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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-27537
JUPITER COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
13-4069996
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
627 BROADWAY
NEW YORK, NEW YORK 10012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER AND ZIP CODE)
(212) 780-6060
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[ ] Yes [X] No
As of November 15, 1999, there were 14,482,952 shares of the registrant's
common stock outstanding.
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JUPITER COMMUNICATIONS, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets at December 31, 1998
and September 30, 1999 (unaudited).......................... 2
Unaudited Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1998 and
1999........................................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1999....... 4
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Qualitative and Quantitative Disclosures about Market
Risk........................................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
Item 7. Signatures.................................................. 22
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
PRO FORMA
PRO FORMA AS ADJUSTED
(SEE NOTE 1(C)) (SEE NOTE 1(C))
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ ------------- --------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............... $ 216,144 $ 3,420,233 $ 3,420,233 $65,963,621
Accounts receivable, net................ 4,579,856 9,325,727 9,325,727 9,325,727
Prepaid expenses and other assets....... 797,168 3,142,100 3,142,100 3,142,100
----------- ----------- ----------- -----------
Total current assets................. 5,593,168 15,888,060 15,888,060 78,431,448
Property and equipment, net............... 1,071,432 3,845,557 3,845,557 3,845,557
Goodwill and other intangible assets,
net..................................... 54,791 987,415 987,415 987,415
Investment in Methodfive LLC.............. 26,510 -- -- --
Security deposits......................... 121,120 241,494 241,494 241,494
----------- ----------- ----------- -----------
Total assets......................... $ 6,867,021 $20,962,526 $20,962,526 $83,505,914
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'/ MEMBER'S
DEFICIENCY
Current liabilities:
Accounts payable........................ $ 1,241,618 $ 2,470,990 $ 2,470,990 $ 2,470,990
Accrued expenses........................ 208,843 1,216,754 1,216,754 1,216,754
Accrued compensation.................... 841,624 1,738,537 1,738,537 1,738,537
Deferred revenue........................ 6,677,233 15,559,865 15,559,865 15,559,865
----------- ----------- ----------- -----------
Total current liabilities............ 8,969,318 20,986,146 20,986,146 20,986,146
Deferred rent............................. 26,477 189,476 189,476 189,476
Common stock, $0.001 par value:
100,000,000 shares authorized on a pro
forma basis, 11,035,335 shares
outstanding on a pro forma basis, and
14,294,085 shares outstanding on a pro
forma, as adjusted, basis............... -- -- 11,035 14,294
Additional paid-in capital................ 3,506,265 5,306,001 318,218 62,858,347
Deferred compensation..................... -- (540,877) (540,877) (540,877)
Accumulated deficit....................... (5,635,039) (4,976,748) -- --
Accumulated other comprehensive loss...... -- (1,472) (1,472) (1,472)
----------- ----------- ----------- -----------
Total stockholders'/members' deficiency... (2,128,774) (213,096) (213,096) 62,330,292
Commitments and contingencies............. -- -- -- --
----------- ----------- ----------- -----------
Total liabilities and
stockholders'/members'
deficiency......................... $ 6,867,021 $20,962,526 $20,962,526 $83,505,914
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Strategic Planning Services........... $ 1,757,185 $ 6,385,050 $ 3,752,165 $14,551,339
Conferences......................... 2,354,321 5,339,915 4,333,342 9,892,711
Other............................... 1,013,855 946,605 2,952,900 2,627,328
----------- ----------- ----------- -----------
Total revenues................... 5,125,361 12,671,570 11,038,407 27,071,378
Cost of services and fulfillment...... 3,127,179 5,520,280 7,409,155 12,374,149
----------- ----------- ----------- -----------
Gross profit..................... 1,998,182 7,151,290 3,629,252 14,697,229
Other operating expenses:
Sales and marketing................. 841,602 3,133,782 2,155,032 7,141,861
General and administrative
expenses......................... 1,132,470 3,228,722 3,050,690 6,897,077
----------- ----------- ----------- -----------
Total other operating expenses... 1,974,072 6,362,504 5,205,722 14,038,938
----------- ----------- ----------- -----------
Net income (loss)................ $ 24,110 $ 788,786 $(1,576,470) $ 658,291
=========== =========== =========== ===========
Pro forma basic net income (loss) per
common share........................ $ -- $ 0.07 $ (0.15) $ 0.06
=========== =========== =========== ===========
Pro forma weighted average common
shares outstanding.................. 10,318,359 10,963,335 10,318,359 10,589,015
=========== =========== =========== ===========
Pro forma diluted net income per
common share........................ $ -- $ 0.06 $ (0.15) $ 0.05
=========== =========== =========== ===========
Pro forma adjusted weighted average
common shares outstanding........... 11,187,394 13,022,902 10,318,359 12,151,781
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................................... $(1,576,470) $ 658,291
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity loss from investment in Methodfive LLC.......... 16,674 26,510
Depreciation and amortization.......................... 145,059 582,570
Provision for allowance for doubtful accounts.......... (208) 37,673
Amortization of deferred compensation.................. -- 36,059
Changes in operating assets and liabilities, net of
effect of acquisition:
Increase in accounts receivable...................... (999,739) (4,783,264)
Increase in prepaid expenses and other assets........ (549,521) (2,312,110)
Increase in security deposits........................ (79,590) (120,374)
Increase in accounts payable......................... 123,034 1,079,055
Increase in accrued expenses......................... 902,387 1,837,762
Increase in deferred revenue......................... 2,047,601 8,685,650
Increase in deferred rent............................ 6,723 162,999
----------- -----------
Net cash provided by operating activities......... 35,950 5,890,821
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (498,587) (3,273,258)
Cash acquired in connection with acquisition, net......... -- 171,975
----------- -----------
Net cash used in investing activities............. (498,587) (3,101,283)
----------- -----------
Cash flows from financing activities:
Exercise of unit options.................................. -- 414,500
----------- -----------
Net cash provided by financing activities......... -- 414,500
----------- -----------
(Decrease) increase in cash and cash
equivalents.................................... (462,637) 3,204,038
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- 51
Cash and cash equivalents at beginning of period............ 1,614,050 216,144
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,151,413 $ 3,420,233
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Jupiter Communications, LLC (the "LLC") was organized on December 1, 1994
as a New York limited liability company. On October 8, 1999, the LLC was merged
with and into Jupiter Communications, Inc., a Delaware corporation ("Jupiter" or
the "Company") (see Note 4(a)). Jupiter is an internet commerce research firm
that provides companies with comprehensive views of industry trends, forecasts
and best practices. The Company's research services encompass Strategic Planning
Services, conferences, newsletters, book-length studies, and custom research
reports and provide clients and customers with focused research and strategic
planning support as they develop interactive products and services.
(b) Unaudited Interim Condensed Consolidated Financial Information
The unaudited interim condensed consolidated financial statements of the
Company as of September 30, 1999 and for the three and nine months ended
September 30, 1998 and 1999 included herein have been prepared in accordance
with the instructions for Form 10-Q under the Securities Exchange Act of 1934,
as amended, and Article 10 of Regulation S-X under the Securities Act of 1933,
as amended. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the accompanying
unaudited financial statements.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. For further
information, refer to the financial statements and notes thereto which are
included in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission in October 1999.
(c) Unaudited Interim Condensed Consolidated Pro Forma Balance Sheet
The accompanying pro forma balance sheet as of September 30, 1999 gives
effect to the Company's reorganization from a limited liability company to a "C"
corporation (see Note 1(j)) as though the reorganization had occurred as of
September 30, 1999. The Company has determined that a deferred tax asset would
result upon the reorganization to a "C" corporation. The deferred tax asset will
not be presented as a pro forma adjustment because the Company would have
provided for a valuation allowance since utilization of the deferred tax asset
is uncertain based on the Company's history of net losses.
The accompanying pro forma as adjusted balance sheet as of September 30,
1999 gives effect to the sale by the Company of 3,258,750 shares of common stock
in connection with the Company's initial public offering (the "IPO") at a price
of $21.00 per share (less underwriting discounts and estimated offering
expenses) as though the IPO had occurred as of September 30, 1999.
(d) Principles of Consolidation
The Company's unaudited condensed consolidated financial statements as of
and for the three and nine months ended September 30, 1999 include the accounts
of the Company and the accounts of Intelligence SE AB ("Intelligence"), a
Swedish research company, from July 31, 1999 (date of acquisition). The
unaudited condensed consolidated financial statements for the prior year periods
include only the accounts of Jupiter. All significant intercompany balances and
transactions have been eliminated.
(e) Foreign Currency Translation
Revenues and expenses related to the Company's foreign subsidiary were
translated at the average monthly exchange rates prevailing during the period.
The assets and liabilities of the Company's foreign
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary were translated into U.S. dollars at the rate of exchange at the
consolidated balance sheet date. The resulting translation adjustment is
reflected as a separate component of stockholders'/members' deficiency.
(f) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(g) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are being amortized on a straight-line
basis over their expected period of benefit ranging from four to five years.
Goodwill and other intangible assets are stated net of total accumulated
amortization of $95,209 and $159,236 at December 31, 1998 and September 30,
1999, respectively.
(h) Revenue and Commission Expense Recognition
Strategic Planning Services revenues are deferred and then reflected
proportionally in operations over the term of the service period, which is
generally up to one year. Conference revenues are reflected in operations when
the conference occurs. Newsletter subscriptions are deferred and then reflected
proportionally in operations over the term of the subscription, which is
generally up to one year. Book-length studies and custom research are reflected
in operations when the product is shipped.
Deferred revenue is composed of prepaid Strategic Planning Services fees to
be earned in the future over the term of the service period, prepaid conference
sponsorship/exhibition fees to be earned from conferences held after the balance
sheet date, and prepaid newsletter subscriptions to be earned in the future over
the term of the subscriptions.
The Company records prepaid commissions related to Strategic Planning
Services upon the signing of the contract and amortizes this corresponding
prepaid commission expense over the contract period in which the related
revenues are earned and amortized into income.
(i) Pro Forma Basic and Diluted Net Income (Loss) Per Common Share
Pro forma basic net income (loss) per common share is computed by dividing
net income (loss) by the pro forma weighted average number of common shares
outstanding for the period. Pro forma diluted net income per common share is
computed in the same manner except that the pro forma weighted average number of
common shares assumes the exercise and conversion of certain options. Pro forma
weighted average number of common shares gives effect to the Company's
reorganization from a limited liability company to a "C" corporation as though
the reorganization had occurred as of January 1, 1998. Net loss per share for
the nine month period ended September 30, 1998 does not include the effect of
approximately 1,790,206 unit options because their effect is anti-dilutive.
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of pro forma net income
(loss) per common share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
Pro forma basic net income (loss) per common
share..................................... $ -- $ 0.07 $ (0.15) $ 0.06
======= ======= ======= =======
Pro forma diluted net income per common
share....................................... $ -- $ 0.06 $ (0.15) $ 0.05
======= ======= ======= =======
Net income (loss)........................... $ 24 $ 788 $(1,576) $ 658
======= ======= ======= =======
Pro forma weighted average common shares
outstanding............................... 10,318 10,963 10,318 10,589
Common stock equivalents:
Unit options.............................. 869 2,060 -- 1,563
------- ------- ------- -------
Pro forma adjusted weighted average common
shares outstanding........................ 11,187 13,023 10,318 12,152
======= ======= ======= =======
(j) Income Taxes
On October 8, 1999 the LLC was merged with and into Jupiter and the Company
was reorganized as a "C" corporation for tax purposes. Accordingly, income or
loss attributed to the Company's operations prior to October 8, 1999 will be
allocated to its members to be reported on their personal tax returns. As a
result, Jupiter will not be able to offset future taxable income, if any,
against losses incurred prior to October 8, 1999.
As of October 8, 1999, income taxes will be accounted for under the asset
and liability method. Under this method, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that the tax change occurs. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
(k) Concentration of Risk
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the three and nine months ended September 30, 1998 and 1999, there were
no customers that accounted for over 10% of revenues generated by the Company,
or of gross accounts receivable at December 31, 1998 and September 30, 1999.
(l) Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1")
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which provides guidance for determining whether computer software is
internal-use software and on accounting for the proceeds of computer software
originally developed or obtained for internal use and then subsequently sold to
the public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use. SOP 98-1 will be
effective for the Company's fiscal year ending December 31, 1999. The adoption
of SOP 98-1 is not expected to have a material impact on the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. This
statement is not expected to affect the Company as it currently does not engage
or plan to engage in derivative instruments or hedging activities.
(2) ACQUISITION
Intelligence SE AB
On July 31, 1999, Jupiter acquired all of the stock of Intelligence, in
exchange for 137,000 Class B (Non-Voting) units at an aggregate value of
$808,300. The total purchase price for this transaction was approximately
$863,500 which includes expenses incurred by the Company of approximately
$55,200 related to the merger.
Of the purchase price, $133,151 was allocated to net liabilities. The
historical carrying amounts of such net liabilities approximated their fair
values. The difference between the purchase price and the fair value of the
acquired net liabilities of Intelligence was recorded as goodwill in the amount
of $996,651 and is being amortized on a straight line basis over its estimated
useful life of 4 years, the expected period of benefit.
(3) STOCKHOLDERS'/MEMBERS' DEFICIENCY
Deferred Compensation
The Company recorded deferred compensation of approximately $577,000,
representing the difference between the exercise price of unit options granted
in July 1999 and the fair value for accounting purposes of the underlying units
at the date of grant, assuming a fair value of the Company's units on the date
of grant of $11.00 per share. The $577,000 deferred compensation cost will be
amortized over the vesting period of the options. During the three months ended
September 30, 1999, the Company has amortized approximately $36,000 of the
deferred compensation.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss as of September 30, 1999 is comprised
of a loss of $1,472 related to the foreign currency translation adjustment of
Intelligence which was acquired by the Company in July 1999.
Comprehensive net income (loss) was $24,110 and ($1,576,470) for the three
and nine months ended September 30, 1998, respectively and $787,314 and $656,819
for the three and nine months ended September 30, 1999, respectively.
(4) SUBSEQUENT EVENTS
(a) Initial Public Offering
On October 14, 1999, Jupiter completed its IPO which resulted in the sale
by the Company of 3,258,750 shares of common stock at $21.00 per share. The
Company's net proceeds from the IPO, after deducting
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JUPITER COMMUNICATIONS, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underwriting discounts and estimated offering expenses, were approximately $62.5
million. On October 8, 1999, prior to the completion of the IPO, the LLC was
merged with and into Jupiter and the Company was reorganized as a "C"
corporation for tax purposes. In connection with the merger, all of the members
of the LLC exchanged their respective membership interests in the LLC for shares
of Jupiter common stock.
(b) Acquisition of New Media Holdings PTY Ltd.
In October 1999, the Company acquired all of the stock of New Media
Holdings PTY Ltd., an Australian research company, in exchange for 20,000 Class
B (Non-Voting) units at an aggregate value of approximately $320,000.
(c) Plug.in
On November 2, 1999, the Company entered into an agreement with Andrew
Rasiej, KnitMedia, Inc., a Delaware corporation, and Michael Dorf (collectively,
the "Sellers"), pursuant to which the Company purchased substantially all of the
Sellers' rights to a portion of the net profits from one of the annual
conferences sponsored by the Company. The aggregate purchase price was $3.85
million, which was paid to the Sellers through the issuance of two $1.925
million zero-coupon convertible promissory notes. Each convertible promissory
note provides for a maturity date of January 7, 2001 and allows the holder of
each convertible promissory note to convert, at any time prior to the maturity
date, all of the outstanding indebtedness into 55,000 shares of the Company's
common stock. In addition, each convertible promissory note allows the Company,
under certain circumstances, to convert all of the outstanding indebtedness into
shares of the Company's common stock and for the holder, under certain
circumstances, to redeem in cash all or a portion of the outstanding
indebtedness.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JUPITER SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED
ELSEWHERE IN THIS QUARTERLY REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. JUPITER'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH
UNDER "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
QUARTERLY REPORT, AND IN OTHER REPORTS AND DOCUMENTS FILED FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We provide research on Internet commerce. Senior executives at our client
companies utilize our research to make informed business decisions in a complex
and rapidly changing Internet economy. Our research, which is focused solely on
the Internet economy, provides our clients with comprehensive views of industry
trends, forecasts and best practices. Our analysis, supported by proprietary
data, emphasizes specific, actionable findings.
Our revenues consist of Strategic Planning Services ("SPS"), conferences
and other revenues. For the nine months ended September 30, 1999, SPS
represented approximately 53.8% of our total revenues. SPS is a combination of
proprietary written analysis, supporting data and access to our analysts. We
typically bill clients annually in advance and deliver the products and services
over the term of the contract. We also produce a wide range of conferences which
offer senior executives the opportunity to hear first-hand the insights of our
analysts and the leading decision makers in the Internet and technology
industries. Conference revenues consist of revenues from individual attendees,
sponsors, which display their logo in our conference program and/or host a
reception, and exhibitors, which receive a booth to promote their companies. For
the nine months ended September 30, 1999, conferences represented approximately
36.5% of our total revenues. Other revenues, which consist primarily of
book-length studies, newsletters and custom research, represented approximately
9.7% of our total revenues for the nine months ended September 30, 1999.
SPS contracts are renewable contracts, typically annual, and payable in
advance. Accordingly, a substantial portion of our billings is initially
recorded as deferred revenue and amortized into revenue over the term of the
contract. Commission expense related to SPS is also initially deferred and
amortized into expense over the contract period in which the related revenues
are earned and amortized into income. Our contracts are non-cancelable and
non-refundable. Billings attributable to our conferences and other products and
services are initially recorded as deferred revenue and recognized upon the
completion of the event or project.
We have experienced rapid growth since our organization, and particularly
since our decision in late 1996 to focus our business on SPS. Between 1995 and
1998, our total revenues have grown from $3.7 million to $14.8 million, a
compound annual growth rate of 59.2%. For the nine months ended September 30,
1999, our revenues were $27.1 million, representing an increase of 145.3% over
revenues of $11.0 million for the nine months ended September 30, 1998. The
number of our SPS contracts has increased from 145 as of December 31, 1997 to
768 as of September 30, 1999. Our total contract value has increased from $2.5
million on December 31, 1997 to $28.4 million on September 30, 1999. We believe
that total contract value is a meaningful measure of the volume of our business.
Total contract value represents the annualized value of all outstanding SPS
contracts without regard to the remaining duration of such contracts. Total
contract value, however, does not necessarily correlate to deferred revenue.
Deferred revenue represents unamortized revenue remaining on all outstanding and
billed contracts. As of September 30, 1999, deferred revenue related to SPS
contracts totaled $14.3 million, which was 50.2% of our total contract value as
of such date.
To date, a substantial portion of expiring SPS contracts have been renewed
for an equal or higher amount. Approximately 75% of contracts expiring during
the 12 months ended September 30, 1999 were
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renewed and approximately 96% of these contracts were renewed for an equal or
larger dollar amount. With this high customer renewal rate, we believe we have a
growing base of recurring revenues from SPS. However, this renewal rate is not
necessarily indicative of the rate of future retention of our revenue base.
We have a highly diversified client base, including companies in the
Internet, media, telecommunications, technology, financial services, retail,
travel, consumer products and professional services industries. No client
accounts for more than 2% of our total annual revenues.
Cost of services and fulfillment represents the costs associated with
production and delivery of our products and services, including the costs of
salaries, bonuses and related benefits for our research and conference
personnel, all associated editorial, travel and support services, and the costs
of producing our conferences. Sales and marketing expenses include salaries,
bonuses, employee benefits, travel expenses, promotional costs, sales
commissions and other costs incurred in marketing and selling our products and
services. General and administrative expenses include the costs of our finance
and technology groups and other administrative functions.
We have recorded deferred compensation of approximately $577,000,
representing the difference between the exercise price of unit options granted
in July 1999 and the fair value for accounting purposes of the underlying units
at the date of grant, assuming a fair value of our units on the date of grant of
$11.00 per share. The $577,000 deferred compensation cost is being amortized
over the vesting period of the options.
We have incurred net losses since our formation. Our net loss was $613,000
in 1996, $2.3 million in 1997 and $2.1 million in 1998. We have net income of
$658,000 for the nine months ended September 30, 1999. However, we expect to
incur a net loss for the full year 1999. As of September 30, 1999, we had an
accumulated deficit of $5.0 million. We expect to incur significant expenditures
in the future associated with our domestic and international expansion
strategies. In particular, we intend to continue to expand our research and
sales personnel, and we intend to continue to invest in technology, leasehold
improvements and the development of additional research practices and modules.
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues increased 147.2% to $12.7 million in the three
months ended September 30, 1999 from $5.1 million in the three months ended
September 30, 1998, and increased 145.3% to $27.1 million in the nine months
ended September 30, 1999 from $11.0 million in the nine months ended September
30, 1998. SPS revenues increased 263.4% to $6.4 million in the three months
ended September 30, 1999 from $1.8 million in the three months ended September
30, 1998, and increased 287.8% to $14.6 million in the nine months ended
September 30, 1999 from $3.8 million in the nine months ended September 30,
1998. The increases are attributable primarily to an increase in the number of
SPS contracts to 768 at September 30, 1999 from 281 at September 30, 1998 and an
increase in average contract value to $37,000 at September 30, 1999 from $25,000
at September 30, 1998. These increases reflect an increase in the number of
users at, and research services purchased by, our client companies. Total
contract value increased to $28.4 million at September 30, 1999 from $7.1
million at September 30, 1998. The SPS deferred revenue related to the contract
value at September 30, 1999 and September 30, 1998 was $14.3 million and $3.1
million, respectively.
Conference revenues increased 126.8% to $5.3 million in the three months
ended September 30, 1999 from $2.4 million in the three months ended September
30, 1998, and increased 128.3% to $9.9 million in the nine months ended
September 30, 1999 from $4.3 million in the nine months ended September 30,
1998. These revenues reflect the results of three conferences in the three
months ended September 30, 1999 and September 30, 1998, and seven conferences in
the nine months ended September 30, 1998 versus eight conferences in the nine
months ended September 30, 1999. The increases are attributable to an increase
in attendee, sponsor and exhibitor revenues and the production of an additional
conference in the nine months ended September 30, 1999.
Other revenues decreased 6.6% to $947,000 in the three months ended
September 30, 1999 from $1.0 million in the three months ended September 30,
1998, and decreased 11.0% to $2.6 million in the nine
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months ended September 30, 1999 from $3.0 million in the nine months ended
September 30, 1998. These decreases reflect our decision to focus our business
on SPS.
Cost of Services and Fulfillment. Cost of services and fulfillment
increased 76.5% to $5.5 million in the three months ended September 30, 1999
from $3.1 million in the three months ended September 30, 1998, and increased
67.0% to $12.4 million in the nine months ended September 30, 1999 from $7.4
million in the nine months ended September 30, 1998. The increases are
attributable to the overall growth of our business, in particular the increased
research staffing for new and existing research practices. Gross margin
increased to 56.4% in the three months ended September 30, 1999 from 39.0% in
the three months ended September 30, 1998, and increased to 54.3% in the nine
months ended September 30, 1999 from 32.9% in the nine months ended September
30, 1998 because the growth in our client base and new business exceeded the
growth in the cost of providing our research services and conferences.
Sales and Marketing. Sales and marketing expenses increased 272.4% to $3.1
million in the three months ended September 30, 1999 from $842,000 in the three
months ended September 30, 1998, and increased 231.4% to $7.1 million in the
nine months ended September 30, 1999 from $2.2 million in the nine months ended
September 30, 1998. As a percentage of total revenues, these expenses increased
to 24.7% in the three months ended September 30, 1999 from 16.4% in the three
months ended September 30, 1998, and to 26.4% in the nine months ended September
30, 1999 from 19.5% in the nine months ended September 30, 1998. The increases
are primarily attributable to an increased number of sales personnel and the
corresponding commission costs associated with increased revenues, as well as
increased promotional costs for our SPS products.
General and Administrative. General and administrative expenses increased
185.1% to $3.2 million in the three months ended September 30, 1999 from $1.1
million in the three months ended September 30, 1998, and increased 126.1% to
$6.9 million in the nine months ended September 30, 1999 from $3.1 million in
the nine months ended September 30, 1998. The increases were primarily
attributable to increased personnel for the finance, human resources and
operations areas, as well as costs associated with our new London office and
higher costs for additional office space in New York, and higher costs for staff
travel and professional fees. As a percentage of total revenues, these expenses
increased to 25.5% in the three months ended September 30, 1999 from 22.1% in
the three months ended September 30, 1998. This increase reflects the fact that
some of these expenses, such as personnel costs, increased at a higher rate than
our revenues. As a percentage of total revenues, these expenses decreased to
25.5% in the nine months ended September 30, 1999 from 27.6% in the nine months
ended September 30, 1998. This decrease reflects the fact that some of these
expenses, such as leasehold expenses, did not increase at the same rate as our
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $5.9 million for the
nine months ended September 30, 1999 from $36,000 for the nine months ended
September 30, 1998, due principally to changes in various balance sheet
accounts, particularly deferred revenue and accrued expenses, as well as the
fact that we had net income of $658,000 and substantially higher non-cash
expenses such as depreciation and amortization.
Net cash used in investing activities increased to $3.1 million for the
nine months ended September 30, 1999 from $499,000 for the nine months ended
September 30, 1998 due to increased capital expenditures for leasehold
improvements, other computer hardware and capitalizable software. These
expenditures were partially offset by the net cash received in connection with
the acquisition of Intelligence.
Net cash provided by financing activities increased to $415,000 for the
nine months ended September 30, 1999 from -0- for the nine months ended
September 30, 1998, due to proceeds received from the exercise of unit options.
As of September 30, 1999, we had $3.4 million in cash and cash equivalents.
We have a $3.0 million committed line of credit, secured by substantially all of
our assets, under which there were no outstanding balances as of September 30,
1999.
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On October 14, 1999 we received net proceeds of approximately $62.5 million
from our initial public offering. To date, none of the proceeds have been
utilized, and they are currently invested in short-term, highly liquid
investment-grade securities.
We expect to continue to spend throughout 1999 and 2000 on technology,
including computer system enhancements, leasehold improvements, expansion of
operations and telecommunications upgrades. We anticipate that we will continue
to increase our capital expenditures and lease commitments consistent with our
anticipated growth in operations, infrastructure and personnel. In addition, we
anticipate that we will continue to evaluate possible investments in other
businesses, and continue to expand our sales and marketing programs and conduct
more aggressive brand promotions, any of which could reduce our liquidity. We
also anticipate that we will continue to experience growth in our operating
expenses to support our revenue growth, including the continued introduction of
new practices and modules.
IMPACT OF THE YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to identify a given year. Computer programs
that have time-sensitive software may interpret the date code "00" as the year
1900 rather than the year 2000. This could result in a disruption of operations
including a temporary inability to process transactions, send invoices or engage
in other normal business activities. We maintain a significant number of
computer software systems and operating systems across our entire organization
which are potentially subject to Year 2000 problems.
Our Year 2000 concerns cover internal and external application and database
production software, internal and external production hardware, internal
infrastructure and external agents.
Internal and external application and database production software includes
all software used either directly by our clients or indirectly in support of our
clients. We have upgraded or replaced all of these systems. All of the systems
are designed to pass Year 2000 compliance tests. As of September 30, 1999,
system testing for Year 2000 compliance has been completed.
Internal and external production hardware includes the hardware that we use
to directly host our Web site, our internal servers and network hardware and our
desktop systems. We have upgraded or replaced all hardware in direct support of
our Web site. As of September 30, 1999, we have upgraded or replaced all
internal servers, network hardware and desktop systems.
Internal infrastructure consists of all hardware and software not described
above which is used in support of our internal staff. This includes all printers
and modems, the phone and voicemail systems and any common office automation
devices, including faxes and copiers. We upgraded the phone system in the second
quarter of 1999 and replaced the voicemail system in the third quarter of 1999.
As of September 30, 1999, we have upgraded or replaced all printers, modems and
common office automation devices.
External agents includes all critical hardware, software and related
systems provided by third parties. Beginning in the second quarter of 1999, we
identified critical suppliers and equipment that we depend on for our day to day
business and surveyed these external vendors as to their Year 2000 compliance.
All of our critical external vendors have responded to our Year 2000 compliance
inquiries. 85% of these external vendors have indicated that they are Year 2000
compliant, 10% have indicated that they are in the process of upgrading or
replacing their systems and 5% have indicated that they are in the process of
assessing whether their systems are Year 2000 compliant. We keep a copy of all
third party Year 2000 compliance statements that we obtain.
Our employees performed all significant work for the Year 2000 projects
described above. We did not hire any additional employees nor did we incur any
significant consulting expenses for the Year 2000 project. The cost of software
tools and consulting expenses used for detection of Year 2000 problems did not
exceed $100,000.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1998 and 1999, inflation has
not had a significant impact on our results of operations.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
IF WE ARE UNABLE TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL, THE QUALITY OF OUR
RESEARCH PRODUCTS AND SERVICES MAY DECLINE, AND OUR ABILITY TO SELL OUR PRODUCTS
AND SERVICES MAY BE HARMED.
Our success depends in large part on the continued contributions of our
senior management team, research analysts and sales representatives. As of
September 30, 1999, we had 44 research analysts and 51 sales representatives. We
expect to increase our hiring of research analysts and sales representatives
significantly in the next few years. We face intense competition in hiring and
retaining personnel from, among others, technology and Internet companies,
market research and consulting firms, print and electronic publishing companies
and financial services companies. Many of these firms have substantially greater
financial resources than we do to attract and retain qualified personnel from a
limited pool of attractive candidates. In addition, some people that we may
attempt to hire could be subject to non-competition agreements that could impede
our recruitment efforts. To the extent that we are unable to retain our existing
management, research analysts or sales representatives or that we are unable to
increase the number of research analysts and sales representatives that we hire,
our business and financial results may suffer.
BECAUSE WE HAVE RECENTLY INTRODUCED MANY OF OUR PRODUCTS AND SERVICES, YOU HAVE
LIMITED INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS.
We have recently launched many of the practices and market modules that we
offer. As a result, we have a limited operating history upon which you can
evaluate our business and the products and services that we offer. Due to our
limited operating history, it is difficult or impossible for us to predict
future results of operations. Moreover, due to our limited operating history,
any evaluation of our business and prospects must be made in light of the risks
and uncertainties frequently encountered by companies in new and rapidly
evolving markets such as ours. Many of these risks and uncertainties are
discussed elsewhere in this section. We cannot assure you that we will be
successful in addressing these risks and uncertainties. Our failure to do so
could cause our business and financial results to suffer.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND
FINANCIAL RESOURCES.
The anticipated future growth of our business will place a significant
strain on our managerial, operational and financial resources. We had 61
employees at December 31, 1996, 88 employees at December 31, 1997, 142 employees
at December 31, 1998 and 235 employees at September 30, 1999. We anticipate
hiring a substantial number of research analysts, sales representatives and
other employees in the foreseeable future to expand our product and service
offerings and to expand our sales of such products and services. We may also
decide to open additional offices in the United States and abroad. As we expand,
we expect that we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures. In addition, as we
expand we will also need to increase our employee training efforts. If we are
unable to manage our growth effectively, our business and financial results may
suffer.
WE HAVE A HISTORY OF OPERATING LOSSES WHICH MAY CONTINUE FOR THE FORESEEABLE
FUTURE.
We have incurred substantial costs to create, market and distribute our
products and services, to retain qualified personnel, including management,
research analysts and sales representatives, and to grow our business. As a
result, we incurred net losses of approximately $613,000 in 1996, $2.3 million
in 1997 and $2.1 million in 1998. We have net income of $658,000 for the nine
months ended September 30, 1999. However, we expect to incur a net loss for the
full year 1999. As a percentage of total revenues, our net losses equaled 9.8%
in 1996, 26.4% in 1997, 14.4% in 1998 and net income was 2.4% of total revenues
for the nine month period ended September 30, 1999. As of September 30, 1999,
our accumulated deficit totaled $5.0 million.
We intend to invest heavily in new products and services, leasehold and
technology improvements, new research and sales personnel and international
expansion. As a result, we will need to achieve significant revenue increases to
achieve and maintain profitability. The number of clients for our research
products and services, as well as the number of attendees to our conferences,
may grow more slowly than we anticipate or
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may even decrease in the future. In addition, even if we become profitable, we
may not sustain or increase our profits on a quarterly or annual basis in the
future.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, WHICH MAY CAUSE
VOLATILITY OR A DECLINE IN THE PRICE OF OUR STOCK.
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a variety of factors that are
outside of our control. These factors include, among others:
- the level and timing of new business and renewals of subscriptions to our
research products and services;
- changes in the market demand for research products or analysis regarding
Internet commerce;
- the levels of attendance at our Internet conferences; and
- the extent to which we experience increased competition.
The above factors could affect our quarterly as well as long-term financial
results. In particular, changes in the demand for our products, competition or
the levels of attendance at our Internet conferences each could have both
short-term and long-term adverse effects on our business.
Our revenues, expenses and operating results may also fluctuate
significantly in the future as a result of business decisions made by us. These
decisions include, among others:
- the timing of the introduction and marketing of our new research products
and services;
- the timing of our conferences;
- changes in operating expenses; and
- the timing of acquisitions and the impact on our operations and our
operating results.
The sales of our research products and services and the success of our
conferences are difficult to forecast accurately. If our revenues fall short of
expectations, we may not be able to adjust our fixed expenses. Further, as a
strategy for remaining competitive, we may have to make pricing, service or
marketing decisions that could cause our business and financial results to
suffer.
Due to all the foregoing factors and other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of
investors. In this event, the price of our common stock is likely to fall.
BECAUSE OUR REVENUES ARE SUBSTANTIALLY DEPENDENT ON THE SALE OF OUR STRATEGIC
PLANNING SERVICES, OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY IN ACQUIRING OR
RETAINING SUBSCRIBERS TO THIS PROGRAM.
Our business and financial results are dependent on our ability to attract
and retain clients for our Strategic Planning Services. In addition, our
business model assumes that we will be able to increase the level of SPS sales
over time to our existing clients. Revenues from subscriptions to SPS, as a
percentage of our total revenues, were 41.8% in 1998 and 53.8% in the nine
months ended September 30, 1999.
Our ability to acquire and retain SPS clients and our ability to increase
sales to existing clients is subject to a number of risks, including the
following:
- We may be unsuccessful in delivering high-quality and timely research
analysis to our clients;
- We may be unsuccessful in anticipating and understanding market trends
and the changing needs of our clients;
- The use of the Internet as a medium for commerce, both in the United
States and abroad, may not continue to grow as we currently anticipate;
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- Our marketing programs designed to attract and retain clients may not
succeed; and
- We may not be able to hire and retain a sufficiently large number of
research and sales personnel in a very competitive job market.
If we are unable to retain existing clients, increase sales to existing
clients or attract a significant number of new SPS clients, our business and
financial results may suffer.
OUR BUSINESS MAY SUFFER IF WE PROVE UNABLE TO ANTICIPATE MARKET TRENDS OR IF WE
FAIL TO PROVIDE INFORMATION THAT IS USEFUL TO OUR CLIENTS.
Our success depends in large part on our ability to anticipate, research
and analyze rapidly changing technologies and industries and on our ability to
provide this information in a timely and cost-effective manner. If we are unable
to continue to provide credible and reliable information that is useful to
companies engaged in online commerce, our business and financial results may
suffer.
Our research products and services, as well as our conferences, focus on
Internet commerce. Internet commerce is relatively new and is undergoing
frequent and dramatic changes, including the introduction of new products and
the obsolescence of others, shifting business strategies and revenue models, the
formation of numerous new companies and high rates of growth. Because of these
rapid and continuous changes in the Internet commerce markets, we face
significant challenges in providing timely analysis and advice. Many of the
industries and areas on which we focus are relatively new, and it is very
difficult to provide predictions and projections as to the future marketplace,
revenue models and competitive factors. In addition, many companies have not
embraced the use of the Internet as a medium for commerce and are unclear as to
how to allocate corporate resources effectively. As a result, some companies may
conclude that our research products are not useful to their businesses. Further,
the need to continually update our research requires the commitment of
substantial financial and personnel resources.
If our predictions or projections prove to be wrong, or if we are unable to
continually update our information, our reputation may suffer and demand for our
research products and services may decline. In addition, if companies do not
agree with our analysis of market trends and the areas on which we choose to
focus our efforts, our business and financial results may suffer.
WE FACE INTENSE COMPETITION IN PROVIDING OUR RESEARCH PRODUCTS AND SERVICES, AS
WELL AS IN PRODUCING CONFERENCES, AND SUCH COMPETITION IS LIKELY TO INCREASE IN
THE FUTURE.
We may not be able to compete successfully against current or future
competitors, and the competitive pressures that we face may cause our business
and financial results to suffer. Our principal current competitor is Forrester
Research, Inc. Earlier this year, Gartner Group, Inc. announced its intention to
compete directly in providing research products related to Internet commerce. A
number of other companies compete with us in providing research and analysis
related to a specific industry or geographic area. In addition, our competitors
include information technology research firms, business consulting and
accounting firms, electronic and print publishing companies and equity analysts
employed by financial services companies.
Our ability to compete both in the United States and abroad depends upon
many factors, many of which are outside of our control. We believe that the
primary competitive factors determining success in our markets include the
quality and timeliness of our research and analysis, our ability to offer
products and services that meet the changing needs of our customers, the prices
we charge for our various research products and general economic conditions.
We expect competition to increase because of the business opportunities
presented by the growth of Internet commerce around the world. Competition may
also intensify as a result of industry consolidation, because the markets in
which we operate face few substantial barriers to entry or because some of our
competitors may provide additional or complementary services, such as consulting
services. Increased competition may result in reduced operating margins, loss of
market share and diminished value in our products and services, as well as
different pricing, service or marketing decisions.
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Our current and potential competitors include many companies that have
substantially greater financial, information gathering and marketing resources
than we have. For example, Gartner Group, Forrester Research and META Group,
Inc. each had higher revenues than we did during 1998, and each currently has
greater marketing resources than we have. This may allow them to devote greater
resources than we can to the promotion of their brand and to the development and
sale of their products and services. We cannot assure you that we will be able
to compete successfully against current and future competitors.
WE EXPECT GARTNER GROUP, OUR LARGEST SHAREHOLDER, WHICH HAS BEEN PROVIDED WITH
CONFIDENTIAL AND PROPRIETARY INFORMATION, TO COMPETE DIRECTLY WITH US AND
POSSIBLY TO USE ITS VOTING POWER IN A WAY THAT WOULD NEGATIVELY AFFECT OUR
ABILITY TO OPERATE OUR BUSINESS.
Earlier this year, Gartner Group, which historically has focused on
information technology research, announced its intention to begin offering
broader research products and services related to Internet commerce. These
products and services are likely to compete directly with the products and
services that we offer. Although Gartner Group has not been actively involved in
our day-to-day operations since it first invested in our company in October
1997, it has been provided with our confidential and proprietary data during
most of this period. As a result, Gartner Group could use our confidential and
proprietary data in developing and marketing competing products and services.
Gartner Group currently owns approximately 27.8% of our outstanding common
stock. As a result, Gartner Group could use its voting power in a way that would
negatively affect our ability to operate our business or have the effect of
delaying, deterring or preventing a change in control, or impeding a merger,
consolidation, takeover or other business combination. Gartner Group has
substantially greater financial resources than we do, which may allow it to
devote greater resources than we can to the development and sale of their
Internet commerce research.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS AND FINANCIAL RESULTS
MAY SUFFER.
Our future success depends on continued growth in the use of the Internet.
We cannot be certain that Internet usage will continue to grow at or above its
historical rates. Internet usage may be inhibited for a number of reasons,
including:
- inadequate network infrastructure;
- inconsistent quality of service; and
- lack of availability of cost-effective, high-speed service.
OUR BUSINESS MAY SUFFER IF THE USE OF THE INTERNET AS A COMMERCIAL MARKETPLACE
DOES NOT CONTINUE TO GROW.
Because our company focuses solely on Internet commerce, our future success
depends on the continued development and acceptance of the Internet as a viable
commercial medium. However, the continued development and acceptance of the
Internet as a widely-used medium for commerce and communication is uncertain. A
number of factors could prevent such continued development and acceptance,
including the following:
- unwillingness of companies and consumers to shift their purchasing from
traditional vendors to online vendors;
- security and authentication concerns with respect to the transmission of
confidential information, such as credit card numbers, over the Internet;
- privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent; and
- significant uncertainty about the demand and market acceptance for
Internet advertising and the lack of standards to measure the
effectiveness of Internet advertising.
LAWS AND REGULATIONS COULD SLOW THE GROWTH OF THE INTERNET AND NEGATIVELY AFFECT
THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MEDIUM.
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Laws and regulations regarding Internet companies and commercial
transactions conducted over the Internet could slow the growth in use of the
Internet generally and decrease the acceptance of the Internet as a commercial
medium. For example, as the popularity and use of the Internet increases, it is
possible that a number of laws and regulations may be adopted in the United
States or in other countries covering issues such as taxation, intellectual
property matters, advertising and other areas. We cannot predict the impact, if
any, that future laws or regulations may have on our business.
WE COULD FACE ADDITIONAL RISKS AND CHALLENGES IF WE CONTINUE TO EXPAND
INTERNATIONALLY.
Our business plan calls for increased international growth. Expansion into
new geographic territories requires considerable management and financial
resources and may negatively impact our near-term results of operations.
Our current international operations, as well as any future international
operations, are subject to numerous challenges and risks, including, but not
limited to, the following:
- political and economic conditions in various jurisdictions;
- fluctuations in currency exchange rates;
- tariffs and other trade barriers;
- adverse tax consequences; and
- difficulties in protecting intellectual property rights in international
jurisdictions.
We cannot assure you that one or more of these factors would not harm any
current or future international operations.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MAINTAIN OR ENHANCEAWARENESS OF THE
JUPITER BRAND OR IF WE INCUR EXCESSIVE EXPENSES ATTEMPTING TO PROMOTE THE
JUPITER BRAND.
Promoting and strengthening the Jupiter brand is critical to our efforts to
attract and retain clients for our research products, as well as to increase
attendance at our conferences. We believe that the importance of brand
recognition will likely increase due to the increasing number of competitors
entering our markets. In order to promote the Jupiter brand, in response to
competitive pressures or otherwise, we may find it necessary to increase our
marketing budget, hire additional marketing and public relations personnel or
otherwise increase our financial commitment to creating and maintaining brand
loyalty among our clients. If we fail to effectively promote and maintain the
Jupiter brand, or incur excessive expenses attempting to promote and maintain
the Jupiter brand, our business and financial results may suffer.
WE FACE POTENTIAL LIABILITY FOR INFORMATION THAT WE PUBLISH, PROVIDE AT
CONFERENCES OR DISSEMINATE THROUGH OUR RESEARCH ANALYSTS.
As a publisher and distributor of original research, market projections and
trend analyses, we face potential liability based on a variety of theories,
including defamation, negligence, copyright or trademark infringement or other
legal theories based on the nature, publication or distribution of this
information. Such claims, whether brought in the United States or abroad, would
likely divert management time and attention and result in significant cost to
investigate and defend, regardless of the merit of any such claims. The filing
of any such claims may also damage our reputation as a high-quality provider of
unbiased, timely analysis and result in client cancellations or overall
decreased demand for our products and services. In addition, if we become
subject to these types of claims and are not successful in our defense, we may
be forced to pay substantial damages. Our insurance may not adequately protect
us against these claims.
DISRUPTION OF OUR WEB SITE DUE TO SECURITY BREACHES AND SYSTEM FAILURES COULD
HARM OUR BUSINESS AND RESULT IN CLIENT CANCELLATIONS.
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Our infrastructure and the infrastructure of our service providers are
vulnerable to security breaches, computer viruses or similar disruptive problems
and system failures. These systems are also subject to telecommunications
failures, power loss and various other events. Any of these events, whether
intentional or accidental, could lead to interruptions or disruptions in the
general operation of our business. In addition, any of these events could also
lead to interruptions, delays or cessation of operation of our Web site, which
provides access to and distribution of many of our research products and
services. For example, many of our SPS clients pay us so that their employees
can read our research solely on our Web site. As a result, providing unimpeded
access to our Web site is critical to servicing our clients and providing
superior customer service. Our inability to provide continuous access to our Web
site could cause some of our clients to discontinue purchasing our research
products and services, prevent or deter some people from purchasing our research
products and services and harm our business reputation.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS.
Our future success will depend in part on the continued service of a number
of key management personnel. We do not carry key person life insurance on any of
our management personnel. The loss of key management personnel, in particular
Gene DeRose, our Chief Executive Officer, or Kurt Abrahamson, our President and
Chief Operating Officer, could harm our business and financial results.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE MAY LOSE OUR
INTELLECTUAL PROPERTY RIGHTS AND BE LIABLE FOR SIGNIFICANT DAMAGES.
We provide our proprietary research products to hundreds of different
companies throughout the world, including some companies that compete with us in
some manner. As a result, any protective steps we have taken may be inadequate
to protect our intellectual property and to deter misappropriation of the
original research and analysis that we develop. We also may be unable to detect
the unauthorized use of our intellectual property or take appropriate steps to
enforce our intellectual property rights. Moreover, effective trademark,
copyright and trade secret protection may not be available in every country in
which we offer our research products and services to the extent these
protections are available in the United States.
Our failure to adequately protect our intellectual property, either in the
United States or abroad, could harm the Jupiter brand or our trademarks, devalue
our proprietary research and analysis and affect our ability to compete
effectively. Defending our intellectual property rights could result in the
expenditure of significant financial and managerial resources, which could harm
our financial results.
Furthermore, other parties may assert claims against us that we have
misappropriated a trade secret or infringed a patent, copyright, trademark or
other proprietary right belonging to them. Any infringement or related claims,
even if not meritorious, could be costly and time consuming to litigate, may
distract management from other tasks of operating the business and may result in
the loss of significant rights and the loss of our ability to operate our
business.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OTHER COMPANIES,
SERVICES OR PRODUCTS.
We have limited experience in acquiring other companies, services or
products. As a result, we cannot assure you that we will be able to complete
future acquisitions successfully or integrate an acquired entity with our
current business. In addition, the key personnel of the acquired company may
decide not to work for us. If we make other types of acquisitions, we could have
difficulty assimilating the acquired services or products. These difficulties
could disrupt our current business, distract our management and employees,
increase our expenses and adversely affect our results of operations.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing shareholders.
OUR DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS EXERCISE SIGNIFICANT CONTROL
OVER US.
As of November 15, 1999, our executive officers and directors beneficially
owned, in the aggregate, approximately 26.0% of our common stock. In addition,
Gartner Group owned approximately 27.8% of our
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outstanding common stock. These stockholders acting together may be able to
exert substantial influence over all matters requiring approval by our
stockholders. These matters include the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger, consolidation, takeover or
other business combination.
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSES AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION.
The Year 2000 problem could harm our business and financial results. Many
currently installed computer systems and software products are coded to accept
or recognize only two-digit entries in the date code field. These systems may
interpret the date code "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies may need to be upgraded or replaced to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. Our failure to correct a Year 2000 problem could
result in an interruption in, or a failure of, aspects of our normal business
activities or operations. Any significant Year 2000 problem could require us to
incur significant unanticipated expenses to remedy these problems and could
divert management's time and attention. We consider the reasonably likely
worst-case scenario to be interruptions in telecommunications networks,
including the Internet. Due to our reliance on the Internet and other
telecommunications networks to keep in contact with our clients and for general
business uses, these interruptions could cause our business to suffer. We have
not developed a contingency plan to address Year 2000 issues.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock, or the perception that such sales
could occur. In addition, these sales also might make it more difficult for us
to sell equity securities in the future at a price that we think is appropriate,
or at all.
OUR STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS.
The market for the stocks of Internet-related companies, including ours,
has experienced extreme price and volume fluctuations. The market price of our
stock may be volatile in the future. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities class
action litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
WE HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM OUR INITIAL PUBLIC
OFFERING, WHICH WE MAY NOT USE EFFECTIVELY.
Our management will have broad discretion over the allocation of the net
proceeds from our initial public offering as well as over the timing of our
expenditures. Investors may not agree with the way our management decides to
spend these proceeds.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS, AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING.
We may need to raise additional funds in the future to fund our operations,
to expand or enhance the range of products and services we offer or to respond
to competitive pressures and/or perceived opportunities. We cannot be sure that
additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available when required or on acceptable terms, we may be
forced to cease our operations, and even if we are able to continue our
operations, our business and financial results may suffer.
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WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks arising from transactions
that are entered into in the normal course of business. These risks, which are
primarily related to interest rate changes and fluctuations in foreign exchange
rates, are not considered to be material to the Company. During the reporting
period, no events or transactions have occurred which would materially change
the information disclosed.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Changes in Securities:
In October 1999, the Company acquired all of the stock of New Media
Holdings PTY Ltd., an Australian research company in exchange for 20,000
Class B (Non-Voting) units at an aggregate value of approximately $320,000.
(b) Use of Proceeds:
The effective date of the Company's first registration statement,
filed on Form S-1 under the Securities Act of 1933 (File No. 333-84175) and
relating to the Company's initial public offering of its common stock, was
October 7, 1999. A total of 3,258,750 shares of the Company's common stock
were sold by the Company to an underwriting syndicate. The managing
underwriters were Donaldson, Lufkin & Jenrette, Deutsche Banc Alex. Brown,
Thomas Weisel Partners LLC and DLJdirect Inc. The offering commenced on
October 8, 1999 at an initial public offering price of $21.00 per share.
The closing of the offering was held on October 14, 1999. The initial
public offering resulted in gross proceeds to the Company of approximately
$68.4 million, approximately $4.8 million of which was applied to the
underwriting discount and approximately $1.1 million of which was applied
to related expenses. As a result, net proceeds of the offering to the
Company were approximately $62.5 million. None of the Company's net
proceeds of the offering were paid by the Company, directly or indirectly,
to any director, officer or general partner of the Company or any of their
associates, or to any persons owning ten percent or more of any class of
the Company's equity securities, or any affiliates of the Company. To date,
none of the proceeds have been utilized, and they are currently invested in
short-term, highly liquid investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 17, 1999, the sole stockholder of the Company, pursuant to a
written consent, approved the adoption of the Company's 1999 Stock Incentive
Plan and 1999 Employee Stock Purchase Plan. On October 1, 1999, the sole
stockholder of the Company, pursuant to a written consent, approved certain
amendments to the Company's certificate of incorporation and bylaws, and
approved the merger of Jupiter Communications, LLC, a predecessor entity of the
Company, with and into the Company.
ITEM 5. OTHER INFORMATION.
On November 2, 1999, the Company entered into an agreement with Andrew
Rasiej, KnitMedia, Inc., a Delaware corporation, and Michael Dorf (collectively,
the "Sellers"), pursuant to which the Company purchased substantially all of the
Sellers' rights to a portion of the net profits from one of the annual
conferences sponsored by the Company. The aggregate purchase price was $3.85
million, which was paid to the Sellers through the issuance of two $1.925
million zero-coupon convertible promissory notes. Each convertible promissory
note provides for a maturity date of January 7, 2001 and allows the holder of
each convertible promissory note to convert, at any time prior to the maturity
date, all of the outstanding indebtedness into 55,000 shares of the Company's
common stock. In addition, each convertible promissory note allows the Company,
under certain circumstances, to convert all of the outstanding indebtedness into
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shares of the Company's common stock and for the holder, under certain
circumstances, to redeem in cash all or a portion of the outstanding
indebtedness.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1999.
ITEM 7. SIGNATURES.
Pursuant to the requirements of the Securities Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 17, 1999
JUPITER COMMUNICATIONS, INC.
/s/ JEAN K. ROBINSON
--------------------------------------
Name: Jean K. Robinson
Title: Chief Financial Officer
(principal financial and
accounting officer)
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