<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
Commission File Number: 000-27601
---------
MEDIAPLEX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7379 94-3295822
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code) Identification No.)
177 STEUART STREET, SUITE 200, SAN FRANCISCO, CALIFORNIA 94105, (415) 808-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 7, 2000:
Common stock, par value $0.0001 per Share 35,801,985 Shares
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999.................................................................... 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited)........................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited).............................................. 5
Notes to Interim Consolidated Financial Statements (unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
Risk Factors.............................................................................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 27
Item 2. Changes in Securities and Use of Proceeds................................................. 27
Item 3. Defaults Upon Senior Securities........................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders....................................... 27
Item 5. Other Information......................................................................... 27
Item 6. Exhibits and Reports on Form 8-K.......................................................... 28
Item 7. Signature................................................................................. 29
</TABLE>
<PAGE>
MEDIAPLEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents......................................................... $ 50,297 $ 78,052
Short-term investments............................................................ 15,259 9,913
------------- ------------
Total cash, cash equivalents, and short-term investments...................... 65,556 87,965
Accounts receivable, net.......................................................... 15,348 7,629
Other current assets.............................................................. 1,155 940
Total current assets.......................................................... 82,059 96,534
Property and equipment, net....................................................... 12,483 4,039
Goodwill and intangible assets, net............................................... 25,658 2,257
Other assets...................................................................... 912 612
------------- ------------
Total assets.................................................................. $ 121,112 $ 103,442
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................................................................ $ 5,177 $ 2,030
Accrued liabilities............................................................. 14,161 9,222
Deferred revenue................................................................ 986 1,087
Capital lease obligation, current portion....................................... 133 --
Notes payable to stockholders, current portion.................................. 110 110
------------- ------------
Total current liabilities..................................................... 20,567 12,449
------------- ------------
Capital lease obligation.......................................................... 557 --
Notes payable to stockholders..................................................... 185 280
Other liabilities................................................................. 52 --
------------- ------------
Total liabilities............................................................. 21,361 12,729
Stockholder's Equity:
Preferred stock, $0.0001 par value; authorized 10,000 shares.................... -- --
Common stock, $0.0001 par value; authorized 150,000 shares;..................... 4 3
35,089 and 31,691 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively
Additional paid-in capital...................................................... 167,093 134,325
Warrants........................................................................ 2,040 2,472
Deferred stock compensation..................................................... (1,443) (6,521)
Accumulated other comprehensive loss............................................ (99) --
Accumulated deficit............................................................. (67,844) (39,566)
------------- ------------
Total stockholders' equity.................................................... 99,751 90,713
------------- ------------
Total liabilities and stockholders' equity.................................... $ 121,112 $ 103,442
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
MEDIAPLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues.................................................. $13,483 $ 6,618 $ 48,313 $ 13,941
Cost of revenues.......................................... 8,917 5,187 34,139 10,949
-------- -------- -------- --------
Gross profit............................................. 4,566 1,431 14,174 2,992
Operating expenses:
Sales and marketing...................................... 5,235 1,876 16,825 3,523
Research and development................................. 2,668 1,388 6,850 2,203
General and administrative............................... 3,084 1,804 8,080 2,886
Stock-based compensation................................. (278) 3,414 11,566 6,705
Amortization of goodwill and intangibles................. 2,188 251 2,689 502
-------- -------- -------- --------
Total operating expenses.............................. 12,897 8,733 46,010 15,819
-------- -------- -------- --------
Loss from operations.................................. (8,331) (7,302) (31,836) (12,827)
Interest income, net...................................... 1,121 173 3,558 187
-------- -------- -------- --------
Net loss.................................................. $(7,210) $ (7,129) $(28,278) $(12,640)
-------- -------- -------- --------
Beneficial conversion feature of Series C
preferred stock.......................................... -- 14,360 -- 14,360
Net loss attributable to common
stockholders............................................. $(7,210) $(21,489) $(28,278) $(27,000)
-------- -------- -------- --------
Net loss per share -
basic and diluted........................................ $ (0.21) $ (1.44) $ (0.85) $ (2.07)
-------- -------- -------- --------
Weighted average shares used to compute
net loss per share - basic and diluted................... 34,578 14,903 33,149 13,074
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
MEDIAPLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $(28,278) $(12,640)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 4,829 766
Allowance for sales credits and doubtful accounts....................................... (1,129) 1,208
Stock-based compensation expense........................................................ 11,566 6,705
Accretion of short-term investments..................................................... (820) --
Write-off of property and equipment..................................................... 486 --
Amortization of debt discount........................................................... 17 --
Changes in assets and liabilities:
Accounts receivable................................................................... (5,433) (5,687)
Other assets.......................................................................... (523) (1,177)
Accounts payable...................................................................... (993) (920)
Payables to stockholders.............................................................. -- (50)
Accrued and other liabilities......................................................... 5,263 4,648
Deferred revenue...................................................................... (101) 1,079
-------- --------
Net cash used in operating activities................................................ (15,116) (6,068)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment...................................................... (6,523) (2,003)
Purchase of short-term investments...................................................... (30,007) --
Sale of short-term investments.......................................................... 25,381 --
Acquisition, net of cash acquired....................................................... (3,357) --
-------- --------
Net cash used in investing activities................................................ (14,506) (2,003)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock........................................... -- 24,101
Proceeds from exercise of stock options, warrants, and
employee stock purchase plan............................................................ 2,080 340
Payments of capital lease obligations................................................... (103) --
Payment of notes payable - stockholders................................................. (110) (225)
-------- --------
Net cash provided by financing activities............................................ 1,867 24,216
-------- --------
Net (decrease) / increase in cash and cash equivalents............................... (27,755) 16,145
Cash and cash equivalents at beginning of period......................................... 78,052 375
-------- --------
Cash and cash equivalents at end of period............................................... $ 50,297 $ 16,520
======== ========
Non-cash financing and investing activities:
Issuance of common stock for acquisitions............................................... $ 23,769 $ 2,553
======== ========
Issuance of note payable for acquisition................................................ $ -- $430,000
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
MEDIAPLEX, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business Activities and Summary of Significant Accounting Policies
Nature of Business
Mediaplex, Inc. ("Mediaplex"), together with its subsidiary, AdWare
Systems, Inc. (the "Company") provides technology-based advertising and
marketing services and offline media-management solutions for companies and
advertising agencies that seek to optimize their marketing campaigns. Our
service offerings include planning and execution of online media and marketing
campaigns, proprietary third-party ad serving to advertisers, tracking and
reporting of an advertiser's return on investment ("ROI"), including evaluation
of online transactions, and media management applications. Our technology-based
services enable companies to deliver customized online advertising messages in
response to changes in their underlying business variables, such as inventory
levels, product pricing and customer data.
Basis of Presentation
The consolidated financial statements include the accounts of Mediaplex and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
In July 2000, Mediaplex acquired AdWare Systems, Inc., and its wholly owned
subsidiary AdWare Systems Canada, Inc. ("AdWare"), a global media management
applications service provider, for approximately $23 million in stock and $4
million in cash, from McCann-Erickson Worldwide, a subsidiary of The Interpublic
Group of Companies, Inc. The acquisition has been accounted for by the purchase
method of accounting, and accordingly the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the acquisition date. Mediaplex recorded approximately $26.0 million of goodwill
and intangible assets. The results of AdWare are included with those of
Mediaplex subsequent to the acquisition date.
The following unaudited pro forma results of operations reflect the
combined results of Mediaplex and AdWare for the nine months ended September 30,
2000 and 1999 and have been prepared as though the entities had been combined as
of January 1, 2000 and 1999, respectively. The unaudited pro forma results do
not reflect any nonrecurring charges that resulted directly from the
transaction.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Revenues ............................................................ $ 53,595 $ 20,364
Net loss ............................................................ $ (28,393) $ (28,943)
Net loss per share - basic and diluted .............................. $ (0.83) $ (2.03)
Shares used to compute net loss per share - basic and diluted ....... 34,047 14,286
</TABLE>
Reincorporation
In August 1999, we reincorporated in Delaware and changing our name to
Mediaplex, Inc. In connection with the reincorporation, we authorized (i) an
increase in the number of authorized shares of common stock to 150,000,000 and
(ii) 10,000,000 shares of undesignated preferred stock. All share data and stock
option plan information has been restated to reflect the reincorporation.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss attributable
to common stockholders for the period by the weighted average number of shares
of common stock outstanding during the period. The calculation of diluted net
loss per share gives effect to common stock equivalents; however, potential
common shares are excluded if their effect is antidilutive. Potential common
shares are composed of common stock subject to repurchase rights and incremental
shares of common stock issuable upon the exercise of stock options and warrants.
6
<PAGE>
MEDIAPLEX, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss attributable to common stockholders .......... $ (7,210) $ (21,489) $ (28,278) $ (27,000)
---------- ----------- ----------- -----------
Denominator:
Weighted average common shares ........................ 34,654 14,903 33,234 13,074
Weighted average unvested common
shares subject to repurchase .......................... (76) -- (85) --
---------- ----------- ----------- -----------
Denominator for basic and diluted calculation ......... 34,578 14,903 33,149 13,074
---------- ----------- ----------- -----------
Net loss per share-
basic and diluted ..................................... $ (0.21) $ (1.44) $ (0.85) $ (2.07)
========== =========== =========== ===========
</TABLE>
The following table sets forth common stock equivalents (potential common
stock) that are not included in the diluted net loss per share calculation above
because to do so would be antidilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average effect of
common stock equivalents:
Stock options ........................................ 6,205 7,538 8,139 6,411
Warrants ............................................. 477 766 485 786
Unvested common stock
subject to repurchase ............................... 76 100 85 100
Convertible preferred stock .......................... -- 8,097 -- 3,524
---------- ----------- ----------- -----------
6,758 16,501 8,709 10,821
========== =========== =========== ===========
</TABLE>
Interim Results and Basis of Presentation
The unaudited consolidated financial statements as of September 30, 2000
and for the three and nine month periods ended September 30, 2000 and 1999 have
been prepared by us and are unaudited. In our opinion, the unaudited
consolidated financial statements have been prepared on the same basis as the
annual consolidated financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
financial position as of September 30, 2000 and the results of our operations
for the three and nine month periods ended September 30, 2000 and 1999 and cash
flows for the nine month periods ended September 30, 2000 and 1999. The
financial data and other information disclosed in these notes to the interim
consolidated financial statements related to these periods are unaudited. The
results for the three and nine month period ended September 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal year ending December 31, 2000. The balance sheet at
December 31, 1999 has been derived from the audited financial statements at that
date.
7
<PAGE>
MEDIAPLEX, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. It is suggested that these
unaudited consolidated financial statements be read in conjunction with our
audited financial statements and notes thereto for the year ended December 31,
1999 as included in our report on Form 10-K, as amended, filed on April 28,
2000. Certain reclassifications have been made to the prior period's financial
statements to conform to the current period presentation.
2. Recently Issued Accounting Standards
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of Accounting Principles Board (APB)
Opinion No. 25." FIN No. 44 clarifies the application of APB Opinion No. 25
regarding the definition of employee for purposes of applying APB Opinion No.
25, the criteria for determining whether a plan qualifies as a noncompensatory
plan, the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. This interpretation was
effective July 1, 2000. We do not anticipate that this interpretation will have
a material impact on our financial position, results of operations or cash
flows.
In November 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment Charges." In
December 1999, the SEC issued SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of impairment
charges. SAB No. 101 expresses the views of the SEC staff in applying
accounting principles generally accepted in the United States to certain revenue
recognition issues. We do not anticipate that these SABs will have a material
impact on our financial position, results of operations or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedge accounting when certain conditions are
met. SFAS No. 133 is effective for the Company in fiscal 2001. Although we have
not fully assessed the implications of SFAS No. 133, we do not believe the
adoption of this statement will have a material effect on our financial
position, results of operations or cash flows.
3. Amended and Restated 1999 Stock Plan
For the three month period ended September 30, 2000, we granted
approximately 700,000 stock options under the Amended and Restated 1999 Stock
Plan at exercise prices ranging from $4.25 to $20.75 per share, based on the
fair market value of the underlying common stock at the respective times of
grant.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with our condensed consolidated financial
statements and the notes to such statements included elsewhere in this quarterly
report. This discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, these forward-
looking statements are typically denoted in this quarterly report by words such
as "anticipates," "believes," "plans," "expects," "future," "intends" and
similar expressions. This quarterly report also contains forward-looking
statements attributed to certain third-parties relating to their estimates
regarding the growth of online spending, online use and online advertising
spending. Prospective investors should not place undue reliance on these
forward-looking statements, which apply only as of the date of this quarterly
report. These forward-looking statements involve risks and uncertainties.
Mediaplex's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, as more fully
described in the "Risk Factors" section on page 14 and elsewhere in this
quarterly report. We undertake no obligation to update publicly any forward-
looking statements for any reason, even if new information becomes available or
other events occur in the future.
OVERVIEW
We provide technology-based advertising and marketing services for
companies and advertising agencies that seek to optimize their Internet
marketing campaigns. In the second quarter of 1998, we began generating revenues
from our advertising campaign management services. Our campaign management
services include online media planning and buying, and tracking, analyzing and
reporting the results of the media campaign. In the second quarter of 1999, we
began utilizing our mobile Java objects, or MOJO, architecture to enhance our
service offerings and expand our business. We plan to broaden our revenue
sources by leveraging the capabilities of our MOJO architecture to offer message
management services, which enable advertisers to integrate their internal
business information into an online advertising campaign and to tailor their
advertising messages or offers in real time. To date, we have not generated
significant revenues from message management services. With our recent
acquisition of AdWare Systems, Inc., we also offer a suite of capabilities
ranging from agency accounting to digital asset management.
We currently provide advertising campaign management services for a fixed
fee, which varies from client to client. This fee is principally based on the
extent of services provided and the direct cost of media placement. This cost of
purchasing advertising space on an Internet site is typically determined by the
cost per thousand impressions. Revenues from advertising campaign management
services are recognized in the period that advertising impressions are
delivered, or placed on an Internet site, provided that no significant
obligations on our part remain at the end of the period and the collection of
the resulting receivable is probable. Our obligations often include, for
instance, guarantees of a minimum number of impressions. To the extent that
significant obligations remain, we defer recognition of the corresponding
portion of the revenues until these obligations are met.
We also generate revenue from application management services and
professional services. Application management services revenue consists of
monthly recurring fees for hosting services and is recognized as the services
are performed. Our application management services provide customers rights to
access applications, hardware for the application access, customer service, and
rights to upgrades and updates. Our customers do not have the right to take
possession of the software at any time during the hosting agreement. Contracts
for application management services that exceed designated minimum monthly or
quarterly volume usage are recognized as revenue in the month or quarter in
which minimum volume is exceeded.
In addition, we may generate revenues from clients obtained through or
referred to us by an ad agency. If an ad agency is used, we will usually bill
the ad agency for work done on behalf of the agency's clients, and the ad agency
will then be responsible for obtaining full payment from the client. We expect
the percentage of our total revenues that we obtain from clients referred to us
by ad agencies to increase in
9
<PAGE>
future periods. To date, we have paid no referral fees to any ad agencies, nor
have any ad agencies paid referral fees to us, for referring clients. However,
we expect to pay referral fees to ad agencies in a limited number of cases. In
addition, we may receive referral fees in the future.
Cost of revenues consists primarily of the cost of procuring advertising
space on third-party Internet sites, the costs and expenses associated with
maintaining the systems for our application management services, and, to a
lesser extent, of the telecommunications and other costs related to maintaining
our ad servers at third-party locations. These costs are recorded in the period
that the advertising impressions are delivered and the related revenues are
recorded. Currently, we purchase advertising space on Internet sites for a
particular media campaign. In the future, we may enter into purchase commitments
to obtain advertising space in bulk without a particular media campaign
identified in order to obtain more favorable pricing.
Until December 31, 1999, we expensed all of our research and development
costs in the period in which we incur these costs, since the period from
achievement of technological feasibility to the general availability of our
software to clients has been short, and therefore software development costs
qualifying for capitalization have been insignificant. For the nine months ended
September 30, 2000, we capitalized $140,000 in software development costs.
In March 1999, we acquired Netranscend Software, Inc., a Java-based
business automation solutions software company, for a note payable of $430,000,
due in four annual installments beginning in March 2000, and 1,979,000 shares of
common stock, with an estimated fair value of $1.29 per share. This acquisition
was accounted for under the purchase method of accounting. We recorded $3.0
million of goodwill and other identifiable intangible assets in connection with
this acquisition, which are being amortized over a three-year period.
In July 2000, we acquired AdWare Systems, Inc., a global media management
applications service provider, for 1,211,921 shares of common stock with an
estimated fair value of $23 million and $4 million in cash, from McCann-Erickson
Worldwide, a subsidiary of The Interpublic Group of Companies, Inc. The
acquisition has been accounted for by the purchase method of accounting. We
recorded $26.1 million of goodwill and other identifiable intangible assets in
connection with this acquisition, which are being amortized over a three-year
period.
We have a limited operating history upon which you may evaluate our
business and prospects. We incurred net losses of $2.0 million in 1998, $21.8
million in 1999, and $28.3 million for the nine month period ended September 30,
2000. At September 30, 2000, our accumulated deficit was $67.8 million, which
includes a non-cash charge of $14.4 million related to the beneficial conversion
feature incurred for the issuance of our Series C preferred stock. We anticipate
that we will incur additional operating losses for the foreseeable future.
Results of Operations
Revenues. Revenues increased to $13.5 million for the three months ended
September 30, 2000 from $6.6 million for the three months ended September 30,
1999. Revenues increased to $48.3 million for the nine months ended September
30, 2000 from $13.9 million for the nine months ended September 30, 1999. The
period-to-period increase was primarily due to the growth of our of selling
advertising campaign management services to a broad set of advertisers,
including advertising agencies, as well as the revenue generated by our wholly-
owned subsidiary.
Cost of Revenues. Cost of revenues increased to $8.9 million, or 66.1% of
revenues, for the three months ended September 30, 2000 from $5.2 million, or
78.4% of revenues, for the three months ended September 30, 1999. Cost of
revenues increased to $34.1 million, or 70.7% of revenues, for the nine months
ended September 30, 2000 from $10.9 million, or 78.5% of revenues, for the nine
months ended September 30, 1999. The increase in cost of revenues in 2000 was
primarily due to the increase in our revenues.
10
<PAGE>
Gross Profit. Gross profit increased to $4.6 million, or 33.9% of revenues,
for the three months ended September 30, 2000 from $1.4 million, or 21.6% of
revenues, for the three months ended September 30, 1999. Gross profit increased
to $14.2 million, or 29.3% of revenues, for the nine months ended September 30,
2000 from $3.0 million, or 21.5% of revenues, for the nine months ended
September 30, 1999. The increase in the gross profit in 2000 was due to a shift
in our mix of services with an increase in our message management services, as
well as the greater margins realized from our wholly-owned subsidiary.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation expenses, including salaries, commissions and related payroll
expenses, recruiting costs, and marketing expenses, including those expenses
associated with customer service and support. Sales and marketing expenses
increased to $5.2 million, or 38.8% of revenues, for the three months ended
September 30, 2000 from $1.9 million, or 28.3% of revenues, for the three months
ended September 30, 1999. Sales and marketing expenses increased to $16.8
million, or 34.8% of revenues, for the nine months ended September 30, 2000 from
$3.5 million, or 25.3% of revenues, for the nine months ended September 30,
1999. The increase in sales and marketing expenses during 2000 was primarily
due to the significant growth of our sales and marketing organization as we
focused on selling advertising campaign management services. The number of
sales and marketing personnel increased from 53 as of September 30, 1999 to 129
as of September 30, 2000. We expect that sales and marketing expenses will
continue to increase.
Research and Development. Research and development expenses consist
primarily of compensation and related expenses for our internal development
staff and fees for contractor services. Research and development expenses
increased to $2.6 million, or 19.8% of revenues, for the three months ended
September 30, 2000 from $1.4 million, or 21.0% of revenues, for the three months
ended September 30, 1999. Research and development expenses increased to $6.8
million, or 14.2% of revenues, for the nine months ended September 30, 2000 from
$2.2 million, or 15.8% of revenues, for the nine months ended September 30,
1999. This increase in research and development expenses was due primarily to an
increase in the number of development engineers in our research and development
organization. The number of development engineers increased from 36 as of
September 30, 1999 to 111 as of September 30, 2000. We expect to continue to
spend significant amounts on research and development as we continue to develop
and upgrade our technology. Accordingly, we expect that research and development
expenses will continue to increase.
General and Administrative. General and administrative expenses consist
primarily of compensation and related expenses and fees for contractor services.
General and administrative expenses increased to $3.1 million, or 22.9% of
revenues, for the three months ended September 30, 2000 from $1.8 million, or
27.3% of revenues, for the three months ended September 30, 1999. General and
administrative expenses increased to $8.1 million, or 16.7% of revenues, for the
nine months ended September 30, 2000 from $2.9 million, or 20.7% of revenues,
for the nine months ended September 30, 1999. The increase in general and
administrative expenses was due primarily to the hiring of general and
administrative personnel. We had 20 general and administrative personnel as of
September 30, 1999 and 57 persons as of September 30, 2000. We expect that
general and administrative expenses will continue to increase, but to continue
to decrease as a percentage of revenue.
Stock-based Compensation. For the three months ended September 30, 2000 we
recaptured $278,000, or 2.1% of revenues, of stock-based compensation. This was
primarily due to the recapturing of previously expensed stock-based compensation
on options that were cancelled unvested due to voluntary employee terminations
during the quarter. Stock-based compensation expense was $3.4 million, or 51.6%
of revenues, for the three months ended September 30, 1999. Stock-based
compensation expense increased to $11.6 million, or 23.9% of revenues, for the
nine months ended September 30, 2000 compared to $6.7 million, or 48.1% of
revenues, for the nine months ended September 30, 1999. For accounting
purposes, we recognize stock-based compensation in connection with the issuance
of shares of our common stock and the granting of options or warrants to
purchase our common stock to employees and consultants where the purchase or
exercise prices are less than the fair market value at the grant date. Stock-
based compensation related to the issuance of shares of common stock has been
expensed in the period in which the common stock was issued. Stock-based
compensation related to the issuance of options and warrants to purchase common
stock is being amortized over the vesting period of the stock options. Total
deferred stock
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compensation as of September 30, 2000 was $1.4 million. The deferred stock
compensation associated with 33,333 options requires remeasurement at the end of
each period until the options are fully vested in April 2001 and is directly
related to the then current fair value of our common stock. Therefore, as our
stock price increases, the stock-based compensation or the amortization of these
deferred stock compensation amounts will proportionately increase.
Amortization of Goodwill and Intangible Assets. Amortization expense was
$2.2 million, or 16.2% of revenues, for the three months ended September 30,
2000 compared to $251,000, or 4.0% of revenues, for the three months ended
September 30, 1999. Amortization expense is due to the amortization of goodwill
and intangible assets recorded in connection with our acquisitions of
Netranscend Software, Inc. in March 1999 and AdWare Systems, Inc. in July 2000.
Amortization expense increased to $2.7 million, or 5.6% of revenues, for the
nine months ended September 30, 2000 from $502,000, or 3.6% of revenues, for the
nine months ended September 30, 1999.
Interest Income, Net. Interest income, net increased to $1.1 million, or
8.3% of revenues, for the three months ended September 30, 2000 compared to
$173,000, or 2.6% of revenues, for the three months ended September 30,1999.
Interest income, net increased to $3.6 million, or 7.4% of revenues, for the
nine months ended September 30, 2000 compared to the $187,000, or 1.3% of
revenues, for the nine months ended September 30, 1999. This increase primarily
represents interest earned on the cash and cash equivalents and short-term
investments we generated in 1999 from the initial public offering of our common
stock.
Net Loss. Net loss was $7.2 million for the three months ended September
30, 2000, and $7.1 million for the three months ended September 30, 1999. Net
loss was $28.3 million for the nine months ended September 30, 2000, and $12.6
million for the nine months ended September 30, 1999. Our net loss for the three
months ended September 30, 2000 did not increase substantially compared to our
net loss for the three months ended September 30, 1999, primarily due to the
increase in gross profit, the increase in net interest income, and the
recapturing of the stock-based compensation. The increase in net loss of $15.6
million from the nine months ended September 30, 1999 to the nine months ended
September 30, 2000 was primarily due to the increase in operating expenses of
$30.2 million, which includes an increase in non-cash stock-based compensation
and amortization of goodwill expenses of $7.0 million.
Beneficial Conversion Feature of the Series C Convertible Preferred Stock.
In August 1999, Mediaplex issued 4,000,000 shares of Series C convertible
preferred stock at a purchase price of $3.59 per share. These shares were
converted into shares of common stock on a one-for-one basis. Because the
conversion price was less than our initial public offering price, the Series C
preferred stock was deemed to have an embedded beneficial conversion feature.
This feature allows the holders to acquire common stock at a purchase price
below its deemed fair value. The amount of the discount assigned to the
beneficial conversion feature is limited to the amount of the proceeds.
Consequently, the issuance and sale of the Series C preferred stock resulted in
a beneficial conversion feature of $14.4 million, which has been reflected as a
preferred dividend in our 1999 statement of operations.
Liquidity and Capital Resources
From our inception in September 1996 through October 1999, we financed our
operations primarily through the private placements of preferred stock, which
has generated net proceeds of $24.2 million. In November 1999, we completed an
initial public offering of our common stock, which generated net proceeds of
$75.5 million. As of September 30, 2000, we had $50.3 million in cash and cash
equivalents and $15.3 million in short-term investments.
Net cash used in operating activities for the nine months ended September
30, 2000 and 1999 was $15.1 million and $6.1 million, respectively. Net cash
used in operating activities in each of these periods was primarily the result
of net losses before non-cash charges and net increases in accounts receivable,
offset by increases in accrued liabilities.
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Net cash used in investing activities for the nine months ended September
30, 2000 and 1999 was $14.5 million and $2.0 million, respectively. Net cash
used in investing activities in both periods presented was due to the
acquisition of computer equipment and software and the investment of our
proceeds from the public offering of our common stock into short-term
investments.
Net cash provided by financing for the nine months ended September 30, 2000
and 1999 was $1.9 million and $24.2 million, respectively. In the nine months
ended September 30, 2000, the cash provided by financing activity primarily
consisted of proceeds generated from the exercise of stock options, warrants and
the employee stock purchase plan. In the nine months ended September 30, 1999,
net cash provided by financing activities was primarily due to issuance of
shares of our preferred stock.
In connection with our acquisition of Adware, a payment to McCann-Erickson
of $4 million was made in July 2000. Although we have no material commitments
for capital expenditures, we anticipate an increase in the rate of capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We believe that our current level of cash and cash
equivalents will be sufficient to meet our anticipated liquidity needs for
working capital and capital expenditures for at least twelve months from
September 30, 2000. After that time, we may need additional funds to expand or
to meet all of our operating needs. Our forecast of the period of time through
which our financial resources will be adequate to support operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary materially as a result of the factors described above. If we
require additional capital resources to grow our business internally or to
acquire complementary technologies and businesses, we may seek to sell
additional equity or debt securities or secure a bank line of credit. The sale
of additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us.
New Accounting Pronouncements
Mediaplex continually assesses the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in the notes to the unaudited interim condensed consolidated
financial statements in this quarterly report on Form 10-Q.
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RISK FACTORS
Set forth below and elsewhere in this quarterly report and in the other
documents we file with the Securities and Exchange Commission are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this
quarterly report.
Risks Related to Our Company
Our limited operating history makes financial forecasting and evaluation of
our business difficult.
We were founded in 1996 and only began selling our advertising campaign
management services in April 1998. In mid-1999, we began deploying our MOJO
technology in client advertising campaigns. In the nine months ended September
30, 2000, we employed portions of our MOJO technology in 41 clients' campaigns.
Consequently, we have only slightly more than one year of relevant operating
history upon which you may evaluate our operations and financial prospects. Our
limited operating history makes it difficult to forecast our future operating
results, and for you to evaluate our future revenue and income potential, as
well as your investment in our common stock. In particular, our limited
operating history makes it difficult to evaluate our ability to:
. purchase appropriate media space at reasonable costs;
. attract new advertisers and maintain current client relationships;
. achieve effective ad campaign results for our clients;
. develop new relationships and maintain existing relationships with
advertising agencies, our marketing alliance partners and other third
parties;
. continue to develop and upgrade our MOJO platform and other technology to
keep pace with the growth of the Internet advertising industry and
changes in technology; and
. continue to expand the type of services we offer.
We have a history of losses, expect future losses and may never become
profitable.
We have not achieved profitability in any period to date and, given the
level of planned operating and capital expenditures, we expect to continue to
incur losses and negative cash flows for the foreseeable future. Our accumulated
deficit as of September 30, 2000 was approximately $67.8 million. We incurred
losses of $28.3 million in the nine months ended September 30, 2000, $21.8
million for the year ended December 31, 1999 and $2.0 million for the year ended
December 31, 1998. If our revenues decrease or grow more slowly than we
anticipate, or if our operating expenses exceed our expectations and cannot be
adjusted accordingly, our business will be harmed. Furthermore, if we are unable
to generate a long-term profit, we will eventually have to cease operations.
Variations in quarterly operating results, due to factors such as changes in
demand and the mix of services we provide, may cause our stock price to
decline.
It is possible that in future periods our results of operations will be
below the expectations of securities analysts. If so, the market price of your
shares would likely decline. Our quarterly operating results have fluctuated in
the past and are likely to continue to do so in the future. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance and should not be relied upon to predict
our future performance or our stock price.
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Our quarterly revenues, expenses and operating results could vary
significantly from quarter-to-quarter for several other reasons, many of which
are beyond our control. These factors include:
. demand for our advertising services and mix of services we provide;
. addition of new or loss of current advertisers and advertising agencies;
. decisions by advertisers or advertising agencies to implement or delay
campaigns;
. amount of advertising spending by current advertisers and advertising
agencies;
. deployment of new services we may offer;
. changes in availability and pricing of advertising space;
. changes in our pricing policies or the pricing policies of our
competitors; and
. costs related to acquisitions of technology or businesses.
Our current and future expense estimates are based, in large part, on
estimates of future revenues, which are difficult to predict, and on our
investment plans. In particular, we plan to increase our operating expenses
significantly in order to expand our sales and marketing operations, to enhance
our proprietary software and to expand internationally. We may be unable to, or
may elect not to, adjust spending quickly enough to offset any unexpected
revenues shortfall. If these expenses are not accompanied by increased revenues,
our results of operations and financial condition would be harmed.
Further, we are subject to employer payroll taxes when an employee
exercises non-qualified stock options. The employer payroll taxes are assessed
on each employee's gain, which is the difference between the price of our common
stock on the date of exercise and the exercise price. These employer payroll
taxes will be recorded as operating expenses in the period those options are
exercised based on the aggregate gains realized by employees. During a
particular period, these payroll taxes could be material. However, because we
are unable to predict our future stock price and the number of optionees who may
exercise during any particular period, we cannot predict what, if any, expense
will be recorded in a future period and the impact on our future financial
results.
Our revenues depend upon a few key clients, and if we lose a major client, our
revenues may be significantly reduced.
Our revenues have been derived from a limited number of advertisers and
advertising agencies that use our services. Our quarterly and annual results of
operations would be harmed by the loss of any of these clients. In 1999,
ShopNow.com and DATEK Online accounted for approximately 12% and 10% of our
annual revenues, respectively. In the first nine months of 2000, no individual
client accounted for more than 10% of our revenues to date. In addition, one
customer accounted for 12% of our outstanding accounts receivable at December
31, 1999. At September 30, one ad agency through which we perform services for
advertisers, accounted for 15% of our outstanding accounts receivable. We expect
that some of these entities may continue to account for a significant percentage
of our revenues for the foreseeable future. Advertisers typically purchase
advertising that runs for a limited time under short-term arrangements ranging
from 30 days to one year. Currently only a limited number of our clients
purchase our advertising services under a long-term contract. Current
advertisers may not continue to purchase advertising from us or we may not be
able to successfully attract additional advertisers. In addition, the non-
payment or late payment of amounts due to us from a significant advertiser or ad
agency could harm our financial condition. This risk of non-payment may be even
greater in cases where no formal contract is in place, such as with certain
AdWare clients. Further, our advertising agency customers may develop online
message management capabilities in-house, thus eliminating their need for our
services.
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We could be held liable for failing to comply with current federal, state and
foreign laws governing consumer privacy or our own stated privacy policies.
Failure to comply with applicable foreign, federal and state laws and
regulatory requirements of regulatory authorities may result in, among other
things, indemnification liability to our clients and the advertising agencies we
work with, administrative enforcement actions and fines, class action lawsuits,
cease and desist orders, and civil and criminal liability. Our stated privacy
policy is to not maintain, share, or sell any personally identifiable data or
anonymous user profile information, and our clients retain the sole and
exclusive right to use any data that they have obtained through explicit
permission from an Internet user. Our failure to comply with this stated policy
could result in similar consequences under federal and state fair trade acts.
The Federal Trade Commission and state attorneys general have been
investigating Internet service providers regarding their use of personal
information. Recently, class action lawsuits have been filed alleging violations
of privacy laws by Internet service providers. In October 1998, the European
Union adopted a directive addressing data privacy that may result in limitations
on our ability to collect and use information regarding Internet users. These
restrictions may limit our ability to target advertising in most European
countries. Our failure to comply with these or other federal, state or foreign
laws could result in liability and materially harm our business.
Future governmental or industry restrictions or regulations related to
privacy on the Internet could limit the effectiveness and reduce the demand
for Internet advertising.
Federal and state legislatures have recently proposed limitations on the
collection and use of information regarding Internet users. For instance, one
proposed restriction would require Web sites to obtain the permission of their
Web visitors before aggregating, sharing or selling any information related to
those Web visitors. Similarly, the high-technology and direct marketing
industries are considering various new, additional or different self-regulatory
standards. If the gathering of profiling information were to be curtailed,
Internet advertising would be less effective, which would reduce demand for
Internet advertising and harm our business.
We may be held liable for our clients' non-compliance with privacy
regulations or their own stated privacy policies.
Our customers are also subject to various federal and state regulations
concerning the collection and use of information regarding individuals. These
laws include the Children's Online Privacy Protection Act, the Federal Drivers
Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley
Act, as well as other laws that govern the collection and use of consumer credit
information. We cannot assure you that our clients are currently in compliance,
or will remain in compliance, with these laws and their own privacy policies. We
may be held liable if our clients use our technology in a manner that is not in
compliance with these laws or their own stated privacy standards.
If we fail to establish, maintain and expand our business and marketing
alliances, our ability to grow could be limited, we may not achieve desired
revenues and our stock price may decline.
In order to grow our business, we must generate, retain and strengthen
successful business and marketing alliances with companies in industries
including:
. Internet and traditional media advertising;
. business software;
. enterprise resource planning;
. Web site development and consulting; and
. information technology consultants.
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We depend, and expect to continue to depend, on our business and marketing
alliances, which are companies with which we have written or oral agreements to
work together to provide services to our clients, to refer business from their
clients and customers to us. If companies with which we have business and
marketing alliances do not refer their clients and customers to us to perform
their online campaign and message management, our revenues and results of
operations would be severely harmed. We currently expect that a significant
amount of our future revenues will need to be generated through these
relationships. In addition, if companies with which we have business and
marketing alliances do not provide high quality products and services to our
mutual clients, our sales could suffer. We have little control over the amount
of resources these companies will devote to online advertising or referring
their clients to our services. We may not be able to generate and maintain
adequate relationships to offset the significant resources that are necessary to
develop marketing efforts to reach clients of our business and marketing
alliances.
AdWare has two primary business partnerships that have an impact on our
ability to deliver needed functionality to our customers. The first is with
Strata, the company whose radio pre-buy product is integrated with AdWare SPOT.
Radio pre-buy is an integral part of broadcast media buying functionality. A
loss of that partnership would necessitate the development of an entirely new
product that would require resources and time. The second is with IBM; loss of
this partnership might damage our reputation and negatively impact our ability
to drive revenues in the digital asset management arena.
We are substantially dependent upon our technologies, including both our MOJO
and AdWare technologies, for our future revenues, and if our technologies do
not generate revenues, our business may fail.
We believe that our future revenues are substantially dependent on the
acceptance by clients of the use of our technologies, which we believe to be the
cornerstone of our business. If our technologies do not perform as anticipated
or otherwise do not attract clients to use our services, our operations will
suffer. We began using our MOJO technology to provide advertising and direct
marketing services in April 1999, and have only used portions of it in 41
clients' campaigns as of September 30, 2000. We have only recently introduced
message management services using our MOJO technology and these services remain
largely untested. To date, we have not generated any material revenue from
message management. In addition, we have incurred and will continue to incur
significant expense developing our technologies. If our revenues generated from
the use of our technologies do not cover these development costs, our financial
condition would suffer.
Our MOJO technology is relatively new and untested; if our MOJO technology
does not perform as anticipated, we would need to devote significant
resources to address defects, and our reputation could be damaged.
Our MOJO technology is complex and has had, and may have in the future,
errors, defects or performance problems. In particular, we may encounter
problems when it is more broadly used or when it is updated to expand and
enhance its capabilities. Although we have internally tested our MOJO technology
extensively, we have only used portions of it in 41 clients' campaigns as of
September 30, 2000. Consequently, our technology may still malfunction or suffer
from design defects. If our technology malfunctions or contains such defects,
our services may not be reliable or compatible in certain online environments
used by our clients. In such instances, we would need to devote significant
resources to address these defects, and any problems could result in lost
revenues and damage to our reputation.
If our technologies suffer from design defects, we may need to expend
significant resources to address resulting product liability claims.
Our business will be harmed if our technologies suffer from design defects
and, as a result, we become subject to significant product liability claims.
Technology as complex as ours may contain design defects which are not
detectable even after extensive internal testing. Such defects may become
apparent only after widespread commercial use. Our contracts with our clients
currently do not contain provisions to limit our exposure to liabilities
resulting from product liability claims. Although we have not experienced any
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product liability claims to date, we cannot assure you that we will not do so in
the future. A product liability claim brought against us which is not adequately
covered by our insurance could materially harm our business.
If we fail to effectively manage our growth, our management and resources
could be strained and our ability to capture new business could suffer.
We have grown significantly since our inception and expect to grow quickly
in the future. Future expansion could be expensive and strain our management and
other resources. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business plan
successfully in the rapidly evolving advertising market. Our failure to manage
this growth could seriously harm our business. We have increased our number of
employees from 109 at September 30, 1999 to 297 at September 30, 2000. In
addition, we anticipate that we will expand international operations in the
future.
The loss of our key personnel, including our chief executive officer and
president, or any inability to attract and retain additional personnel, could
affect our ability to grow our business.
Our future success depends to a significant extent on the continued service
of our key senior management, technical and professional service and support
personnel. The loss of the services of any member of our management team, in
particular our chief executive officer and president , would harm our business.
We have employment agreements with only some of our key senior management,
namely, Gregory R. Raifman, Jon L. Edwards, Don Fitzpatrick, Minna Vallentine,
Michael Waltermyer, and William Hewitt, however, any of these individuals could
terminate their employment with us anytime. All of our other employees are at-
will. Because of the substantial competition for qualified personnel , we could
suffer substantial attrition and could lose key members of our management. We
would also be harmed if one or more of our officers or key employees decided to
join a competitor or otherwise compete with us. In addition, because many of our
executives have only recently joined us, our management team has only worked
together for a short time and may not work effectively together.
Our future success also depends on our continuing ability to attract,
retain and motivate highly skilled employees. Competition for qualified
personnel in the high technology industry is intense, particularly in the San
Francisco Bay area of Northern California, where our principal offices are
located. If we fail to hire and retain a sufficient number of sales, marketing,
technical, service and support personnel, we will not be able to maintain or
expand our business.
Our sales and implementation cycle is lengthy, which could divert our
financial and other resources, and is subject to delays, which could result
in delayed revenues.
If the sales and implementation cycle of our services is delayed, our
revenues will likewise be delayed. Our sales and implementation cycle is
lengthy, causing us to recognize revenues long after our initial contact with a
client. During our sales effort, we spend significant time educating prospective
clients on the use and benefit of our campaign and message management services.
As a result, the sales cycle for our products and services is long, ranging from
a few weeks to several months for our larger clients. The sales cycle for our
message management services and media management applications is likely to be
longer than the sales cycle for our other current campaign management services
because we believe that clients may require more extensive approval processes
related to integrating internal business information with their advertising
campaigns. In addition, in order for a client to implement our services, the
client must commit a significant amount of resources over an extended period of
time. Furthermore, even after a client purchases our services, the
implementation cycle is subject to delays. These delays may be caused by factors
within our control, such as possible technology defects, as well as those
outside our control, such as clients' budgetary constraints, internal acceptance
reviews, functionality enhancements, lack of appropriate customer staff to
implement our media management applications and the complexity of clients'
advertising needs. Also, failure to deliver service or application features
consistent with delivery commitments could result in a delay or cancellation of
the agreement.
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Sustained or repeated system failures could significantly disrupt our
operations, cause client dissatisfaction and reduce our revenues.
The continuing and uninterrupted performance of our computer systems is
critical to our success. Our operations depend on our ability to protect our
computer systems against damage from fire, power loss, water damage,
telecommunications failures, viruses, vandalism and other malicious acts, and
similar unexpected adverse events, including earthquakes. Although we maintain
system backup and auxiliary systems to mitigate the damage from the occurrence
of any of these events, we may not have taken adequate steps to guard against
every difficulty that could occur. In the event of a sustained data center
outage, our ability to recover is predicated on the execution of disaster
recovery agreements with third parties. Clients may become dissatisfied by any
system failure that interrupts our ability to provide our services to them,
including failures affecting the ability to deliver advertisements quickly and
accurately to the targeted audiences. Sustained or repeated system failures
would reduce significantly the attractiveness of our solutions to advertisers.
In addition, interruptions in our services could result from the failure of
our telecommunications providers to provide the necessary data communications
capacity in the time frame required. Our ad network operations and computer
hardware is primarily housed with third-party providers of Internet
communication services located in Sunnyvale and San Jose, California, McLean,
Virginia and Hamburg, Germany. In addition, the failure of any advertising
server system such as ours, including failures that delay the delivery of
advertisements to Internet sites, could reduce client satisfaction and severely
harm our business, results of operations and financial condition.
In the past, users have occasionally experienced difficulties due to
software incompatibility or system failures unrelated to our systems. In
particular, on two occasions our network operations and computer hardware
located in San Francisco experienced power failures that affected our ability to
deliver our ad serving services for fifteen minutes and one hour, respectively.
On another occasion, the same facility had network routing problems that caused
a high number of retries to serve ads, which slowed down our ad serving
operations. A separate facility suffered a denial of service attack, causing an
outage for several hours. Although these disruptions have not had a material
effect on our business, any further disruption in the Internet access provided
by third-party providers or any failure of third-party providers to handle
higher volumes of user traffic could seriously harm our business, results of
operations and financial condition.
Our technology has not yet been fully tested at higher capacities, and
capacity constraints could reduce our advertising revenues.
The volume of advertising delivered through our servers has increased from
1 million impressions per day in January 1999 to up to a high of 85 million
impressions per day as of September 30, 2000, representing approximately 55% of
our capacity at that date. Although to date we have not had difficulties in
meeting demand for our services, further increases in the volume of advertising
delivered through our servers could strain the capacity of our MOJO technology
platform, which could lead to slower response times or system failures. This
would adversely affect the availability of advertisements, the number of
impressions received by advertisers and our advertising revenues. If we do not
effectively address capacity constraints or system failures, our business,
results of operations and financial condition would be harmed.
The expected benefits of our recent acquisition of AdWare may not be realized,
and we may have difficulties in integrating the personnel, operations and
technology of AdWare.
In July 2000, we acquired AdWare Systems, Inc., a global media management
applications service provider. We anticipate that as a result of this
acquisition, we will be able to offer agencies, advertisers and other partners a
more complete online-to-offline media-management solution. However, achieving
this may depend in part on the integration of our and AdWare's personnel,
operations and technology. The integration of Mediaplex and AdWare will be a
complex, time consuming and expensive process and may disrupt both businesses if
not completed in a timely and efficient manner. We have no experience in
integrating operations on the scale presented by the acquisition. The
integration process will be complicated by the need to integrate different
operations, multiple executive offices and different corporate
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cultures. It is uncertain whether we can successfully integrate AdWare in a
timely manner or at all, or that any of the anticipated benefits will be
realized. Failure to do so could materially harm our business and operations.
If we are unable to maintain key business partnerships, future revenue will
be adversely affected.
AdWare has two primary business partnerships that have an impact on our
ability to deliver needed functionality to our customers. The first is with
Strata Marketing, Inc., the company whose radio pre-buy product is integrated
with AdWare SPOT. Radio pre-buy is an integral part of broadcast media buying
functionality. A loss of that partnership would necessitate the development of
an entirely new product that would require resources and time. The second is
with IBM; loss of this partnership might damage our reputation and negatively
impact our ability to drive revenues in the digital asset management arena.
Should we choose to substantially increase our presence in the digital asset
management arena, we will need to gain 100% ownership of the AdVISUAL
intellectual property partially owned by our development partner, ImageSoft.
Currently, AdWare shares ownership of the AdVISUAL code with ImageSoft.
AdWare and ImageSoft hold joint copyrights in AdVisual, AdVisual Capture, and
AdVisual 2.0. Should ImageSoft choose not to focus on and invest in AdVISUAL in
the future, the current customer base will be negatively impacted and our
reputation may be damaged. Gaining full control of AdVISUAL would require
purchasing ImageSoft's share of the intellectual property.
Loss of our office space in New York and Louisville may negatively impact
AdWare's productivity.
The leases for both New York and Louisville AdWare facilities remain in the
name of AdWare's previous owner, McCann Ericson Worldwide. Negotiations are
currently underway to determine whether AdWare will be permitted to remain in
those facilities. Because the training centers at both facilities are used for
much of the new customer training, a loss of these centers would negatively
impact AdWare's ability to deliver the necessary training. Leasing of new
training center locations would be at a higher rental rate than currently
incurred.
Acquisitions or strategic investments may divert our management's attention
and consume resources necessary to sustain our business.
We intend to continue pursuing selective acquisitions of businesses and
technologies to complement our current business. Any future acquisition or
investment may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt, and
amortization expenses related to goodwill and other intangible assets. In
addition, acquisitions involve numerous risks, any of which could harm our
business, operating results or financial condition including:
. difficulties in the integration and assimilation of the operations,
technologies, services and personnel of an acquired business;
. diversion of management's attention from other business concerns;
. unavailability of favorable financing for future acquisitions; and
. potential loss of key employees in any acquired business.
If we fail to develop new technology-based services or improve our existing
technology-based services to adapt to the changing needs and standards of the
Internet advertising industry, sales of our services will decline.
The Internet advertising markets are characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing client demands. The introduction
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of new services embodying new technologies and the emergence of new industry
standards and practices could render our existing services obsolete and
unmarketable or require unanticipated investments in research and development.
Our failure to adapt successfully to these changes could harm our business,
results of operations and financial condition.
Our future success will depend on our ability to adapt to rapidly changing
technologies, to enhance existing technologies and to partner or develop and
introduce a variety of new technology-based services to address our clients'
changing demands. For example, AdWare must quickly rearchitect certain of its
products into web-enabled products in order to stay ahead of our competition.
Additionally, advertisers may require the ability to deliver advertisements
utilizing new rich media formats and more precise consumer targeting techniques.
Further, increased availability of broadband Internet access is expected to
enable the development of new services that take advantage of this expansion in
delivery capability. We may also experience difficulties that could delay or
prevent the successful design, development, introduction or marketing of our
technology-based services. In addition, any new technologies or enhancements
that we develop must meet the requirements of our current and prospective
clients and must achieve significant market acceptance. Material delays in
introducing new technology-based services and enhancements may cause clients to
forego purchases of our services and purchase those of our competitors.
A key component of our strategy is to enhance the return on investment and
other performance measurements for our advertiser and advertising agency
clients. We have limited experience in implementing and following such a
strategy and this strategy may not succeed.
We intend to expand our international sales efforts but do not have
substantial experience in international markets.
We intend to expand our international sales effects in the future. We
expect to initiate operations in selected international markets in the future.
As of September 30, 2000, we had not generated any significant revenues from
international operations. We have limited experience in marketing, selling and
supporting our services abroad, and we consequently may not be successful in
these international markets. Expansion into international markets will require
extensive management attention and resources.
We also may enter into a number of international alliances as part of our
international strategy and rely on these prospective business alliances to
conduct operations, establish local networks, aggregate Internet sites and
coordinate sales and marketing efforts. Our success in international markets
will depend on the success of our business alliances and their willingness to
dedicate sufficient resources to our relationships. In the future, any
international operations we commence will be subject to other risks, including:
. difficulties and costs of staffing and managing foreign operations;
. seasonal reductions in business activity;
. the impact of recessions in economies outside the United States;
. privacy laws and regulations outside the United States;
. changes in regulatory requirements;
. export restrictions, including export controls relating to encryption
technology;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences;
. political and economic instability;
. tariffs and other trade barriers; and
. fluctuations in currency exchange rates.
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Our failure to address these risks adequately may severely harm our ability to
expand our operations internationally.
If others claim that we are infringing their intellectual property, we could
incur significant expenses or be prevented from selling our services.
Third parties may claim that we are infringing their intellectual property
rights. In particular, third parties may claim that our MOJO technology, on
which our success depends in large part, infringes their intellectual property
rights. The intellectual property rights of others may cover some of our
technology. Claims of intellectual property infringement might require us to
enter into royalty or license agreements; however, we may not be able to obtain
royalty or license agreements on terms acceptable to us, or at all. We also may
be subject to significant damages or an injunction against the use of our
services.
If any claims of infringement are brought against us, we could incur
significant expenses defending against those claims, and suffer additional
damages if our defense is not successful. Any litigation regarding our
intellectual property could be costly and time-consuming and divert the
attention of our management and key personnel from our business operations. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. A successful claim of patent or other
intellectual property infringement against us would immediately harm our
business and financial condition.
We may not be able to protect our technology from unauthorized use, which
could diminish the value of our services, weaken our competitive position and
reduce our revenues.
Our success depends in large part on our proprietary technology, including
our MOJO platform. In addition, we believe that our Mediaplex and MOJO
trademarks are key to identifying and differentiating our services from those of
our competitors. We may be required to spend significant resources to monitor
and police our intellectual property rights. If we fail to successfully enforce
our intellectual property rights, the value of our services could be diminished
and our competitive position may suffer.
We rely on a combination of patent, copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect our proprietary rights. Third-party software providers could copy or
otherwise obtain and use our technology without authorization or develop similar
technology independently which may infringe our proprietary rights. We may not
be able to detect infringement and may lose competitive position in the market
before we do so. In addition, competitors may design around our technology or
develop competing technologies. Intellectual property protection may also be
unavailable or limited in some foreign countries.
We generally enter into confidentiality or license agreements with our
employees, consultants, vendor clients and corporate partners, and generally
control access to and distribution of our technologies, documentation and other
proprietary information. Despite these efforts, unauthorized parties may
attempt to disclose, obtain or use our services or technologies. Our
precautions may not prevent misappropriation of our services or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
Risks Related to Our Industry
Inadequate security on the Internet could limit the effectiveness of and
reduce the demand for our services and technology.
The failure of the Internet to continue to develop as a medium for the
purchase of goods and services would decrease the demand for online advertising.
Concerns over the security of transactions conducted over the Internet and the
privacy of consumers may inhibit the growth of the Internet and online
advertisers. Our clients generally have implemented security features to protect
the privacy and integrity of the data collected from their users. However, this
information may be susceptible to hacker interception, break-ins and disruption.
If any of these were to occur, or if a well-publicized compromise of security
were
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to occur, Internet usage may not increase at the rate we expect and,
consequently, our services would be perceived as less effective or desirable by
our clients.
Increased usage of filtering software could limit the effectiveness of and
reduce the demand for our services and technology.
Visitors to Web sites on which our advertising messages are placed may not
be aware that information regarding them is being collected by third-party data
profiling companies. There currently exists software that can limit the
effectiveness of data profiling technology in capturing information for a
particular visitor to a Web site. Widespread use of this limiting or inhibiting
technology would decrease the effectiveness of our services for our clients that
are dependent upon the reliability of the information we obtain from profiling
companies, which would decrease the attractiveness of those services to our
clients. If this occurs, our business would be significantly harmed.
Our business model and ability to generate significant revenues depend upon
broad market acceptance of Internet advertising.
Our business model relies on revenues generated primarily by providing
Internet advertising services to response-oriented advertisers. The Internet as
an advertising medium has not been in existence for a sufficient period of time
to demonstrate its effectiveness. Internet advertising, as well as technology-
based methods for targeting advertising and tracking, measuring and reporting
the results of Internet advertising may not achieve broad market acceptance. Our
ability to generate significant revenues from advertisers will depend, in part,
on our ability to:
. demonstrate to advertisers that advertising on the Internet will add
value and increase marketing effectiveness;
. attract and retain advertisers and advertising agencies by
differentiating the services and technology we offer; and
. obtain adequate available advertising inventory from a large base of
Internet sites.
Intense competition in the Internet advertising industry could reduce our
ability to gain clients and might require us to reduce prices, which could
reduce our revenues.
We face intense competition in the Internet advertising services industry.
Our primary competitor for providers of online media planning and buying
services is Avenue A, and our primary competitor for third party ad serving is
DoubleClick. We have terminated our contractual relationship with DoubleClick
and, as a result, we expect competitive pressure from DoubleClick to increase in
the future.
The following categories represent current and potential competition:
. providers of online media planning and buying services, such as Avenue A;
. ad serving companies, such as AdForce, DoubleClick and Engage
Technologies;
. publisher networks that provide services directly to clients, such as
Flycast Communications, Adsmart, and 24/7 Media;
. organizations that manage affiliate programs, such as LinkShare; and
. advertising agencies that have or elect to develop in-house online media
management capabilities, such as Lowe Interactive.
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We believe that our ability to compete depends upon many factors both within
and outside of our control, including:
. the effectiveness, ease of use, performance and features of our
technology;
. client perceptions of the effectiveness of our services and technology;
. the price of our services;
. our ability to service our clients effectively over a broad geographic
basis; and
. the timing and acceptance of new services and enhancements to existing
solutions developed by us or our competitors.
The intense competition among Internet sites has led to the creation of a
number of pricing alternatives for Internet advertising. These alternatives make
it difficult for us to project future levels of advertising revenues and
applicable gross margins that can be sustained either by us or the Internet
advertising industry in general.
We expect competition to continue to increase in our industry because there
are no substantial barriers to entry. In particular, advertising agencies
without in-house online media management capabilities, including those with
which we currently work, may develop these capabilities in the future. We
believe that, in addition, competition will continue to increase as a result of
industry mergers, partnerships and consolidations. For example, AdForce and
Flycast have recently been acquired by CMGI, AdKnowledge has recently been
acquired by Engage Technologies, a subsidiary of CMGI, and NetGravity has
recently been acquired by DoubleClick. As we expand internationally, we expect
to face competition from internationally-based competitors such as Mindshare
Digital and Publicis Technology, as well as our domestic competitors with
international operations, such as BBDO Interactive, Leo Burnett and The
Interpublic Group. Companies doing business on the Internet, including ours,
must also compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets. Advertisers may be reluctant to devote a
significant portion of their advertising budget to Internet advertising if they
perceive the Internet to be a limited or ineffective advertising medium. In
addition, as we expand the scope of our Internet advertising and direct
marketing services, we may compete with a greater number of Internet sites and
other media companies across a wide range of different Internet services.
Competitive pressures could prevent us from growing, reduce our market share or
require us to reduce prices on our services, any of which could harm our
business.
Many of our existing competitors have significantly greater financial,
technical, marketing, service and other resources, have a larger installed base
of users, have been in business longer or have greater name recognition than we
do. Some of our competitors' services may be more effective than our services
at performing particular functions or be more customized for particular needs.
Some large companies may attempt to build functions into their services that are
similar to functions of our services. Even if these functions are more limited
than those provided by our services, those services could discourage potential
clients from purchasing our services, as well as lead to price reductions that
could harm our revenues. In addition, companies larger than ourselves may be
more successful in purchasing advertising space.
Seasonality and cyclical spending may cause fluctuations in our quarterly
revenue, which may cause us to miss our revenue projections and result in a
decline in our stock price.
We believe that our revenues will be subject to seasonal fluctuations
because advertisers generally place fewer advertisements during the first and
third calendar quarters of each year. In addition, expenditures by advertisers
tend to be cyclical, reflecting overall economic conditions as well as budgeting
and buying patterns. A decline in the economic prospects of advertisers or the
economy generally could cause companies to discontinue, delay or reduce online
advertising spending. These events could reduce the demand for our services and
cause a decline in our stock price.
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Potential clients in specific industries may require us to refuse business
from their competitors, limiting our business opportunities and stunting our
revenue growth.
To use our services most effectively, advertisers must integrate their
internal business data into their advertising campaigns to deliver a targeted
message. This type of integration may raise privacy concerns and prompt our
clients to require us to contract with them exclusively within their specific
industry. If our clients impose these restrictions on us, our potential client
base and revenue growth would be limited.
To fully utilize our MOJO-based services, we must have access to our
clients' proprietary business data. Many companies are wary of third parties
having access to their business information, because access by third parties
increases the risk that confidential business data may become known, even if
unintentionally, to outsiders who are not the intended recipients of the data.
These privacy concerns may be so great as to prompt our clients to attempt to
contractually prohibit us from managing the online advertising campaigns of
their competitors. If our potential client base in a particular industry was
limited in this way, our business and future revenues could be harmed. To date,
a few clients have requested that we do not service their competitors; however,
we have not agreed to these requests. To address our clients' concerns, we have
established procedures to ensure the protection of our clients' data, such as
the use of separate teams to work with each client and the use of separate,
secure servers for clients' advertising and message campaigns where a conflict
may exist. However, we cannot assure you that these measures will be adequate
for our clients to continue to use our services.
Government regulation and legal uncertainties of doing business on the
Internet may inhibit the commercial acceptance of the Internet and result in
decreased demand for our services.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. These regulations could affect the
costs of communicating on the Internet and adversely affect the growth in use of
the Internet. In turn, these regulations could result in decreased demand for
our services or otherwise harm our business.
Recently, the United States Congress enacted Internet legislation regarding
children's privacy, copyrights and taxation. A number of other laws and
regulations may be adopted covering issues such as user privacy, pricing,
acceptable content, taxation and quality of products and services. This
legislation could hinder growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. In addition, the growing use of the Internet has burdened
existing telecommunications infrastructure and has caused interruptions in
telephone service. Certain telephone carriers have petitioned the government to
regulate and impose fees on Internet service providers and online service
providers in a manner similar to long distance carriers.
Due to the global nature of the Internet, it is possible that, while our
transmissions originate in California, the governments of other states or
foreign countries might attempt to regulate our transmissions or levy sales or
other taxes relating to our activities. The laws governing the Internet remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws including those
governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising. In addition, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet. Our
business could be adversely affected by the adoption or modification of laws or
regulations relating to the Internet.
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Additional Risks That May Cause Your Investment in Our Stock to Decline
Because our directors and executive officers together own a large percentage
of our voting stock, your voting power may be limited, which may prevent an
acquisition of our company or depress our stock price.
As of September 30, 2000, our executive officers and directors beneficially
owned or controlled, directly or indirectly, 16,914,649 shares of common stock,
which in the aggregate represents approximately 43.2% of the outstanding shares
of common stock. As a result, if these persons act together, they will have the
ability to control all matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any business
combination. This may delay or prevent an acquisition or affect the market price
of our stock.
We have adopted anti-takeover provisions in our charter documents that could
delay or prevent an acquisition of our company.
Our certificate of incorporation and bylaws contain provisions, such as
undesignated preferred stock, a staggered board and the restriction on the
persons that can call special board or stockholder meetings, which could make it
more difficult for a third-party to acquire us without the consent of our board
of directors. While we believe these provisions provide for an opportunity to
receive a higher bid by requiring potential acquirers to negotiate with our
board of directors, these provisions may apply even if the offer may be
considered beneficial by some stockholders.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS DURING THE REPORTING PERIOD
On July 21, 2000, we completed the acquisition of AdWare Systems, Inc. and
issued 1,211,921 shares of our common stock (valued at approximately $23
million) and $4 million cash to McCann-Erickson USA, Inc., the sole shareholder
of AdWare. The issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, because of the limited number of
investors, the sophistication and accreditation of the investor, and the manner
in which the transactions were conducted.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2000 Annual Meeting of Stockholders on June 9, 2000. At that
meeting, the stockholders approved the following proposals: (i) election of
Lawrence D. Lehihan, Jr. and Peter S. Sealey as Class I directors to serve on
the Board of Directors, (ii) ratify and approve amendments to our Amended and
Restated 1999 Stock Plan (the "Plan") to increase the number of shares reserved
for issuance thereunder by 1,000,000 shares and to provide for a higher annual
increase, to be added on the first day of the fiscal year commencing in 2001,
equal to the lesser of: (a) 2,500,000 shares, (b) 5% of the outstanding shares
of our capital stock, or (c) such lesser amount as may be determined by our
board of directors, and (iii) selection of PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending December 31, 2000.
There were 24,936,710 votes cast for and 11,310 votes withheld in
connection with the election of each of Lawrence D. Lehihan, Jr. and Peter S.
Sealey as Class I Directors. The remainder of Mediaplex's Board of Directors
remains as previously reported. There were 20,156,288 votes cast for, 2,447,898
votes cast against, 322,572 abstentions, and 2,021,262 broker non-votes in
connection with the amendments of the Plan. There were 20,156,288 votes cast
for, 9,437 votes cast against and 1,745 abstentions in connection with the
selection of PricewaterhouseCoopers LLP as independent auditors.
ITEM 5. OTHER INFORMATION
On September 15, 2000, Mediaplex issued a press release including the
announcement that Walter Haefeker had resigned from the position of Chief
Scientist. On October 16, 2000, Mediaplex issued a press release announcing
that Ruiqing ("Barclay") Jiang had resigned from the position of Chief
Technology Officer to join an industry organization.
Engineering is now being provided by our established team headed by Mark
Joseph, our former Senior Vice President of Engineering who has been promoted to
Chief Technology Officer. George Rekouts, formerly Director of Engineering for
Advanced Products, has been promoted to the position of Vice President of
Engineering and Product Development. Alan Heckman, formerly Director of
Database Systems, has been named Vice President of Research & Development.
In August, Paul Ryan changed roles from Acting Chief Financial Officer to
Vice President, E-Mail Initiative. The Board of Directors has charged its
Executive Committee with the search for a Chief Financial Officer. Until the
position is filled, our Controller and Vice President of Finance, Sameer
Prabhavalker, is handling the CFO duties.
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Attached as Exhibit 99.1 and 99.2 to this report are press releases issued
on September 15, 2000 and October 16, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
27.1 Financial Data Schedule.
99.1 Press Release Dated September 15, 2000
99.2 Press Release Dated October 16, 2000
(b) Reports on Form 8-K
We filed a Report on Form 8-K, Item 2, on August 2, 2000, announcing a
Share Acquisition Agreement, dated as of June 30, 2000, with The Interpublic
Group of Companies, Inc., a Delaware corporation ("IPG"), McCann-Erickson USA,
Inc., a Delaware corporation and wholly-owned subsidiary of IPG ("McCann") and
AdWare Systems, Inc., a Kentucky corporation and wholly-owned subsidiary of
McCann ("AdWare"), pursuant to which, on July 21, 2000, Mediaplex acquired all
of the outstanding capital stock of AdWare. As a result of the Acquisition,
AdWare became a wholly-owned subsidiary of Mediaplex. On July 21, 2000 we filed
an amendment to this Form 8-K to amend Item 7(a) and Item 7(b) and to include
certain pro forma financial statements.
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ITEM 7. SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 14, 2000 MEDIAPLEX, INC.
By: /s/ GREGORY R. RAIFMAN
-----------------------------
Gregory R. Raifman
Chairman and Chief Executive Officer
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