<PAGE>
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: 333-76331
internet.com Corporation
(Exact name of Registrant as specified in its charter)
Delaware 06-1542480
- -------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
20 Ketchum Street
Westport, Connecticut 06880
- ------------------------------------- ---------------------------------
(Address of principal executive (Zip Code)
offices)
(203) 226-6967
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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 [ ]
The number of outstanding shares the Registrant's common stock, par value $.01
per share, as of September 30, 1999, was 23,325,000.
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internet.com Corporation
------------------------
Index
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Page
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
and September 30, 1999 3
Consolidated Statements of Operations - For the Three and Nine Months
Ended September 30, 1998 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity - For the Nine
Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows - For the Nine Months
Ended September 30, 1998 and 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. Other Information 17-18
Signatures 19
EXHIBIT 27. Financial Data Schedule 20
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PART I. FINANCIAL INFORMATION Item 1. Financial Statements
INTERNET.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------- ------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 129 $30,211
Accounts receivable, net of allowances of $42 and $393, respectively 1,723 3,671
Prepaid expenses and other 120 202
----------------- ------------------
Total current assets 1,972 34,084
Property and equipment, net of accumulated depreciation 1,380 2,241
of $15 and $425, respectively
Intangible assets, net of accumulated amortization 22,332 28,140
of $632 and $7,004, respectively
Investment in internet.com Venture Fund I LLC - 600
Other assets 192 377
----------------- ------------------
Total assets $25,876 $ 65,442
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 482 $ 755
Accrued payroll and related expenses 296 1,259
Accrued expenses and other 462 1,701
Accrued Web site acquisition payments 775 816
Deferred revenues 122 650
Borrowings under line of credit 1,886 -
----------------- ------------------
Total current liabilities 4,023 5,181
Accrued Web site acquisition payments - 394
----------------- ------------------
Total liabilities 4,023 5,575
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 4,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value, 75,000,000 shares authorized,
16,215,891 and 23,325,000 shares issued and outstanding at
December 31, 1998 and September 30, 1999, respectively 162 233
Additional paid-in capital 22,665 78,718
Accumulated deficit (974) (19,084)
----------------- ------------------
Total stockholders' equity 21,853 59,867
----------------- ------------------
Total liabilities and stockholders' equity $25,876 $65,442
----------------- ------------------
----------------- ------------------
</TABLE>
See notes to consolidated financial statements.
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
(PREDECESSOR (PREDECESSOR
BUSINESS) BUSINESS)
--------------- ---------------
1998 1999 1998 1999
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 973 $ 4,114 $ 2,775 $ 8,598
Cost of revenues 684 2,035 1,828 4,938
--------------- ------------ --------------- ------------
Gross profit 289 2,079 947 3,660
--------------- ------------ --------------- ------------
Operating expenses:
Advertising, promotion and selling 307 2,107 1,081 4,649
General and administrative 402 1,123 1,113 2,742
Depreciation 117 224 328 413
Amortization 252 2,344 712 6,372
Non-cash compensation charge - - - 7,975
--------------- ------------ --------------- ------------
Total operating expenses 1,078 5,798 3,234 22,151
--------------- ------------ --------------- ------------
Operating loss (789) (3,719) (2,287) (18,491)
Interest income (expense), net - 465 - 381
--------------- ------------ --------------- ------------
Net loss $ (789) $ (3,254) $(2,287) $ (18,110)
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
Basic and diluted loss per share $ (0.05) $ (0.14) $ (0.14) $ (0.94)
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
Weighted average number of common shares 16,216 23,325 16,216 19,326
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
</TABLE>
See notes to consolidated financial statements.
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------- ------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 16,215,891 $162 $22,665 $ (974) $21,853
Proceeds from private
placement 908,475 9 2,232 - 2,241
Issuance of management
shares 725,000 7 7,968 - 7,975
Exercise of warrant 2,075,634 21 2,979 - 3,000
Proceeds from initial
public offering 3,400,000 34 42,874 - 42,908
Net loss - - - (18,110) (18,110)
------------- ------------- ---------------- ----------------- ----------------
Balance at September 30, 1999 23,325,000 $233 $78,718 $ (19,084) $59,867
------------- ------------- ---------------- ----------------- ----------------
------------- ------------- ---------------- ----------------- ----------------
</TABLE>
Note:
- -----
Immediately prior to the closing of its initial public offering, internet.com
LLC converted its business form to a corporation. This reorganization was
effected by merging internet.com LLC into a newly-formed Delaware corporation
called internet.com Corporation. Each member of internet.com LLC received shares
of internet.com Corporation common stock in exchange for their membership units
at a rate of 16,215.891 shares per membership unit. All share and per share data
have been retroactively adjusted to reflect the reorganization.
See notes to consolidated financial statements.
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(PREDECESSOR
BUSINESS)
------------------------
1998 1999
------------ ----------
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Cash flows from operating activities:
Net loss $ (2,287) $(18,110)
Adjustments to reconcile net cash used in operations-
Depreciation and amortization 1,040 6,785
Provision for losses on accounts receivable 94 351
Non-cash compensation charge -- 7,975
Changes in assets and liabilities -
Accounts receivable, net (261) (2,116)
Prepaid expenses and other (9) (270)
Accounts payable and accrued expenses 143 2,197
Deferred revenues -- 345
----------- ----------
Net cash used in operating activities (1,280) (2,843)
----------- ----------
Cash flows from investing activities:
Additions to property and equipment (650) (1,271)
Acquisitions of Web sites, related Internet media properties and other (2,865) (11,467)
Investment in internet.com Venture Fund I LLC -- (600)
----------- ----------
Net cash used in investing activities (3,515) (13,338)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 45,149
Proceeds from exercise of warrant -- 3,000
Contributions from Mecklermedia Corporation 4,795 --
Borrowings under line of credit -- 4,670
Payments for line of credit -- (6,556)
----------- ----------
Net cash provided by financing activities 4,795 46,263
----------- ----------
Net increase in cash and cash equivalents -- 30,082
Cash and cash equivalents, beginning of period -- 129
----------- ----------
Cash and cash equivalents, end of period $ -- 30,211
----------- ----------
----------- ----------
Supplemental disclosures of cash flow:
Cash paid for interest $ -- $ 92
----------- ----------
----------- ----------
Cash paid for income taxes $ -- $ --
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
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INTERNET.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The Company
-----------
internet.com owns and operates a leading network of integrated
business-to-business Web sites and related Internet media properties focused
solely on the Internet industry. As of September 30, 1999, this network of
Internet media properties consisted of 70 Web sites, 65 e-mail newsletters, 99
online discussion forums and 71 moderated e-mail discussion lists. The network
is organized into nine vertical content channels to serve Internet users, which
include Internet industry and Internet technology professionals, Web developers
and experienced Internet users.
Since all of internet.com's products and services relate to providing
Internet-related information to Internet industry and Internet technology
professionals, Web developers and experienced Internet users, its success is
dependent on the continued growth of the Internet.
On June 25, 1999, internet.com completed an initial public offering ("IPO") of
3,400,000 shares of common stock at $14.00 per share. Net proceeds to
internet.com aggregated approximately $42.9 million (net of underwriters'
commissions and offering expenses of $4.7 million). On June 30, 1999,
internet.com paid the outstanding balance under its line of credit of
approximately $5.0 million and terminated the line of credit.
(2) History
-------
internet.com LLC was formed as part of the acquisition of Mecklermedia
Corporation by Internet World Media, Inc., a wholly-owned subsidiary of Penton
Media, Inc. (a publicly-owned corporation). On November 24, 1998, Mecklermedia
was acquired by Internet World Media in an all-cash tender offer. Following its
purchase of Mecklermedia, Internet World Media caused iWorld Corporation (a
wholly-owned subsidiary of Meckermedia) to be merged into internet.com LLC, a
newly-formed Delaware limited liability company. Internet World Media then sold
80.1% of its membership interest in internet.com LLC to Alan M. Meckler,
Mecklermedia's Chairman and Chief Executive Officer (including four trusts for
the benefit of his children), for a total of $18.0 million in cash and a warrant
valued at $284,000. Internet World Media retained a 19.9% interest in
internet.com LLC and a warrant to acquire up to an additional 128 membership
units in internet.com LLC (representing 2,075,634 shares of internet.com common
stock) for up to $3.0 million. For accounting purposes, the warrant has been
valued at $284,000 which reflects the present value of the strike price using a
risk free rate of return over a three year term, as compared to the cash price
per share paid to Penton Media. This warrant was exercised by Penton Media on
June 24, 1999.
Immediately prior to the closing of the IPO, internet.com LLC converted its
business form to a corporation. This reorganization was effected by merging
internet.com LLC into a newly-formed Delaware corporation called internet.com
Corporation. Each member of internet.com LLC received shares of internet.com
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Corporation common stock in exchange for their membership units at a rate of
16,215.891 shares per membership unit. All share and per share data have been
retroactively adjusted to reflect the reorganization.
(3) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
from the books and records of internet.com in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998 included in
internet.com's Registration Statement on Form S-1. In the opinion of management,
all adjustments considered necessary for a fair presentation of the results for
the interim periods presented have been reflected in such consolidated financial
statements.
The consolidated financial statements include the accounts of internet.com and
its majority owned investments. All significant intercompany transactions have
been eliminated.
Certain amounts have been reclassified in the prior year statements to conform
to the current year presentation.
internet.com does not believe any recently issued accounting standards will have
a material impact on its financial condition or results of operations.
(4) Computation of Net Loss Per Share
---------------------------------
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Dilutive 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 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.
Computations of basic and diluted loss per share for the three and nine months
ended September 30, 1998 and 1999 are as follows:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
(PREDECESSOR (PREDECESSOR
BUSINESS) BUSINESS)
--------------- ---------------
1998 1999 1998 1999
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED NET LOSS PER SHARE
Numerator: Net loss $ (789) $(3,254) $(2,287) $(18,110)
Denominator: Weighted average shares outstanding 16,216 23,325 16,216 19,326
--------------- ------------ --------------- ------------
$(0.05) $ (0.14) $ (0.14) $ (0.94)
--------------- ------------ --------------- ------------
--------------- ------------ --------------- ------------
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(5) Acquisitions of Assets
----------------------
internet.com made 12 acquisitions of Web sites and related Internet media
properties for a total of $10.8 million during the nine months ended September
30, 1999. These acquisitions were accounted for as purchases. Eight of these
acquisitions provide for contingent payments to be made after the acquisition
date based upon the achievement of certain objectives. The acquired Web sites
and related Internet media properties had minimal tangible assets or
liabilities. Therefore, the entire purchase price has been recorded as
intangible assets and is being amortized over its estimated useful life for
these acquisitions. The pro forma results for the nine months ended September
30, 1999, assuming these acquisitions had been made at the beginning of the
period, would not be materially different from reported results.
(6) Non-Cash Compensation Charge
----------------------------
In March 1999, internet.com LLC granted 4% of its total membership units at the
time (assuming full dilution, including the exercise of the Internet World Media
warrant) to certain of its employees. As these membership units vested upon the
completion of the IPO, internet.com recorded an $8.0 million compensation charge
concurrent with the completion of the IPO on June 25, 1999.
(7) Office Leases
-------------
In July 1999, internet.com entered into an agreement to lease office space for
its corporate headquarters in Darien, Connecticut at an annual rate of
approximately $350,000. This lease will terminate in February 2003. In September
1999, internet.com entered into agreements to lease office space in South San
Francisco, California and New York, New York at annual rates of approximately
$130,000 and $310,000, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the accompanying notes which appear elsewhere in this filing.
This filing contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. These statements relate to our future plans, objectives, beliefs,
expectations and intentions. These statements may be identified by the use of
words such as "expects," "anticipates," "believes," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
discussed in these statements. Factors that could cause or contribute to these
differences include those discussed below and in "Risk Factors" contained in our
prospectus dated June 25, 1999.
OVERVIEW
We own and operate a leading network of integrated business-to-business vertical
content Web sites, e-mail newsletters, online discussion forums and moderated
e-mail discussion lists focused solely on the Internet industry. As of September
30, 1999, our network consisted of nine integrated business-to-business vertical
content channels containing 70 Web sites, 65 e-mail newsletters, 99 online
discussion forums and 71 moderated e-mail discussion lists focused solely on the
Internet industry. During the month of September 1999, we delivered
approximately 57 million page views to over 1.8 million unique visitors and 14.3
million copies of our e-mail newsletters to 1.3 million subscribers, and 42.3
million postings were generated by 80,000 subscribers to our moderated e-mail
discussion lists.
We were formed in November 1998 following the acquisition of Mecklermedia
Corporation by Penton Media, Inc. As part of the acquisition, Penton Media
agreed to contribute all the assets of Mecklermedia's Internet media business
division, iWorld, to a newly formed limited liability company, internet.com LLC.
As part of this acquisition agreement, we reserved 4% of our total membership
units for discretionary grants to our employees. The grants were completed in
March 1999. As these membership units vested upon the completion of our initial
public offering, we recorded an $8.0 million compensation charge concurrent with
the completion of this offering. Prior to the acquisition of Mecklermedia by
Penton Media, iWorld operated as one of three business lines which comprised
Mecklermedia. Our predecessor Web sites, MecklerWeb and iWorld.com, were also
dedicated to covering Internet developments.
We generate revenues from the following sources:
- - advertising on our Web sites, e-mail newsletters, online discussion forums
and moderated e-mail discussion lists;
- - e-commerce agreements and offerings;
- - paid subscription services;
- - licensing of our editorial content, brands and software;
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- - seminars;
- - opt-in e-mail list rentals; and
- - venture fund management fees
We barter an immaterial portion of the unsold advertising impressions generated
by our network for advertising and promotion in media properties owned by Penton
Media and other third parties. We do not record any revenues or expenses for
such barter because we do not incur any costs to fulfill such barter and because
such unsold advertising and promotion exchanged and received would otherwise
have no value. Therefore, the recording of any barter would result in an
overstatement of revenues and expenses. For the nine months ended September 30,
1999, approximately 82% of our revenues were from the sale of advertising. We
recognize advertising revenue ratably in the period the advertising is
displayed, provided that no significant company obligations remain outstanding
and collection of the resulting receivable is probable. Such obligations
typically include guarantees of a minimum number of advertising impressions, or
times an advertisement is displayed. We use a direct sales force of over 50
employees to sell advertising to companies and advertising agencies.
Our e-commerce agreements generally include advertising on our Web sites or
revenue sharing for sales made by the e-commerce vendors as a result of links
from our network, or in some cases both advertising and revenue sharing. We
recognize the advertising component of these agreements ratably in the period
the advertising is displayed, provided that no significant company obligations
remain and collection of the remaining receivable is probable. We recognize the
revenue sharing component of these agreements as revenue in the period that the
underlying sales are made by the e-commerce vendor.
Paid subscription services relate to customer subscriptions to our paid e-mail
newsletters, Internet Stock Report's Monthly HotWatch, Internet StockTracker,
SearchEngineWatch, and certain sections of Wall Street Research Net, which are
sold through our network and through affiliate relationships. Revenue from
subscriptions is recognized ratably over the subscription period. Deferred
revenues relate to the portion of collected subscription fees which has not yet
been recognized as revenue.
Our licensing agreements vary in structure, with internet.com generating fixed
fees, royalties or both for access to our editorial content, brands or software.
We generally license our editorial content, brands and software to offline and
online media companies.
As of September 30, 1999, we have made 35 acquisitions of Internet media
properties, consisting of 45 Web sites, 35 e-mail newsletters, 72 online
discussion forums and 61 moderated e-mail discussion lists since July 1995. We
expect to continue to pursue strategic acquisitions to strengthen our content
offerings and services.
We believe that advertising sales in traditional media, such as print
publishing, generally are lower in the first and third calendar quarters of each
year due to buying patterns of advertisers. If the Internet makes the transition
from an emerging to a more developed advertising medium, we may experience
similar seasonal patterns as those in the traditional media industry.
We have sustained losses on a quarterly and annual basis in the past. We expect
to incur significantly higher costs, particularly advertising, promotion and
selling expense, to grow our business. As a result, we expect to incur
significant operating losses for the foreseeable future and because costs are
largely fixed in the short term, we expect to be vulnerable to significant
fluctuations in operating losses if actual revenues fall below anticipated
levels. Furthermore, given the rapidly evolving nature of our business and our
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limited operating history, our operating results are difficult to forecast
and period-to-period comparison of our operating results will not be
meaningful and should not be relied upon as any indication of future
performance. Due to these and other factors, many of which are outside our
control, quarterly operating results may fluctuate significantly in the
future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. We generate revenues from advertising on our Web sites, e-mail
newsletters, online discussion forums and moderated e-mail discussion lists;
e-commerce agreements; paid subscription services; licensing of our editorial
content, brands and software; opt-in e-mail list rentals; seminars; and venture
fund management. Revenues were $973,000 for the three months ended September 30,
1998 and approximately $4.1 million for the three months ended September 30,
1999, representing an increase of 323%. This increase was primarily due to
increased advertising on our network of Web sites, e-mail newsletters, online
discussion forums and moderated e-mail discussion lists. While we anticipate
that advertising revenues will continue to represent a substantial majority of
our revenues for the foreseeable future, we believe that revenues from
e-commerce agreements, licensing, paid subscription services, seminars, opt-in
e-mail list rentals, online press release distribution services and venture fund
management will expand and diversify our future revenue streams.
COST OF REVENUES. Cost of revenues primarily consists of expenses associated
with editorial, communications infrastructure and Web site hosting. Cost of
revenues was $684,000 for the three months ended September 30, 1998 and
approximately $2.0 million for the three months ended September 30, 1999,
representing an increase of 198%. This change was primarily due to the increased
hiring of editorial, technology and operations personnel and expenses for
freelance contributors. As a percentage of revenues, cost of revenues was 70%
for the three months ended September 30, 1998 and 49% for the three months ended
September 30, 1999. We anticipate that our cost of revenues will continue to
increase in absolute dollars as we continue to strengthen our existing content
offerings and services. However, we anticipate cost of revenues to decrease as a
percentage of revenues. We anticipate hiring additional editorial, technology
and operations personnel, as well as freelance contributors, as we acquire
additional Web sites, e-mail newsletters, online discussion forums and moderated
e-mail discussion lists and expand our proprietary content.
ADVERTISING, PROMOTION AND SELLING. Advertising, promotion and selling expenses
primarily consist of costs related to sales and marketing staff, sales
commissions and promotion costs. Advertising, promotion and selling expenses
were $307,000 for the three months ended September 30, 1998 and approximately
$2.1 million for the three months ended September 30, 1999, representing a 586%
increase. This change was primarily due to increased hiring of advertising sales
personnel. As a percentage of revenues, advertising, promotion and selling
expenses were 32% for the three months ended September 30, 1998 and 51% for the
three months ended September 30, 1999. We anticipate that our advertising,
promotion and selling expenses will continue to increase in absolute dollars,
primarily due to our planned hiring of additional sales personnel in an effort
to increase our advertising sales as well as increased expenses for the
promotion of our content offerings and services to our community of Internet
users, advertisers and vendors.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of salaries, professional fees, facilities costs and bad debt expense.
General and administrative expenses were $402,000 for the three months ended
September 30, 1998 and approximately $1.1 million for the three months ended
September 30, 1999, representing a 179% increase. This change was primarily due
to the hiring of additional personnel and increased professional fees. As a
percentage of revenues, general and administrative expenses were 41% for the
three months ended September 30, 1998 and 27% for the three months ended
September 30, 1999. We expect that our general and administrative expenses will
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continue to increase in absolute dollars, but these expenses are expected to
decrease as a percentage of revenues. We anticipate hiring additional
personnel and incurring additional costs related to being a public company,
including directors' and officers' liability insurance, investor relations
programs and professional services fees.
Depreciation and amortization. Depreciation of property and equipment was
$117,000 for the three months ended September 30, 1998 and $224,000 for the
three months ended September 30, 1999, representing a 91% increase. As a
percentage of revenues, depreciation of property and equipment was 12% for the
three months ended September 30, 1998 and 5% for the three months ended
September 30, 1999. Amortization of intangibles was $252,000 for the three
months ended September 30, 1998 and approximately $2.3 million for the three
months ended September 30, 1999, representing an 830% increase. This increase
was primarily due to the amortization of the goodwill associated with the
formation of internet.com LLC and acquisitions of Web sites and related Internet
media properties. As a percentage of revenues, amortization of intangibles was
26% for the three months ended September 30, 1998 and 57% for the three months
ended September 30, 1999. We anticipate that depreciation and amortization will
continue to increase as we acquire additional Web sites, e-mail newsletters,
online discussion forums and moderated e-mail discussion lists and other online
businesses. We also anticipate increasing our capital expenditures to support
the current and expected growth of our business.
INTEREST INCOME (EXPENSE), NET. Interest income was $465,000 for the three
months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Revenues were approximately $2.8 million for the nine months ended
September 30, 1998 and approximately $8.6 million for the nine months ended
September 30, 1999, representing an increase of 210%. This increase was
primarily due to increased advertising on our network of Web sites, e-mail
newsletters, online discussion forums and moderated e-mail discussion lists.
COST OF REVENUES. Cost of revenues was approximately $1.8 million for the nine
months ended September 30, 1998 and approximately $4.9 million for the nine
months ended September 30, 1999, representing an increase of 170%. This change
was primarily due to the increased hiring of editorial, technology and
operations personnel and expenses for freelance contributors. As a percentage of
revenues, cost of revenues was 66% for the nine months ended September 30, 1998
and 57% for the nine months ended September 30, 1999.
ADVERTISING, PROMOTION AND SELLING. Advertising, promotion and selling expenses
were approximately $1.1 million for the nine months ended September 30, 1998 and
approximately $4.6 million for the nine months ended September 30, 1999,
representing a 330% increase. This change was primarily due to increased hiring
of advertising sales personnel. As a percentage of revenues, advertising,
promotion and selling expenses were 39% for the nine months ended September 30,
1998 and 54% for the nine months ended September 30, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1.1 million for the nine months ended September 30, 1998 and
approximately $2.7 million for the nine months ended September 30, 1999,
representing a 146% increase. This change was primarily due to the hiring of
additional personnel and increased professional fees. As a percentage of
revenues, general and administrative expenses were 40% for the nine months ended
September 30, 1998 and 32% for the nine months ended September 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment was
$328,000 for the nine months ended September 30, 1998 and $413,000 for the nine
months ended September 30, 1999, representing a 26% increase. As a percentage of
revenues, depreciation of property and equipment was 12% for the nine months
ended September 30, 1998 and 5% for the nine months ended September 30, 1999.
Amortization of intangibles was $712,000 for the nine months ended September 30,
-13
<PAGE>
1998 and approximately $6.4 million for the nine months ended September 30,
1999, representing a 795% increase. This increase was primarily due to the
amortization of the goodwill associated with the formation of internet.com
LLC and acquisitions of Web sites and related Internet media properties. As a
percentage of revenues, amortization of intangibles was 26% for the nine
months ended September 30, 1998 and 74% for the nine months ended September
30, 1999.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense, was
$381,000 for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded operations primarily with cash from proceeds
from our IPO, borrowings under a line of credit and the capital contributions of
members of internet.com LLC. On June 25, 1999, we completed our IPO of 3,400,000
shares of our common stock at $14.00 per share. Net proceeds to internet.com
aggregated approximately $42.9 million (net of underwriters' commissions and
offering expenses of $4.7 million). On June 30, 1999, internet.com paid the
outstanding balance under its line of credit of approximately $5.0 million and
terminated the line of credit.
As of September 30, 1999, internet.com had total current assets of $34.1 million
and total current liabilities of $5.2 million, or working capital of $28.9
million.
Net cash used in operating activities was approximately $1.3 million for the
nine months ended September 30, 1998 and $2.8 million for the nine months ended
September 30, 1999. Net cash used in operating activities was primarily a result
of our net losses adjusted for a non-cash compensation charge, depreciation and
amortization, and increases in accounts receivable, offset by an increase in
accounts payable, accrued expenses and deferred revenues.
Net cash used in investing activities was approximately $3.5 million for the
nine months ended September 30, 1998 and $13.3 million for the nine months ended
September 30, 1999. Net cash used in investing activities was primarily a result
of acquisitions of Web sites and related Internet media properties and capital
expenditures.
Net cash provided by financing activities was approximately $4.8 million for the
nine months ended September 30, 1998 and $46.3 million for the nine months ended
September 30, 1999. Net cash provided by financing activities was a result of
our initial public offering, borrowings under our line of credit, the exercise
of a warrant by Penton Media, a private placement of equity securities and
contributions from Mecklermedia.
Capital expenditures were $650,000 for the nine months ended September 30, 1998
and approximately $1.3 million for the nine months ended September 30, 1999. We
anticipate that we will increase our capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel.
YEAR 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, an inability to process transactions, send invoices or engage in similar
normal business activities. We may be affected by Year 2000 issues related to
non-compliant information technology systems or non-information technology
systems operated by us or third parties. Our information technology
-14-
<PAGE>
systems consist of software and data developed either in-house or purchased from
third parties, and hardware purchased from vendors.
State of Readiness. We have completed a preliminary assessment of our
information technology systems, which includes but is not limited to the
hardware and software necessary to provide and deliver our services. We are
continuing to perform assessments of our non-information technology systems,
which include many of the building and office equipment systems. To date, our
assessment has consisted of the following steps:
- identifying and evaluating all software and hardware upon which we are
dependent; - contacting third-party vendors of hardware, software and
services that we utilize;
- contacting material non-information technology systems and service
providers; and
- developing and formalizing procedures to implement necessary remedial
measures.
As of September 30, 1999 we have performed the following:
- we have reviewed all functional areas of our business and have
identified Microsoft Windows 95, Microsoft Office 97 and Microsoft
Windows NT as the only software programs that are not Year 2000
compliant;
- we will continue to perform Year 2000 simulations on our systems and
services to test our system and service readiness;
- we have revised and continue to revise our systems as necessary to
improve their Year 2000 compliance based on the results of our Year
2000 simulation tests;
- we are continuing to upgrade and test all other hardware and software
used in our operations;
- we have identified all vendors of material hardware and software
components of our information technology systems, have contacted our
principal vendors of hardware, software and data providers, and have
obtained confirmation from all of our material vendors, either in
writing or from information available on their Web sites, confirming
their Year 2000 compliance;
- we are continuing the process of working with our hardware and
software providers to assure that we are prepared for the Year 2000;
and
- we have received confirmation from all of our material non-information
technology systems and service providers, either in writing or from
information available on their Web sites, confirming their Year 2000
compliance.
At this point in our assessment, we are not currently aware of any Year 2000
problems relating to these systems which would have a material effect on our
business, financial condition or results of operations. We plan to complete our
Year 2000 assessment during the fall of 1999 and expect to make all remediations
by November 1999. We believe that the work required to achieve Year 2000
compliance is approximately 90% complete.
Cost. As of September 30, 1999, we had incurred costs of approximately $65,000
and we expect to incur an additional $5,000 in connection with identifying,
evaluating and addressing Year 2000 compliance issues. Most of our expenses have
been related to, and are expected to continue to relate to, the operating costs
associated
-15
<PAGE>
with time spent by employees in the evaluation process and Year 2000 compliance
matters. If such expenses are higher than anticipated, our business, financial
condition and operating results would suffer.
Risks. Although our assessment may be finalized without identifying any
additional material non-compliant information technology or systems operated by
us or by third parties, a systemic failure beyond our control, such as a
prolonged telecommunications or electrical failure, is possible. This type of
failure could prevent us from operating our business, prevent users from
accessing our network, or change the behavior of advertising customers or
persons accessing our network. We believe that the primary business risks, in
the event of such failure, would include but not be limited to lost advertising
revenues, lost business revenues, increased operating costs, loss of customers
or persons accessing our network and servers, or other business interruptions of
a material nature, as well as claims of mismanagement, misrepresentation or
breach of contract.
Contingency Plan. As discussed above, we are engaged in an ongoing Year 2000
assessment. The results of our further testing and the responses we receive from
third-party vendors, service providers and customers will be taken into account
in determining the nature and extent of any contingency plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We have no derivative financial instruments or derivative commodity instruments
in our cash and cash equivalents. We have invested our net proceeds from our IPO
in short-term, interest-bearing, investment grade securities. Our transactions
are generally conducted, and our accounts are denominated, in United States
dollars. Accordingly, we are not exposed to significant foreign currency risk.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a description of material pending legal
proceedings affecting the Registrant, see "Business
- Legal Proceedings" contained in the Registrant's
Prospectus, dated June 25, 1999.
Item 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) See Part II - Item 15 of our Registration Statement
on Form S-1 (Commission file number 333-76331)
(d) On June 24, 1999, our Registration Statement on Form
S-1 covering the offering of 3,400,000 shares of our
common stock, Commission file number 333-76331, was
declared effective. The offering commenced on June
25, 1999 and terminated the same day following the
sale of all securities registered. The offering was
managed by U.S. Bancorp Piper Jaffray, Inc., William
Blair & Company LLC and DLJdirect, Inc. as
representatives of the several underwriters named in
the Registration Statement (the "Underwriters"). The
total price to the public for the shares offered and
sold by internet.com was $47,600,000.
Our Underwriters exercised in full an over-allotment
option to purchase an additional 510,000 shares of
our common stock from Internet World Media, Inc., a
selling stockholder. The total price to the public
for the shares offered and sold by Internet World
Media was $7,140,000. internet.com did not receive
any proceeds from the sale of such over-allotment
shares.
The amount of expenses incurred for internet.com's
account in connection with the offering are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts and commissions $3,332,000
Finders' fees -
Expenses paid to or for the Underwriters -
Other expenses 1,360,000
-----------------
Total expenses $4,692,000
-----------------
-----------------
</TABLE>
All of the foregoing expenses were direct or indirect
payments to persons other than (i) directors,
officers or their associates; (ii) persons owning ten
percent (10%) or more of our common stock; or (iii)
affiliates of internet.com.
The net proceeds of the offering to internet.com
(after deducting the foregoing expenses) was
$42,908,000. Since the effective date of the
Registration Statement, the net proceeds have been
used for the following purposes:
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<PAGE>
<TABLE>
<S> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 435,000
Purchase of real estate -
Acquisition of other businesses (including transaction costs) 8,234,000
Repayment of indebtedness 5,001,000
Working capital 2,151,000
Temporary investments, including cash and cash equivalents 26,487,000
Investment in Venture Fund I LLC 600,000
-----------------
-----------------
$ 42,908,000
-----------------
-----------------
</TABLE>
All of the foregoing payments were direct or indirect
payments to persons other than (i) directors,
officers or their associates: (ii) persons owning ten
percent (10%) or more of our common stock; or (iii)
affiliates of internet.com.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list of exhibits filed as part of
this Report on Form 10-Q. Where so indicated by
footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the
previous filing is indicated parenthetically except
for in those situations where the exhibit number was
the same as set forth below.
Exhibit
Number Description
----------- ---------------------------------------
11 Statement Regarding Computation of Per
Share Earnings (Loss) (included in
notes to financial statements)
27 Financial Data Schedule
(b) Reports on Form 8-K
None
-18-
<PAGE>
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.
Dated: November 1, 1999 internet.com Corporation
/s/Christopher S. Cardell
----------------------------------------
Christopher S. Cardell
Director, President and
Chief Operating Officer
/s/Christopher J. Baudouin
----------------------------------------
Christopher J. Baudouin
Chief Financial Officer
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERNET.COM
CORPORATION'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,211
<SECURITIES> 0
<RECEIVABLES> 4,064
<ALLOWANCES> 393
<INVENTORY> 0
<CURRENT-ASSETS> 34,084
<PP&E> 2,666
<DEPRECIATION> 425
<TOTAL-ASSETS> 65,442
<CURRENT-LIABILITIES> 5,181
<BONDS> 0
0
0
<COMMON> 233
<OTHER-SE> 59,634
<TOTAL-LIABILITY-AND-EQUITY> 65,442
<SALES> 0
<TOTAL-REVENUES> 8,598
<CGS> 0
<TOTAL-COSTS> 4,938
<OTHER-EXPENSES> 22,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,110)
<EPS-BASIC> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
