<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, 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: 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.)
23 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
------------------------------------ ---------------------------------
(Address of principal executive (Zip Code)
offices)
(203) 662-2800
(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 November 8, 2000 was 25,322,907.
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INTERNET.COM CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999 and September 30, 2000 3
Consolidated Statements of Operations - For the Three Months and Nine
Months Ended September 30, 1999 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity - For the Nine
Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1999 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information 18
Signatures 19
EXHIBIT 27. Financial Data Schedule 20
</TABLE>
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PART I. FINANCIAL INFORMATION Item 1. Financial Statements
INTERNET.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $17,943 $67,912
Accounts receivable, net of allowances of $712 and $1,658, respectively 5,568 12,043
Prepaid expenses and other 347 1,452
---------------- ------------------
Total current assets 23,858 81,407
Property and equipment, net of accumulated depreciation
of $688 and $2,134, respectively 3,221 4,598
Intangible assets, net of accumulated amortization
of $10,428 and $26,805, respectively 39,086 71,248
Investments in internet.com venture funds and other 1,855 6,487
Other assets 370 621
---------------- ------------------
Total assets $68,390 $164,361
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,635 $1,819
Accrued payroll and related expenses 1,441 1,786
Accrued expenses and other 2,096 4,811
Accrued Web site acquisition payments 6,462 7,800
Deferred revenues 403 1,269
---------------- ------------------
Total current liabilities 12,037 17,485
Accrued Web site acquisition payments 338 919
---------------- ------------------
Total liabilities 12,375 18,404
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,
23,334,520 and 25,319,076 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively 233 253
Additional paid-in capital 70,917 175,304
Accumulated deficit (15,135) (29,604)
Accumulated other comprehensive income - 4
---------------- ------------------
Total stockholders' equity 56,015 145,957
---------------- ------------------
Total liabilities and stockholders' equity $68,390 $164,361
================ ==================
</TABLE>
See notes to consolidated financial statements.
3
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999(1) 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 4,114 $ 14,717 $ 8,598 $ 36,523
Cost of revenues 2,035 6,334 4,938 16,058
-------- -------- -------- --------
Gross profit 2,079 8,383 3,660 20,465
-------- -------- -------- --------
Operating expenses:
Advertising, promotion and selling 2,107 4,835 4,649 13,416
General and administrative 1,123 2,563 2,742 6,702
Depreciation 224 578 413 1,446
Amortization 2,344 6,712 6,372 16,377
Non-cash compensation charge -- -- 7,975 --
-------- -------- -------- --------
Total operating expenses 5,798 14,688 22,151 37,941
-------- -------- -------- --------
Operating loss (3,719) (6,305) (18,491) (17,476)
Minority interest -- 88 -- 230
Equity loss from international and venture fund
investments, net -- (566) -- (665)
Loss on investments, net -- (157) -- (85)
Interest income (expense), net 465 1,199 381 3,675
-------- -------- -------- --------
Loss before income taxes (3,254) (5,741) (18,110) (14,321)
Provision for income taxes -- 49 -- 148
-------- -------- -------- --------
Net loss $ (3,254) $ (5,790) $(18,110) $(14,469)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.14) $ (0.23) $ (0.94) $ (0.58)
======== ======== ======== ========
Weighted average number of common
shares outstanding 23,325 25,143 19,326 24,904
======== ======== ======== ========
</TABLE>
(1) Represents the combined financial data of predecessor
business and internet.com.
See notes to consolidated financial statements.
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL TOTAL
------------------------ PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY LOSS
------------ ---------- ------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 23,334,520 $233 $70,917 $(15,135) $- $56,015 $-
Proceeds from
public offering 1,750,000 18 98,312 - - 98,330 -
Exercise of stock
options 23,174 - 304 - - 304 -
Issuance of stock
for acquisitions 211,382 2 5,771 - - 5,773 -
Foreign currency
translation
adjustment - - - - 4 4 4
Net loss - - - (14,469) - (14,469) (14,469)
------------ ---------- ------------- --------------- ----------------- --------------- ---------------
Balance at
September 30, 2000 25,319,076 $253 $175,304 $(29,604) $4 $145,957 $(14,465)
============ ========== ============= =============== ================= =============== ===============
</TABLE>
See notes to consolidated financial statements.
5
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INTERNET.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999(1) 2000
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,110) $(14,469)
Adjustments to reconcile net cash (used in) provided by operating activities-
Depreciation and amortization 6,785 17,823
Provision for losses on accounts receivable 351 1,262
Minority interest - (230)
Equity loss from international and venture fund investments, net - 665
Loss on investments, net - 85
Non-cash compensation charge 7,975 -
Changes in assets and liabilities- -
Accounts receivable (2,116) (7,610)
Prepaid expenses and other (270) (1,355)
Accounts payable and accrued expenses 2,197 3,453
Deferred revenues 345 814
--------------- --------------
Net cash (used in) provided by operating activities (2,843) 438
--------------- --------------
Cash flows from investing activities:
Additions to property and equipment (1,271) (2,808)
Acquisitions of Web sites, related Internet media properties and other (11,467) (40,918)
Investments in internet.com venture funds and other (600) (5,382)
--------------- --------------
Net cash used in investing activities (13,338) (49,108)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 45,149 98,330
Proceeds from exercise of stock options - 304
Proceeds from exercise of warrant 3,000 -
Borrowings under line of credit 4,670 -
Payments for line of credit (6,556) -
--------------- --------------
Net cash provided by financing activities 46,263 98,634
--------------- --------------
Effects of exchange rates on cash - 5
--------------- --------------
Net increase in cash and cash equivalents 30,082 49,969
Cash and cash equivalents, beginning of period 129 17,943
--------------- --------------
Cash and cash equivalents, end of period $30,211 $67,912
=============== ==============
Supplemental disclosures of cash flow:
Cash paid for interest $92 $-
=============== ==============
Cash paid for income taxes $- $25
=============== ==============
</TABLE>
(1) Represents the combined financial data of predecessor business and
internet.com.
See notes to consolidated financial statements.
6
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INTERNET.COM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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, 2000, this network of
Internet media properties consisted of 137 Web sites, 250 e-mail newsletters,
136 online discussion forums and 78 moderated e-mail discussion lists. The
network is organized into 14 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, internet.com's
success is dependent on, among other factors, 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.
On February 1, 2000, internet.com completed a follow-on offering of
3,750,000 shares of common stock priced at $60.00 per share, of which 1,750,000
shares were sold by internet.com and 2,000,000 shares were sold by Penton Media,
Inc. Net proceeds received by internet.com from the follow-on offering were
approximately $98.3 million. internet.com did not receive any of the proceeds
from the sale of shares by Penton Media, Inc.
2. 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, 1999 included in
internet.com's Form 10-K for the fiscal year ended December 31, 1999. 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 and wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") subsequently amended by SFAS No. 137, to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative financial instruments, such as interest rate swap contracts
and foreign exchange contracts, be recognized in the financial statements and
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measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity, depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of SFAS No. 133 will not have a material effect on our
financial statements as we do not hold any derivative financial instruments.
As of July 1, 2000, internet.com adopted Emerging Issues Task Force
Issue 00-2, "Accounting for Web Site Development Costs." As a result,
internet.com is now capitalizing costs incurred with the development of
internal Web sites, which had previously been expensed as a component of cost
of revenues. internet.com continues to expense all costs incurred that relate to
the planning and post-implementation phases of development. These charges are
included in cost of revenues in the accompanying statements of operations.
Amounts capitalized are included in intangible assets in the accompanying
balance sheets and the related amortization is included in amortization
expense in the accompanying statements of operations. These capitalized costs
are being amortized over three years. As of September 30, 2000, internet.com
had capitalized $409,000 of Web site development costs and recorded related
amortization expense of $23,000 for the three months ended September 30,
2000.
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101")
to provide guidance on the recognition, presentation, and disclosure of revenue
in financial statements. However, SAB No. 101 does not change existing
literature on revenue recognition. On June 26, 2000, the SEC staff announced
that they are delaying the required implementation date for SAB No. 101.
internet.com is now required to adopt SAB No. 101 no later than the fourth
quarter of its fiscal year ended December 31, 2000. internet.com does not
believe that the adoption of SAB No. 101 will have a material effect on its
financial condition.
4. COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net 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 net loss per share for the three and
nine months ended September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1999 2000 1999 2000
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator: Net loss $(3,254) $(5,790) $(18,110) $(14,469)
Denominator: Weighted average shares outstanding 23,325 25,143 19,326 24,904
------------ ------------- ------------- -------------
Basic and diluted net loss per share $(0.14) $ (0.23) $ (0.94) $ (0.58)
============ ============= ============= =============
</TABLE>
8
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5. ACQUISITIONS OF ASSETS
The financial information presented in the accompanying unaudited
condensed consolidated financial statements includes the results of operations
of each business acquisition from the date the acquisition was consummated.
For the nine months ended September 30, 1999 and 2000, internet.com made
12 and 24 acquisitions of Web sites and related Internet media properties for a
total of $11.8 million and $39.1 million, respectively. These acquisitions were
accounted for as purchases. Fifteen of the acquisitions made during the nine
months ended September 30, 2000 provide for contingent payments to be made after
the acquisition date based upon the achievement of certain objectives. With the
exception of the ClickZ acquisition discussed below, the acquired Web sites and
related Internet media properties had minimal tangible assets or liabilities.
On September 8, 2000 internet.com consummated the acquisition of all the
assets of ClickZ, Inc., a Massachusetts corporation ("ClickZ"), pursuant to an
asset purchase agreement, dated September 8, 2000, by and among internet.com and
the owners of ClickZ.
The consideration paid in the acquisition of ClickZ (which was determined
as a result of arms'-length negotiations) consisted of cash in the amount of $10
million and 211,382 restricted shares of internet.com's common stock.
Furthermore, an additional payment, based on future performance measures will be
made at the end of the earnout period consisting of 50% cash and 50% restricted
shares of internet.com's common stock.
A substantial majority of the purchase price of all the acquisitions made
during the nine months ended September 30, 2000 has been recorded as intangible
assets on a preliminary basis and is being amortized over an estimated useful
life of three years. The purchase accounting for these acquisitions will be
finalized at a later date not to exceed one year from the purchase date of each
acquisition.
The unaudited pro forma information below presents results of operations,
as if all the acquisitions occurred as of January 1, 1999 and 2000,
respectively, for the nine months ended September 30, 1999 and 2000,
respectively. The unaudited pro forma information is not necessarily indicative
of the results of operations of the combined companies had these events occurred
at the beginning of the periods presented nor is it indicative of future
results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
---------- --------
<S> <C> <C>
Pro forma revenues $ 11,331 $ 41,058
========== ========
Pro forma net loss $ (29,939) $(18,735)
========== ========
Pro forma basic and diluted net loss per share $ (1.20) $ (0.75)
========== ========
</TABLE>
6. INVESTMENT IN INTERNET.COM VENTURE PARTNERS III LLC
internet.com Venture Partners III LLC (the "Fund ") was organized on June
1, 2000, as a Delaware limited liability company. The Fund has received $75
million in capital commitments from its members. I-Venture Management LLC, a
wholly-owned subsidiary of internet.com, is the managing member and acts as the
Fund's investment manager and makes all investment decisions on behalf of the
Fund. internet.com is responsible for the day-to-day operation of the Fund.
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internet.com has committed $10.4 million representing a 14% investment in
the Fund. The undrawn position of internet.com's capital commitment was
approximately $7.3 million as of September 30, 2000. internet.com accounts for
this investment on the equity basis of accounting.
internet.com is entitled to approximately a 2% management fee for the
day-to-day management of the Fund. For the period from inception of the Fund to
September 30, 2000, management fees from the Fund amounted to $360,000. In
addition, internet.com is entitled to reimbursement for certain costs associated
with the operations of the Fund. The Fund owes $288,000 to internet.com related
to such costs as of September 30, 2000.
7. SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
internet.com barters portions of unsold advertising impressions for equity
interests in certain of its venture funds' portfolio companies. internet.com
recorded $613,000 and approximately $1.4 million in revenue and investments, in
internet.com venture funds and other during the three and nine months,
respectively, ended September 30, 2000 related to the barter of unsold
advertising impressions for equity.
internet.com exchanged 211,382 shares of its common stock valued at
$5.8 million for all the assets of ClickZ, Inc. as partial consideration
pursuant to the asset purchase agreement dated September 8, 2000 (see note 5).
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ITEM 2. 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 that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
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. Such forward-looking statements involve risks and uncertainties
which could cause actual results to differ materially from those described in
the forward-looking statements. The potential risks and uncertainties address a
variety of subjects including, for example, the competitive environment in which
internet.com competes; the unpredictability of internet.com's future revenues
(including those resulting from online advertising on internet.com's network of
Web sites and related internet media properties), expenses, cash flows and stock
price; internet.com's investments in international and venture fund investments;
any material change in internet.com's intellectual property rights and continued
growth and acceptance of the Internet. Factors which could cause our actual
results to differ from those contained in the forward-looking statements are
discussed below and in our reports filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933 and the Securities Exchange
Act of 1934. The forward-looking statements included herein are made as of the
date of this Form 10-Q, and we are under no obligation to update the
forward-looking statements after the date hereof.
OVERVIEW
We own and operate a network of Web sites, e-mail newsletters, online
discussion forums and moderated e-mail discussion lists focused solely on the
Internet industry. As of September 30, 2000, our network consisted of 14 subject
areas, or vertical content channels, that contain 137 Web sites, 250 e-mail
newsletters, 136 online discussion forums and 78 moderated e-mail discussion
lists focused solely on the Internet industry. During the month of September
2000, we delivered approximately 170 million page views to over 3 million unique
visitors and 28.8 million copies of our e-mail newsletters to 4 million
subscribers, and 29.5 million postings were generated by 134,000 subscribers to
our moderated e-mail discussion lists.
We generate revenues from the following sources:
o advertising on our Web sites, e-mail newsletters, online discussion
forums and moderated e-mail discussion lists;
o e-commerce agreements and offerings;
o permission based opt-in e-mail list rentals;
o seminars and Internet breakfast forums;
o paid subscription services;
o licensing of our editorial content, brands and software;
o online press release distribution services; and
o venture fund management fees.
We barter a portion of the unsold advertising impressions generated by our
network for advertising and promotion in media properties owned by Penton Media,
Inc. and other third parties. In addition, internet.com barters portions of
unsold advertising impressions for equity interests in certain of our venture
funds' portfolio companies. We did not record the effects of this barter in our
financial statements for the nine months ended September 30, 1999. Beginning in
January 2000, in accordance with Emerging Issues Task Force Issue No. 99-17,
"Accounting for Advertising Barter Transactions," we have prospectively recorded
revenues and expenses from barter transactions at their estimated fair values.
Revenues related to barter transactions were approximately $1.2 million and $3.1
million for the three and nine months ended September 30, 2000,
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respectively. Expenses related to barter transactions were $565,000 and $1.7
million for the three and nine months ended September 30, 2000, respectively.
For the three and nine months ended September 30, 2000, approximately 65%
and 70%, respectively, of our revenues were from the sale of advertising. We
recognize advertising revenue ratably in the period the advertising is
displayed, provided that we have no significant remaining obligations and
collection of the resulting receivable is probable. Such obligations typically
include guarantees of a minimum number of advertising impressions, or the number
of times an advertisement is displayed. We use a direct sales force to sell
advertising to companies and advertising agencies.
Our e-commerce agreements and offerings generally include advertising on
our Web sites, bounties for new customers or revenue sharing for sales made by
the e-commerce vendors as a result of links from our network, or in some cases a
combination of advertising, bounties 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.
Through a third-party agent, we currently offer for rental our permission
based opt-in e-mail list names relating to 229 Internet-specific topics. Members
of our community of Internet users volunteer, or "opt in," to be included on
these lists to receive e-mail product offerings and information relevant to
their Internet interests. Subscribers to these permission based opt-in e-mail
lists receive e-mail announcements of special offers relating to each topic
subscribed. We generate revenues on a per use basis for the rental of our list
names. Revenue from permission based opt-in list rentals is recognized at the
time of use by the renter.
Our seminars generate revenues from attendee registrations, as well as
from advertiser and vendor sponsorships. Proceeds from the sale of attendee
registrations and advertiser and vendor sponsorships are deferred and recognized
as revenue at the time the seminars are held. In addition, internet.com
offers Internet breakfast forums on a monthly basis in cities in which it has
news bureaus in the United States, as well as overseas where internet.com has
international editions. Proceeds from the sale of sponsorships and table top
exhibitions are deferred and recognized at the time the breakfast forums are
held.
Paid subscription services relate primarily to customer subscriptions to
our paid e-mail newsletters and services, 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. Revenues are recognized ratably over the
period of the licensing agreements.
Online press release distribution revenues are generated through
InternetNewsBureau.com, which we acquired in October 1999. We distribute e-mail
based press releases to over 5,600 registered journalists. Revenues are
recognized at the time of distribution.
Venture fund management fees relate to management fees earned for the
day-to-day operation and general management of internet.com Venture Fund I LLC,
internet.com Venture Fund II LLC and internet.com Venture Partners III LLC.
Management fees are recognized ratably over the period the services are
rendered. In addition, internet.com is entitled to 20% of the realized gains
from portfolio investments.
From July 1995 through September 30, 2000, we made 66 acquisitions of
Internet media properties, consisting of 80 Web sites, 85 e-mail newsletters, 99
online discussion forums and 64 moderated e-mail discussion lists. We expect to
continue to pursue strategic acquisitions to strengthen our content offerings
and services. All of internet.com's acquisitions have been accounted for as
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purchases. Consequently, as of September 30, 2000 we had approximately $69.9
million of goodwill, net, which is being amortized over three years.
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
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, 1999 AND 2000
REVENUES. Revenues were approximately $4.1 million for the three months
ended September 30, 1999 and approximately $14.7 million for the three months
ended September 30, 2000, representing an increase of 258%. Revenues relate
to advertising on our network of Web sites, e-mail newsletters, online
discussion forums and moderated e-mail discussion lists; e-commerce
agreements and offerings; permission based opt-in e-mail list rentals;
seminars and Internet breakfast forums; paid subscription services;
licensing; online press release distribution services; and venture fund
management fees. While we anticipate that advertising revenues will continue
to represent a majority of our revenues for the foreseeable future, we
believe that revenues from e-commerce agreements and offerings, permission
based opt-in e-mail list rentals, seminars, paid subscription services,
licensing, online press release distribution services and venture fund
management fees 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 approximately $2.0 million for the three months ended
September 30, 1999 and approximately $6.3 million for the three months ended
September 30, 2000, representing an increase of 211%. This change was primarily
due to the increased hiring of editorial, technology and operations personnel
and expenses for freelance contributors. The increase was offset by
capitalization of certain costs under the Emerging Issues Task Force Issue No.
00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), of $409,000 for
the three months ended September 30, 2000. As a percentage of revenues, cost of
revenues was 49% for the three months ended September 30, 1999 and 43% for the
three months ended September 30, 2000. We anticipate that our cost of revenues
will continue to increase in absolute dollars as we continue to expand our
existing content offerings and services. 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 approximately $2.1 million for the three months ended September 30, 1999
and approximately $4.8 million for the three months ended September 30, 2000,
representing a 129% increase. This change was primarily due to increased hiring
of advertising sales personnel and the recording of barter advertising. As a
percentage of revenues, advertising, promotion and selling expenses were 51% for
the three months ended September 30, 1999 and 33% for the three months ended
September 30, 2000. 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
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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 provisions for
losses on accounts receivable. General and administrative expenses were
approximately $1.1 million for the three months ended September 30, 1999 and
approximately $2.6 million for the three months ended September 30, 2000,
representing a 128% increase. This change was primarily due to the hiring of
additional personnel and increased provisions for losses on accounts receivable.
As a percentage of revenues, general and administrative expenses were 27% for
the three months ended September 30, 1999 and 17% for the three months ended
September 30, 2000. We expect that our general and administrative expenses will
continue to increase in absolute dollars, but these expenses are expected to
decrease as a percentage of revenues. We anticipate hiring additional general
and administrative personnel.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment was
$224,000 for the three months ended September 30, 1999 and $578,000 for the
three months ended September 30, 2000, representing a 158% increase. As a
percentage of revenues, depreciation of property and equipment was 5% for the
three months ended September 30, 1999 and 4% for the three months ended
September 30, 2000. Amortization of intangibles was approximately $2.3 million
for the three months ended September 30, 1999 and approximately $6.7 million for
the three months ended September 30, 2000, representing a 186% increase. This
increase was primarily due to the amortization of acquired Web sites and related
Internet media properties. As a percentage of revenues, amortization of
intangibles was 57% for the three months ended September 30, 1999 and 46% for
the three months ended September 30, 2000. We anticipate that depreciation and
amortization will continue to increase as we acquire additional Web sites,
e-mail newsletters, online discussion forums, 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.
MINORITY INTEREST. Minority interest represents the minority stockholders'
proportionate share of losses of internet.com's majority-owned consolidated
international subsidiaries.
EQUITY LOSS FROM INTERNATIONAL AND VENTURE FUND INVESTMENTS, NET. Equity
losses represent internet.com's net equity interests in the investments in
international joint ventures and the internet.com venture funds. Equity losses
from international joint ventures were $176,000 for the three months ended
September 30, 2000. Equity losses from the internet.com venture funds were
$390,000 for the three months ended September 30, 2000.
LOSS ON INVESTMENTS, NET. During the three months ended September 30,
2000, internet.com determined that the declines in value from internet.com's
accounting basis for certain of our investments in internet.com venture fund
portfolio companies was other than temporary. internet.com recognized losses
totaling $157,000 to record its investments at the lower of their cost or
estimated current fair value as of September 30, 2000.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense
that related to borrowings under a line of credit, was $465,000 for the three
months ended September 30, 1999. Interest income was approximately $1.2 million
for the three months ended September 30, 2000.
PROVISION FOR INCOME TAXES. internet.com recorded a provision for income
taxes of $49,000 for the three months ended September 30, 2000 related to
foreign income tax liabilities which were recorded based upon estimated foreign
tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES. Revenues were approximately $8.6 million for the nine months
ended September 30, 1999 and approximately $36.5 million for the nine months
ended September 30, 2000, representing an increase of 325%. Revenues relate
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to advertising on our network of Web sites, e-mail newsletters, online
discussion forums and moderated e-mail discussion lists; e-commerce
agreements and offerings; permission based opt-in e-mail list rentals;
seminars and Internet breakfast forums; paid subscription services;
licensing; online press release distribution services; and venture fund
management fees.
COST OF REVENUES. Cost of revenues primarily consists of expenses
associated with editorial, communications infrastructure and Web site hosting.
Cost of revenues was approximately $4.9 million for the nine months ended
September 30, 1999 and approximately $16.1 million for the nine months ended
September 30, 2000, representing an increase of 225%. This change was primarily
due to the increased hiring of editorial, technology and operations personnel
and expenses for freelance contributors. The increase was offset by
capitalization of certain costs under EITF 00-2, of $409,000 for the three
months ended September 30, 2000. As a percentage of revenues, cost of revenues
was 57% for the nine months ended September 30, 1999 and 44% for the nine months
ended September 30, 2000.
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 approximately $4.6 million for the nine months ended September 30, 1999 and
approximately $13.4 million for the nine months ended September 30, 2000,
representing a 189% increase. This change was primarily due to increased hiring
of advertising sales personnel and the recording of barter advertising. As a
percentage of revenues, advertising, promotion and selling expenses were 54% for
the nine months ended September 30, 1999 and 37% for the nine months ended
September 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of salaries, professional fees, facilities costs and provisions for
losses on accounts receivable. General and administrative expenses were
approximately $2.7 million for the nine months ended September 30, 1999 and
approximately $6.7 million for the nine months ended September 30, 2000,
representing a 144% increase. This change was primarily due to the hiring of
additional personnel and increased provisions for losses on accounts receivable.
As a percentage of revenues, general and administrative expenses were 32% for
the nine months ended September 30, 1999 and 18% for the nine months ended
September 30, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment was
$413,000 for the nine months ended September 30, 1999 and approximately $1.4
million for the nine months ended September 30, 2000, representing a 250%
increase. As a percentage of revenues, depreciation of property and equipment
was 5% for the nine months ended September 30, 1999 and 4% for the nine months
ended September 30, 2000. Amortization of intangibles was approximately $6.4
million for the nine months ended September 30, 1999 and approximately $16.4
million for the nine months ended September 30, 2000, representing a 157%
increase. This increase was primarily due to the amortization of acquired Web
sites and related Internet media properties. As a percentage of revenues,
amortization of intangibles was 74% for the nine months ended September 30, 1999
and 45% for the nine months ended September 30, 2000.
NON-CASH COMPENSATION CHARGE. In March 1999, internet.com LLC granted 4%
of its total common stock at the time to certain of its employees. As this
common stock vested upon the completion of our initial public offering ("IPO"),
we recorded an $8.0 million non-cash compensation charge concurrent with the
completion of our IPO.
MINORITY INTEREST. Minority interest represents the minority stockholders'
proportionate share of losses of internet.com's majority-owned consolidated
international subsidiaries
EQUITY LOSS FROM INTERNATIONAL AND VENTURE FUND INVESTMENTS, NET. Equity
losses represent internet.com's net equity interests in the investments in
international joint ventures and the internet.com venture funds. Equity
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losses from international joint ventures were $250,000 for the nine months ended
September 30, 2000. Equity losses from the internet.com venture funds were
$415,000 for the nine months ended September 30, 2000.
LOSS ON INVESTMENTS, NET. During the nine months ended September 30, 2000,
internet.com received 17,213 shares of GoTo.com, Inc. common stock as a
distribution from internet.com Venture Fund I LLC. internet.com recorded $72,000
in net realized gains on the disposition of its investment in GoTo.com, Inc.
During the nine months ended September 30, 2000, internet.com determined that
the declines in value from internet.com's accounting basis for certain of our
investments in internet.com venture fund portfolio companies was other than
temporary. internet.com recognized losses totaling $157,000 to record its
investments at the lower of their cost or estimated current fair value as of
September 30, 2000.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense
that related to borrowings under a line of credit, was $381,000 for the nine
months ended September 30, 1999. Interest income was approximately $3.7 million
for the nine months ended September 30, 2000.
PROVISION FOR INCOME TAXES. internet.com recorded a provision for income
taxes of $148,000 for the nine months ended September 30, 2000 related to
foreign income tax liabilities which were recorded based upon estimated foreign
tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded operations primarily with cash from
proceeds from our IPO and follow-on public equity offering, borrowings under a
line of credit and, prior to our IPO, 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. On June 30, 1999, internet.com paid the outstanding
balance under our line of credit of approximately $5.0 million and terminated
the line of credit. On February 1, 2000, we completed our follow-on public
offering of 3,750,000 shares of common stock priced at $60.00 per share, of
which 1,750,000 shares were sold by internet.com and 2,000,000 shares were sold
by Penton Media, Inc. Net proceeds received by internet.com from the follow-on
offering were approximately $98.3 million. internet.com did not receive any of
the proceeds from the sale of shares by Penton Media, Inc.
As of September 30, 2000, internet.com had total current assets of $81.4
million and total current liabilities of $18.4 million, or working capital of
$63.0 million.
Net cash used in operating activities was approximately $2.8 million for
the nine months ended September 30, 1999 and net cash provided by operating
activities was $438,000 for the nine months ended September 30, 2000. Net cash
used in operating activities for the nine months ended September 30, 1999 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 and accrued expenses. Net cash
provided by operating activities for the nine months ended September 30, 2000
was a result of a decrease in our net losses adjusted for depreciation and
amortization and increases in accounts payable offset by increases in accounts
receivable.
Net cash used in investing activities was approximately $13.3 million for
the nine months ended September 30, 1999 and $49.1 million for the nine months
ended September 30, 2000. Net cash used in investing activities was primarily a
result of acquisitions of Web sites and related Internet media properties and
capital expenditures. Included in investing activities are securities received
as a result of certain barter transactions with third parties.
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Net cash provided by financing activities was approximately $46.3 million
for the nine months ended September 30, 1999 and $98.6 million for the nine
months ended September 30, 2000. Net cash provided by financing activities was
primarily a result of net proceeds from our initial public offering, borrowings
under our line of credit and the capital contributions of members of
internet.com LLC during the nine months ended September 30, 1999 and from net
proceeds from our follow-on public offering for the nine months ended September
30, 2000.
Capital expenditures were approximately $1.2 million for the nine months
ended September 30, 1999 and approximately $2.8 million for the nine months
ended September 30, 2000. We anticipate that we will increase our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No.
133") subsequently amended by SFAS No. 137, to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative financial instruments, such as interest rate swap contracts
and foreign exchange contracts, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity, depending on whether
the derivative is being used to hedge changes in fair value or cash flows. The
adoption of SFAS No. 133 will not have a material effect on our financial
statements, as internet.com does not hold any derivative financial instruments.
As of July 1, 2000, internet.com adopted Emerging Issues Task Force
Issue 00-2, "Accounting for Web Site Development Costs." As a result,
internet.com is now capitalizing costs incurred with the development of
internal Web sites, which had previously been expensed as a component of cost
of revenues. internet.com continues to expense all costs incurred that relate to
the planning and post-implementation phases of development. These charges are
included in cost of revenues in the accompanying statements of operations.
Amounts capitalized are included in intangible assets in the accompanying
balance sheets and the related amortization is included in amortization
expense in the accompanying statements of operations. These capitalized costs
are being amortized over three years. As of September 30, 2000, internet.com
had capitalized $409,000 of Web site development costs and recorded related
amortization expense of $23,000 for the three months ended September 30, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101")
to provide guidance on the recognition, presentation, and disclosure of revenue
in financial statements. However, SAB No. 101 does not change existing
literature on revenue recognition. On June 26, 2000, the SEC staff announced
that they are delaying the required implementation date for SAB No. 101.
internet.com is now required to adopt SAB No. 101 no later than the fourth
quarter of its fiscal year ended December 31, 2000. internet.com does not
believe that the adoption of SAB No. 101 will have a material effect on its
financial condition.
ITEM 3. 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 public offerings in short-term, interest-bearing, investment grade
securities. Our transactions are generally conducted, and our accounts are
generally denominated, in United States dollars. Accordingly, we are not exposed
to significant foreign currency risk.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a description of material pending legal proceedings
affecting the Registrant, see Item 3.-Legal Proceedings
contained in the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
Item 2. CHANGES IN SECURITIES
Not Applicable
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 consolidated financial
statements)
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 11, 2000 internet.com filed a Form 8-K
under Item 2 announcing its acquisition of all the
assets of ClickZ, Inc. a Massachusetts corporation
(ClickZ) pursuant to an asset purchase agreement,
dated September 8, 2000 by and among internet.com,
ClickZ, Andrew R. Bourland and Ann M. Handley.
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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 14, 2000 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
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