving industry standards. Inherent in the
Company's business are various risks and uncertainties, including its uncertain
profitability, history of losses, anticipated continuing losses, dependence on
the Internet and the risks associated with Internet advertising.
(2) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated condensed interim balance sheets,
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 at June 30, 2000, and the results of operations and
cash flows for the interim periods ended June 30, 2000 and 1999. The results of
operations for any interim period are not necessarily indicative of About'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 accounting principles generally accepted
in the United States have been condensed or omitted pursuant to the Securities
and Exchange Commission's ("SEC") rules and regulations. It is suggested that
these unaudited consolidated condensed interim financial statements be read in
conjunction with About's audited consolidated financial statements and notes
thereto for the year ended December 31, 1999, as included in About's Form 10-K
filed with the SEC on March 30, 2000.
About 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.
6
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ABOUT.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED INTERIM FINANCIAL
STATEMENTS
(Continued)
(B) BASIC AND DILUTED NET LOSS PER COMMON SHARE
About adopted Statement of Accounting Standards ("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 ("IPO") (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 has included
218,890 shares of common stock in the calculation of basic and diluted net loss
per common share for the three and six month periods ended June 30, 1999 which
relate to certain investor warrants issued for nominal consideration, all of
which were exercised in December 1999 when About exercised its right to call
those warrants.
Diluted net loss per common share for the periods ended June 30, 2000 and
1999, does not include the effect of options to purchase 4,828,508 and 2,821,811
shares of common stock and 21,360 and 65,860 warrants to purchase common stock,
respectively, as they would not have had a dilutive effect on loss per basic
common share due to About's net loss position.
(C) COMPREHENSIVE LOSS
As of January 1, 1999, About 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. Comprehensive loss is comprised of net loss and a
foreign currency translation adjustment, related to the equity investment.
Comprehensive loss was $18.9 million and $32.0 million for the three and six
months ended June 30, 2000.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("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 2000, 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 the Company as it currently does not engage
or plan to engage in derivative instruments or hedging activities.
7
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED INTERIM FINANCIAL
STATEMENTS
(Continued)
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance
regarding certain existing accounting principles for the recognition and
classification of revenues in financial statements. The Company has adopted SAB
101, noting no material impact on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For
Certain Transactions Involving Stock Compensation" ("FIN No. 44"), which
provides guidance for applying APB Opinion No. 25, "Accounting For Stock Issued
to Employees." With certain exceptions, FIN No. 44 applies prospectively to new
awards, exchanges of awards in a business combination, modifications to
outstanding awards and changes in grantee status on or after July 1, 2000. The
Company does not believe that the implementation of FIN No. 44 will have a
significant effect on its results of operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-2, "Accounting for Web Site Development Costs," which provides
guidance on when to capitalize versus expense costs incurred to develop a web
site. The consensus is effective for web site development costs in quarters
beginning after June 30, 2000. The Company is in the process of evaluating the
overall impact on its financial statements.
(3) NOTE RECEIVABLE
Note Receivable consists of a $5 million Senior Secured Promissory Note
("Note") entered into by the Company on June 8, 2000 with Smartshop.com, Inc.
("Smartshop"). The Note accrues interest annually beginning September 8, 2000 at
a rate of 9.5%, and all payments of principal and accrued interest are due at
maturity, March 8, 2001. At any time prior to March 8, 2001, About may elect to
convert all or a portion of the unpaid principal and interest into a pro-ratable
number of shares of Series C Preferred Stock ("Stock") of Smartshop, based upon
the price per share of the Stock, as defined in the Note.
(4) NON-CASH COMPENSATION
About recorded non-cash charges of approximately $3.0 million and $3.6
million for the six months ended June 30, 2000 and 1999, respectively, for guide
compensation. These charges were the result of granting fully vested,
non-qualified stock options to purchase 127,400 shares of common stock at an
exercise price of $35.75 per share in May 2000, and 199,500 shares of common
stock at an exercise price of $25.00 per share in March 1999, to a substantial
majority of its guides. The options have a two-year exercise term. Accordingly,
such amounts were recorded as a non-cash compensation expense in About's
statements of operations for the six months ended June 30, 2000 and 1999, with
an offsetting increase to additional paid in capital.
(5) ACQUISITIONS
On May 12, 2000, About formed Jazz II Acquisition Corporation ("JAC"), a
Delaware corporation and wholly owned subsidiary of the Company. JAC was merged
into Sitetracker Marketing, Inc. ("Sitetracker"), with Sitetracker as the
surviving corporation. As a result of the merger, Sitetracker is a wholly owned
subsidiary of About. The consideration paid in connection with the merger
approximated $8 million, by new issuance of 199,726 shares of the Company's
common stock, valued at $40.14 per share.
8
<PAGE>
ABOUT.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED INTERIM FINANCIAL
STATEMENTS
(Continued)
On April 24, 2000, the Company acquired all of the assets of
AllExperts.com ("AllExperts"), for a purchase price of approximately $1.2
million, which includes 38,968 newly issued shares of About's common stock,
valued at $29.35 per share, and cash consideration of approximately $45,000.
On March 24, 2000, About acquired Sombasa Media Inc. ("Sombasa") for
approximately $38.1 million, including approximately $20,000 of acquisition
costs. The consideration consisted of 406,673 newly issued shares of the
Company's common stock, valued at $87.61 per share, as well as the assumption of
options to purchase shares of common stock of Sombasa that were exchanged for
options to purchase approximately 31,495 shares of About's common stock, valued
at approximately $2.5 million.
On January 28, 2000, About acquired ExpertCentral.com, Inc.
("ExpertCentral") for approximately $32.8 million, which includes approximately
$200,000 of acquisition costs. The consideration consisted of 510,771 newly
issued shares of the Company's common stock, valued at $62.80 per share, as well
as the assumption of options to purchase shares of common stock of ExpertCentral
that were exchanged for options to purchase approximately 8,287 shares of
About's common stock, valued at approximately $500,000.
On December 15, 1999, About.com Acquisition Corporation, a Delaware
corporation formed in November 1999 and wholly owned by the Company, was merged
with and into North Sky, Inc. ("North Sky"), a Delaware corporation, with North
Sky as the surviving corporation. The consideration of $37.6 million paid by the
Company in connection with the merger consisted of 501,585 newly issued shares
of common stock, valued at approximately $22.9 million, approximately $80,000 of
acquisition related costs and the assumption of options to purchase shares of
common stock of North Sky which were exchanged for options to purchase
approximately 330,166 shares of About's common stock, valued at approximately
$14.6 million.
On June 14, 1999, About.com Acquisition Corporation, a Delaware
corporation formed in June 1999 and wholly owned by the Company, was merged into
VantageNet, Inc. ("VantageNet"), with VantageNet as the surviving corporation.
As a result of the merger, VantageNet is a wholly owned subsidiary of About. The
consideration paid in connection with the merger approximated $2.5 million,
which includes cash consideration of approximately $550,000 and the issuance of
65,550 shares of the Company's common stock, valued at $29.75 per share.
The acquisitions of Sitetracker, AllExperts, Sombasa, ExpertCentral, North
Sky and VantegeNet (collectively the "Acquisitions"), have been accounted for as
purchase business combinations. The aggregate purchase price of the Acquisitions
of approximately $119.3 million, has been preliminarily allocated to the
identifiable tangible and intangible assets acquired, based upon their
respective fair values. Substantially all of the purchase price was allocated
preliminarily to goodwill and other purchased intangibles and is being amortized
over a three year period. The preliminary allocation of the aggregated purchase
price was performed using values and estimates available as of the respective
dates of the Acquisitions.
The Company's consolidated results of operations includes results of
operations from the Acquisitions' as of their respective acquisition dates. The
unaudited pro forma information below presents the consolidated results of
operations as if the Acquisitions' had occurred at the beginning of the
9
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ABOUT.COM, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED INTERIM FINANCIAL
STATEMENTS
(Continued)
respective periods presented. The unaudited pro forma information has been
included for comparative purposes and is not indicative of the results of
operations of the consolidated company had the Acquisitions occurred at the
beginning of the periods presented, nor is it necessarily indicative of future
results (amounts in thousands, except per share data).
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues $ 20,225 $ 4,122 $ 36,397 $ 6,776
Net loss attributable to common
shareholders $(19,146) $(29,739) $(37,368) $(42,938)
Net loss per common share (1) $ (1.07) $ (2.19) $ (2.10) $ (5.07)
Weighted average shares used in
net loss per common share calculation 17,977 13,590 17,806 8,475
</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 six month periods ended June 30, 2000 and 1999, respectively, plus the
common shares issued in connection with the Acquisitions from January 1,
2000 and 1999, respectively. The common stock issued in connection with
the Acquisitions was adjusted for the weighted average period such shares
were considered to be outstanding during 2000 and 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.
(6) EQUITY INVESTMENT
In June 2000, the Company entered into a joint venture, Recruit About.com
Japan, Inc. ("Recruit"), to launch a Japanese service. About currently holds a
47.5% interest in this venture and accounts for it under the equity method of
accounting. About contributed approximately $938,000 to Recruit during the six
months ended June 30, 2000. As the joint venture has not yet commenced
operations, About did not record any income/loss in equity investment within the
statement of operations for the periods ended June 30, 2000.
In connection with the joint venture, About entered into an agreement to
provide Recruit with a license to use the About.com Intellectual Property,
solely for the development, operation, management, marketing and maintenance of
the Japan service. In exchange, Recruit has agreed to pay a royalty fee of $3.0
million. Such fee, when received, will not be recorded as revenue but instead
netted against the investment.
10
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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, INC. ("ABOUT") CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS AND THE FUTURE PERFORMANCE OF ABOUT 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'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'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 the
About.com network of sites, ("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 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
11
<PAGE>
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 over a particular threshold
resulting from direct links from About.com. Through March 31, 2000, 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 and placement fees ratably over the term of the agreement.
For the three and six months ended June 30, 2000 and 1999, approximately
3% and 6% and 4% and 7%, respectively, 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 payment for outstanding guide service, we granted fully
vested, non-qualified stock options to purchase 127,400 shares of common stock
to a substantial majority of our guides. The exercise price per share of these
options was $35.75 and the options have two-year exercise terms. Since the
guides are independent contractors, we recorded non-cash compensation expense of
approximately $3 million during the quarter ended June 30, 2000, representing
the fair market value of the options at the date of grant. This amount is
included in a separate line item above the gross profit (loss) line.
Through December 31, 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 $1.1 million and $478,000 for the years ended
December 31, 1999 and 1998, respectively, of which $19,000 and $27,000 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. For the six months ended June 30,
2000, amortization of deferred compensation expense was $301,200. We currently
expect to amortize the following amounts of deferred compensation expense
annually: 2000-$0.6 million; 2001-$0.6 million; and 2002-$0.6 million. Such
amount is net of certain options which were forfeited in January 2000 and
resulted in a $1.1 million reduction in deferred compensation.
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In June 1999, December 1999, January 2000, March 2000,April 2000 and May
2000, we acquired VantageNet, Inc., North Sky, Inc., ExpertCentral.com, Inc.,
Sombasa Media Inc. AllExperts.com and SiteTracker Marketing, Inc. (the
"Acquisitions"), respectively. The Company's Acquisitions were accounted for
using the purchase method of accounting. The purchase prices of the Acquisitions
have been preliminarily allocated to the identifiable tangible and intangible
assets acquired, based upon their respective fair values. In connection with the
Acquisitions, About recorded goodwill and purchased intangibles of $2.5 million,
$37.7 million, $35.5 million, $38.0 million, $1.2 million and $7.9 million,
respectively, which are being amortized over a three year period. The
preliminary allocation of the purchase price was performed using values and
estimates available as of the dates of the Acquisitions. Operating results of
the Acquisitions are included in the unaudited consolidated condensed statements
of operations from their respective acquisition dates.
RESULTS OF OPERATIONS
REVENUES
For the three months ended June 30, 2000, revenues grew to approximately
$20.1 million from $3.7 million for the three months ended June 30, 1999. For
the six months ended June 30, 2000 and 1999, revenue increased to $35.9 million
from $6.1 million. This 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 sales people. Barter revenue included
in these amounts was approximately $700,000 and $215,200, for the three months
ended June 30, 200 and 1999, respectively, and $1.5 million and $452,000 for the
six months ended June 30, 2000 and 1999, respectively.
COST OF REVENUES
Cost of revenues consists primarily of guide compensation, salaries of
operations personnel, site hosting and depreciation costs, fees paid to third
party websites and barter advertising expenses. Cost of revenues increased to
$7.1 million for the three months ended June 30, 2000 from $2.9 million for the
three months ended June 30, 1999. For the six months ended June 30, 2000 and
1999, cost of revenues increased to $13.1 million from $5.2 million. The
absolute dollar increase in cost of revenues for the three and six month periods
was due to an increase in site hosting costs to support the increase in web site
traffic, guide costs, third party website costs and depreciation.
NON-CASH COMPENSATION EXPENSE
For the three months ended June 30, 2000 and 1999, amortization of
deferred compensation relating to stock options granted to operations personnel
was $5,000 in each period. For the six months ended June 30, 2000 and 1999,
amortization of deferred compensation amounted to $10,000 and $9,300,
respectively. In addition, non-cash compensation charges relating to About's
grant of fully vested stock options to the guides to purchase 127,400 and
199,500 shares of common stock were included in the six periods ended June 30,
2000 and 1999, respectively. These non-cash compensation charges, which were
recorded as a component of cost of revenues in the second quarter of 2000 and
the first quarter of 1999, were based on Black Scholes valuations of the options
granted to the guides, and amounted to approximately $3.0 million and $3.6
million, respectively.
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OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and
related expenses for sales and marketing personnel, sales commissions,
advertising, public relations and research. Sales and marketing expenses were
$11.3 million for the three months ended June 30, 2000 and $18.3 million for the
three months ended June 30, 1999. For the six months ended June 30, 2000 and
1999, sales and marketing expenses decreased to $22.3 million from $23.8
million. These period-to-period decreases were primarily attributable to the
launch of our national branding and marketing campaigns which were not carried
forward in 2000. The decrease was also attributable to the reduced spending of
About's online advertising efforts as well as decreased sales and marketing
related expenses, partially offset by increased sales commission as a result of
increasing revenue for the Company.
Product Development
Product development expenses include personnel and consulting costs
associated with the design, development and testing of About.com and About's
systems and editorial personnel costs. About expenses its product development
costs as incurred. Product development expenses were $4.8 million for the three
months ended June 30, 2000 and $1.8 million for the three months ended June 30,
1999. For the six months ended June 30, 2000 and 1999, product development
expenses increased to $9.5 million from $2.9 million. This period-to-period
increase was primarily attributable to increased staffing levels and related
expenses needed to support the growth and development of About.com. About
believes that timely deployment of new and enhanced features and technology are
critical to attaining its strategic objectives.
General and Administrative
General and administrative expenses consist primarily of salaries
and related costs for general corporate functions, including finance, human
resources, facilities and legal expenses and fees for professional services, as
well as bad debt expense and other general corporate charges. General and
administrative expenses were $5.0 million for the three months ended June 30,
2000 and $1.9 million for the three months ended June 30, 1999. For the six
months ended June 30, 2000 and 1999, general and administrative expenses
increased to $9.0 million from $3.3 million. This period-to-period increase was
primarily attributable to increased salaries and related expenses associated
with hiring additional personnel, increased general corporate expenses,
facility-related expenses and costs relating to About's operations as a public
company.
Non-Cash Compensation Expense
For the three months ended June 30, 2000 and 1999, amortization of
deferred compensation relating to stock options granted to non-operations
personnel amounted to $235,000 and $242,000, respectively. For the six months
ended June 30, 2000 and 1999, amortization of deferred compensation on stock
options was $301,000 and $616,000, respectively. The decrease in amortization
across the periods is attributed to the forfeiture of certain options in January
2000, which resulted in a $1.1 million reduction in deferred compensation.
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Other Income, Net
Other income, net was $2.3 million and $800,000 for the three months
ended June 30, 2000 and 1999, respectively. For the six months ended June 30,
2000 and 1999, other income, net increased to $4.6 million from $819,000. The
period-to-period increase was primarily related to increased interest income as
a result of the increase in cash related to About's initial public offering and
subsequent follow-on offering.
Cumulative Dividends and Accretion of Convertible Preferred Stock
Cumulative dividends on About's convertible preferred stock and
accretion of costs associated with the convertible preferred stock issuance
amounted to $660,000 for the six months ended June 30, 1999. At the date of the
initial public offering on March 24, 1999, the preferred shares were converted
to shares of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, About has financed its operations primarily
through the private placement of equity securities, the incurrence of
indebtedness and more recently, from its initial public offering and concurrent
placement and follow-on offering. In March 1999, About received net proceeds of
approximately $81.0 million from its initial public offering and concurrent
private placement of shares of About's common stock. In October 1999, About
received net proceeds of approximately $140.6 million from a follow-on offering.
In November 1999, the underwriters exercised their over-allotment option,
creating net proceeds to About of approximately $5.1 million.
To date, the Company has experienced negative cash flows from
operating activities. Net cash used in operating activities was $16.0 million
and $25.5 million for the six months ended June 30, 2000 and 1999, respectively.
For the period ended June 30, 2000, net cash used in operating activities was
primarily attributable to About's net losses during these periods, adjusted for
certain non-cash items, a higher level of accounts receivable resulting from an
increase in About's revenues and by decreases in accounts payable and accrued
expenses, which was offset slightly by deferred revenues. For the period ended
June 30, 1999, net cash used in operating activities was primarily attributable
to About's net loss, adjusted for certain non-cash items, and a higher level of
accounts receivable, which was offset by increases in accounts payable, accrued
expenses and deferred revenue.
Net cash used in investing activities was $29.8 million for the six
months ended June 30, 2000 and $5.9 million for the six months ended June 30,
1999. For the six months ended June 30, 2000, net cash used in investing
activities related to $9.4 million of capital expenditures, primarily in
relation to leasehold improvements and infrastructure necessary to support the
About.com service offerings, as well as $5.0 million for a note receivable and
$938,000 related to the equity investment in a joint venture. For the six months
ended June 30, 1999, net cash used in investing activities related to $4.8
million of capital expenditures, $587,000 related to certain acquisitions and
$488,000 related to the purchase of certain intangible assets.
Net cash used in financing activities was $1.5 million for the six
months ended June 30, 2000 and consisted primarily of the retirement of certain
debt and capital lease obligations, offset by proceeds from the issuance of
common stock related to option exercises. Net cash provided by financing
activities was $82.3 million for the six months ended June 30, 1999 and
consisted primarily of approximately $81.0 million in net proceeds received by
About in connection with the closing of its initial public offering and
concurrent placement in March 2000 and $781,000 of proceeds from a secured
credit facility.
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As of June 30, 2000, About had $143.5 million of cash and cash
equivalents, short-term and long-term investments. About's principal commitments
consist of obligations outstanding under capital and operating leases. About has
spent approximately $21.3 million on capital expenditures since inception,
excluding capital lease agreements. About anticipates that it will increase the
Company's capital expenditures and lease commitments consistent with its
anticipated growth in operations, infrastructure and personnel. About has
committed to spend $6.4 million for leasehold improvements and furniture and
fixtures related to the relocation of our headquarters. About currently
anticipates that the Company will continue to experience significant growth in
operating expenses for the foreseeable future and that operating expenses will
be a material use of About's cash resources.
About's ability to generate significant revenues is uncertain. About has
incurred substantial costs to create, launch and enhance About.com and to grow
its business. At June 30, 2000, About had an accumulated deficit of $113.8
million. About expects losses from operations and negative cash flow to continue
for the foreseeable future as a result of its expansion plans and its continuing
significant increases in operating expenses in the next several years. Although
About has experienced revenue growth in recent periods, About's revenues may not
remain at their current level or increase in the future. If About's revenues do
not increase substantially, About may not achieve profitability, which would
have a material adverse effect on About's business, results of operations and
financial condition. Even if About achieves profitability, it may not sustain or
increase profitability on a quarterly or annual basis in the future.
About currently believes that the net proceeds of its prior offerings,
together with existing cash and cash equivalents, short-term and long-term
investments, will be sufficient to meet anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. The
Company 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 About,
or at all. If adequate funds are not available or not available on acceptable
terms, the Company may be unable to fund its expansion, successfully promote the
About brand, develop or enhance the network, respond to competitive pressures or
take advantage of acquisition opportunities, which could have a material adverse
effect on About's business, results of operations and financial condition. If
About raises additional funds by issuing equity securities, stockholders may
experience dilution of their ownership interest and those securities may have
rights superior to those of the holders of the common stock. If About raises
additional funds by issuing debt, it may be subject to certain limitations on
its operations, including limitations on the payment of dividends.
YEAR 2000 COMPLIANCE
To date, the Company's systems and software have not experienced any
material disruption due to the onset of the Year 2000. However, About cannot
assure that it will not experience disruptions in the future as a consequence of
the Year 2000 bug. The Company cannot quantify the amount of potential exposure,
if any, and do not believe it to be material.
NEW ACCOUNTING PRONOUNCEMENTS
About continues to assess the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in the footnotes to the Unaudited Interim Consolidated
Condensed Financial Statements.
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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 service 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 7% of
our revenues in 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 June 30,
2000, our accumulated deficit was $113.8 million. We expect to continue to lose
money for the foreseeable future because we plan to continue to incur
significant expenses.
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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.
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 numbers 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 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 and page views on our
website are 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 expend significant amounts to expand our internal
advertising sales force and to build 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;
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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.
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 users. If we do not implement these
systems successfully, we may not be able to accurately evaluate the demographic
characteristics of our users. 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
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. Advertising based on impressions,
or the number of times an advertisement is delivered to users, comprises
virtually 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
the industry standard. This makes it difficult to project our future advertising
rates and revenues.
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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
customers' 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.
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 and electronic commerce marketers. 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 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.
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.
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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. Some of our key employees
have recently been hired. These individuals do not have significant experience
working with us or our management team. In addition, we expect that the number
of guides will continue to increase as new GuideSites 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 service,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition. There is, 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 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 service to customers.
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IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE COMPLETED AND FUTURE ACQUISITIONS
INTO OUR OPERATION, THERE COULD BE AN ADVERSE EFFECT ON OUR BUSINESS AND RESULTS
OF OPERATIONS.
We have and may continue to 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 an customers as a
result of change 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 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 have not estimated the minimum 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.
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WE DEPEND ON OUR 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 Chief Executive
Officer, and Mr. William C. Day, our President and 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 in our
service.
In January 1998, we entered into an Internet-hosting agreement with
GlobalCenter, Inc. ("GlobalCenter") 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.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, 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 proprietary
rights 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
uncertain and still evolving.
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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 our 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 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, take advantage of
acquisition opportunities, develop or enhance services or respond to competitive
pressures, 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.
OUR OFFICERS AND DIRECTORS MAY SUBSTANTIALLY INFLUENCE US.
Our executive officers and directors, in the aggregate, beneficially own
approximately 14% of the common stock. These stockholders may be able to
exercise significant influence 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY RATE FLUCTUATIONS. The Company is exposed to foreign exchange
rate fluctuations as About's share of the assets of its foreign equity
investment is translated into U.S. dollars. As exchange rates vary, these
assets, when translated, may be adversely affected. The effect of foreign rate
fluctuations on the Company's results of operations, financial position and cash
flows in the quarter ended June 30, 2000 was not material. About does not use
derivative financial instruments to limit its foreign currency risk exposure.
MARKET RISK. About's accounts receivables are subject, in the normal
course of business, to collection risks. About regularly assesses these risks
and has established policies and business practices to protect against the
adverse effects of collection risks. As a result, About does not anticipate any
material losses in this area.
INTEREST RATE RISK. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We have not used
derivative financial instruments in its investment portfolio. We invest our
excess cash in debt instruments of the U.S. Government and its agencies and
high-quality corporate issuers and, by policy, limit the amount of credit
exposure to any one issuer. We protect and preserve our invested funds by
limiting default, market and reinvestment risk.
Investments in both fixed and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impact due to a rise in their interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to change in interest rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
On April 24, 2000, About.com issued an aggregate of 38,968 shares of
common stock in exchange for all of the outstanding capital stock of
AllExperts.com. The shares were issued pursuant to an exemption by reason of
Section 4(2) of the Securities Act of 1933. The issuance was made without
general solicitation or advertising. The former AllExperts.com stockholder was a
sophisticated investor with access to all relevant information necessary to an
investment decision.
On May 12, 2000, About.com issued an aggregate of 199,726 shares of common
stock in exchange for all of the outstanding capital stock of SiteTracker
Marketing, Inc. ("SiteTracker") The shares were issued pursuant to an exemption
by reason of Section 4(2) of the Securities Act of 1933. The issuance was made
without general solicitation or advertising. Each of the former SiteTracker
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stockholders was an accredited investor or a sophisticated investor with access
to all relevant information necessary to an investment decision.
(b) Use of Proceeds
On March 29, 1999, we consummated the initial public offering of 3,450,000
shares of our common stock and a concurrent private placement of 107,527 shares
of our common stock (collectively, the "Initial Public Offering"). Net proceeds
from the Initial Public Offering were approximately $81.0 million.
On November 3, 1999 and November 17, 1999, we consummated the follow-on
offering of 3,110,000 shares of our common stock (the "Follow-on Offering"). Net
proceeds from the Follow-on Offering were approximately $145.7 million
From March 31, 1999 to June 30, 2000, we used all of the proceeds from the
Initial Public Offering for general corporate purposes, capital expenditures,
marketing expenditures related to marketing and branding campaigns, the payment
of debt obligations, cash paid in connection with the acquisition of VantageNet
and cash paid to retire ExpertCentral bridge loans.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2000, the Company held its Annual Meeting of Stockholders. At
the meeting, the stockholders elected as directors Scott P. Kurnit (with
14,888,438 affirmative votes and 4,142 votes withheld), Frank J. Biondi, Jr.
(with 14,888,438 affirmative votes and 4,142 votes withheld), Stanley Fung (with
14,888,438 affirmative votes and 4,142 votes withheld), Daphne Kis (with
14,848,387 affirmative votes and 44,193 votes withheld), Ronald Unterman (with
14, 888,438 affirmative votes and 4,142 votes withheld) and Kristopher A. Wood
(with 14,848,387 affirmative votes and 44,193 votes withheld).
The stockholders also ratified the appointment of KPMG LLP as the
independent accountants for the Company for the year ending December 31, 2000
(with 14,797,251 shares voting for, 92,412 against and 2,917 abstaining).
The stockholders also approved an amendment to the Company's Second
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 50,000,000 to 100,000,000 (with
14,348,228 shares voting for, 541,829 against and 2,523 abstaining).
The stockholders also approved and amendment to the Company's Amended and
Restated 1998 Stock Option/Stock Issuance Plan (the "Plan") to increase the
number of shares of Common Stock authorized for issuance over the term of the
Plan by an additional 4,000,000 shares (with 10,836,023 shares voting for,
2,411,518 against, 3,266 abstaining and 1,641,773 unvoted).
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ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
3.1 Second Amendment and Restated Certificate of Incorporation, as
amended by a Certificate of Ownership and Merger and a
Certificate of Amendment, filed on May 9, 2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1) On June 21, 2000, the Company filed a report on Form 8-K,
pursuant to Item 5 of such Form, announcing that it had
changed its certifying accountant from KPMG, LLP to Ernst &
Young LLP effective June 15, 2000, based upon recommendation
by the Audit Committee of the Company's Board of Directors.
2) On April 10, 2000, the Company filed a report on Form 8-K,
pursuant to Item 2 of such Form, announcing that it acquired
Sombasa Media Inc. on March 27, 2000.
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000 ABOUT.COM, INC.
By: /s/ Todd B. Sloan
--------------------------------------------
Todd B. Sloan
Chief Financial Officer (Principal Financial
Officer)
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