U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-25525
ABOUT.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-4034015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
220 EAST 42ND STREET, 24TH FLOOR
NEW YORK, NEW YORK 10017
(Address of Principal Executive Officer and Zip Code)
(212) 849-2000
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
As of May 3, 2000, there were 17,722,560 shares of the registrant's common
stock outstanding.
ABOUT.COM, INC.
FORM 10-Q
INDEX
Page
Number
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PART I FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 2000 and 1999 5
Notes to Unaudited Interim Condensed Consolidated Financial
Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 26
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 26
ITEM 2: Changes in Securities and Use of Proceeds 26
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 27
ITEM 7: Signatures 28
PART I FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements:
About.com, Inc.
Consolidated Balance Sheets
(in thousands)
March 31, 2000 December 31, 1999
------------------ ------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 46,645 $ 74,780
Short-term investments 103,628 86,937
Accounts receivable, less allowance for doubtful accounts
of $972 and $780, respectively 10,211 11,067
Prepaid and other current assets 2,777 1,354
--------- ---------
Total current assets 163,261 174,138
--------- ---------
Property and equipment, net 13,504 9,401
Goodwill and other intangibles, net 106,262 39,183
Long-term investments 13,963 14,197
Other assets, net 5,243 5,162
--------- ---------
Total assets $ 302,233 $ 242,081
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 12,745 $ 13,421
Guide fees payable 1,087 1,187
Deferred revenue 1,964 1,018
Current portion of notes payable 434 412
Current installments of obligations under capital leases 1,265 157
--------- ---------
Total current liabilities 17,495 16,195
--------- ---------
Notes payable, excluding current portion 334 695
Deferred rent 14 21
Obligations under capital leases, excluding current installments -- 10
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.001 par value; 50,000,000 shares authorized,
17,597,777 and 16,175,367 shares isssued and outstanding 18 16
Additional paid-in capital 380,848 309,755
Deferred compensation (1,598) (2,859)
Accumulated deficit (94,878) (81,752)
--------- ---------
Total stockholders' equity 284,390 225,160
--------- ---------
Commitments and contingencies -- --
Total liabilities and stockholders' equity $ 302,233 $ 242,081
========= =========
See accompanying notes to interim condensed consolidated financial statements.
About.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended March 31,
----------------------------
2000 1999
--------- ---------
(Unaudited) (Unaudited)
Revenues $ 15,807 $ 2,367
-------- --------
Cost of revenues 6,000 2,323
Non-cash compensation 5 3,616
-------- --------
Gross profit (loss) 9,802 (3,572)
-------- --------
Operating expenses:
Sales and marketing 10,986 5,438
Product development 4,658 1,153
General and administrative 3,992 1,403
Amortization of goodwill and other intangibles 5,503 --
Non-cash compensation 146 374
-------- --------
Total operating expenses 25,285 8,368
-------- --------
Loss from operations (15,483) (11,940)
-------- --------
Other income (expense), net 2,357 18
-------- --------
Net loss (13,126) (11,922)
Cumulative dividends and accretion -- (660)
-------- --------
Net loss attributable to common stockholders $(13,126) $(12,582)
======== ========
Net loss per common share - basic
and diluted $ (0.78) $ (4.07)
======== ========
Weighted average shares outstanding 16,889 3,095
======== ========
See accompanying notes to interim condensed consolidated financial statements.
About.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Three months ended March 31,
----------------------------
2000 1999
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (13,126) $(11,922)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,751 423
Non-cash compensation expense 151 3,990
Other (7) (6)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net 1,004 (554)
Other assets (1,362) (723)
Accounts payable and accrued expenses (1,431) 2,459
Guide fees payable (100) (12)
Deferred revenue 946 17
--------- --------
Net cash used in operating activities (7,174) (6,328)
--------- --------
Cash flows used in investing activities:
Cash paid for acquisitions, net of cash acquired 654 --
Purchase of marketable securities (178,007) --
Sale of marketable securities 161,550 --
Purchase of intangible assets (45) --
Capital expenditures (4,017) (1,678)
--------- --------
Net cash used in investing activities (19,865) (1,678)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock related to initial
public offering and concurrent placement, net -- 81,049
Proceeds from issuance of common stock in connection with
the exercise of options and warrants 2,248 115
Proceeds from secured credit facility -- 781
Repayment of ExpertCentral bridge loans (2,871) --
Principal payments under secured credit facility (426) (73)
Principal payments under capital leases (47) (53)
Deferred offering/financing costs -- 569
--------- --------
Net cash (used in) provided by financing activities (1,096) 82,388
--------- --------
Net (decrease) increase in cash and cash equivalents (28,135) 74,382
Cash and cash equivalents at beginning of period 74,780 10,644
--------- --------
Cash and cash equivalents at end of period $ 46,645 $ 85,026
========= ========
See accompanying notes to interim condensed consolidated financial statements.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1) Organization and Business
About.com, Inc. ("About.com" or the "Company") was incorporated in New
York on June 27, 1996 (inception) as General Internet Inc. and commenced
operations on that date. In December 1998, General Internet Inc. changed its
corporate name to MiningCo.com, Inc. and reincorporated in Delaware. In May
1999, MiningCo.com, Inc. changed its corporate name to About.com, Inc.
About.com's Internet service, About.com, is a platform comprised of a network of
more than 700 highly-targeted, topic-specific web sites. About.com's primary
revenue source is the sale of advertising.
About.com's business is characterized by rapid technological change, new
product and service development and evolving industry standards. Inherent in the
Company's business are various risks and uncertainties, including its limited
operating history, uncertain profitability, history of losses, anticipated
continuing losses, its dependence on the Internet and risks associated with
Internet advertising.
(2) Summary of Operations and Significant Accounting Policies
(a) Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated balance sheets
and statements of operations and cash flows reflect all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial position of About.com at March 31, 2000, and the
results of operations and cash flows for the interim periods ended March 31,
2000 and 1999. The results of operations for any interim period are not
necessarily indicative of About.com's results of operations for any other future
interim period or for a full fiscal year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited interim
condensed financial statements be read in conjunction with About.com's audited
financial statements and notes thereto for the year ended December 31, 1999 as
included in About.com's Form 10-K filed with the Securities and Exchange
Commission on March 30, 2000.
About.com has made certain reclassifications within its financial
statements to more accurately present the financial results of the Company.
Accordingly, certain prior period balances have been reclassified to conform to
the current period presentation.
(b) Principles of Consolidation
The Company's consolidated financial statements as of December 31, 1999
and for the three months ended March 31, 2000 include the accounts of the
Company and its wholly owned subsidiaries from their respective date of
acquisition, VantageNet, Inc. from June 14, 1999, North Sky, Inc. from December
15, 1999, ExpertCentral.com, Inc. from January 28, 2000 and Sombasa Media Inc.
from March 24, 2000. All significant intercompany balances have been eliminated
in consolidation.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
(c) Use of Estimates
The preparation of 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 financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
About.com considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Cash equivalents, which consists
primarily of money market funds and commercial paper were approximately $46.6
million at March 31, 2000 and approximately $74.8 million at December 31, 1999.
(e) Investments
Short-term investments are classified as available-for-sale with a
maturity date from 90 days to one year and are available to support current
operations or to take advantage of other investment opportunities. These
investments consist of commercial paper, treasury notes and other government
agencies notes which are stated at book value. Realized gains, realized losses
and declines in value, judged to be other-than-temporary are included in other
income. The cost of securities sold is based on the specific-identification
method and interest earned is included in interest income. Short-term
investments were approximately $103.6 million at March 31, 2000 and $86.9
million at December 31, 1999.
Long-term investments consist entirely of treasury notes. Long-term
investments were approximately $14.0 million at March 31, 2000 and $14.2 million
at December 31, 1999.
For the three months ended March 31, 2000 and the year ended December 31,
1999, About.com did not recognize any material gains or losses upon the sale of
securities. Dividend and interest income is recognized when earned. At March 31,
2000 and December 31, 1999, the fair value of investments in marketable
securities approximated cost and the unrealized holding gains or losses were not
material.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
(f) Goodwill
Goodwill and other purchased intangible assets are stated net of
accumulated amortization. For the period ended March 31, 2000, accumulated
amortization of goodwill was approximately $6.5 million. For the year ended
December 31, 1999, accumulated amortization of goodwill was approximately $1.0
million. Goodwill and other purchased intangible assets are being amortized on a
straight-line basis over the expected period of benefit of three years.
(g) Revenue and Expense Recognition
Revenue Recognition
To date, substantially all of About.com's revenues have been derived from
the sale of advertisements on About.com. About.com offers numerous sizes and
types of advertising placement, including banner advertisements, button
advertisements, text links and sponsorship programs. Advertising revenues are
derived principally from short-term advertising contracts in which About.com
typically guarantees a minimum number of impressions to advertisers over a
specified period of time for a fixed fee. Revenues from advertising sales are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant About.com obligations remain, at the lesser of the
ratio of impressions delivered over total guaranteed impressions or the
straight-line basis over the term of the contract, and collection of the
resulting receivable is probable. Payments received from advertisers prior to
displaying their advertisements on About.com are recorded as deferred revenue
and are recognized as revenue ratably as the advertisements are displayed.
Pursuant to its agreements with advertisers, About.com generally guarantees a
minimum number of impressions (times that an advertisement appears in pages
viewed by the users of About.com) to be delivered over a specified period of
time for a fixed fee. To the extent minimum guaranteed impression levels are not
met ratably over the contract period, About.com defers recognition of the
corresponding pro-rata portion of the revenues relating to such unfulfilled
obligations until the guaranteed impression levels are achieved. When there is
no guarantee of a minimum number of impressions over a specified period of time,
About.com recognizes revenues in the period in which the advertisement is
displayed. About.com's short-term advertising agreements are generally
terminable by either party upon relatively short notice. In certain cases, these
agreements are longer in duration and entitle About.com to a share of revenues
generated by sales over a particular threshold resulting from direct links from
About.com. To date, About.com has not recognized any material revenues from
these revenue sharing agreements. About.com's revenue derived from these revenue
sharing agreements will be recognized by About.com upon notification from its
advertisers and electronic commerce partners of sales attributable to About.com.
A portion of About.com's revenues are from barter advertisements
(agreements whereby About.com trades advertisements on About.com in exchange for
advertisements on third-party web sites). Barter advertising revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more determinable in the circumstances. Revenue from barter
advertising transactions is recognized as income when advertisements are
delivered on About.com. Barter expense is recognized when About.com's
advertisements are run on third-party web sites, which is typically in the same
period when barter revenue is recognized. Barter expense is included as a
component of cost of revenues. Barter advertising revenues and expenses were
$781,000 and $237,000 for the three months ended March 31, 2000 and 1999,
respectively.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
At March 31, 2000, accounts receivable included approximately $12,000 of
unbilled receivables. Such unbilled receivables represent the recognized sales
value of short-term advertising contracts that were earned but not billable to
customers. The terms of the related advertising contracts typically require
billing at the end of 30, 60 or 90 days from the signing of the contract.
Expense Recognition - Guide Compensation
About.com's guides are compensated at an amount equal to the greater of a
monthly minimum guarantee or a percentage of net advertising revenues generated
by the entire network, which is distributed among the guides based on the user
traffic on their respective sites. Net advertising revenues has been defined as
total advertising revenues received less particular types of non-cash revenues,
third-party advertising sales representative organization fees and marketing
expenses. Guides are currently entitled to a percentage of net transaction
revenues and net syndication revenues. In addition, management may distribute a
semi-annual discretionary bonus to guides. Guide compensation is included as a
component of cost of revenues, except for the non-cash compensation portion
which was recorded in connection with the grant of stock options to the guides
and presented as a separate line item above the gross profit (loss) line.
Expense Recognition - Distribution and Syndication Partnerships
About.com has entered into distribution and syndication partnership
agreements that drive traffic to About.com. Through these partnerships,
About.com provides content to a partner's web site, and users can link to
about.com by clicking on the content. About.com has agreements to provide
content to some of the leading Internet service providers, content web sites,
search engines/Internet directories and broadband cable-related sites. These
short-term agreements typically require About.com to make payments, which are
expensed, that are either fixed or are based on the amount of user traffic
directed from the partner's site to About.com. About.com's fixed fees are paid
on a monthly basis and contracts in which fees are paid in advance are deferred
and amortized over the contract term.
(i) Product Development Expenses
Product development expenses include personnel and consulting costs
associated with the design, development and testing of about.com and About.com's
systems and editorial personnel costs. About.com generally expenses its product
development expenses as incurred. In the first quarter of 1999, the Company
adopted the American Institute of Certified Public Accountants Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 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.
The adoption of SOP 98-1 did not have a material effect on the Company's
consolidated financial statements.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
(j) Basic and Diluted Net Loss Per Common Share
About.com adopted SFAS No. 128, "Computation of Earnings Per Share,"
during the year ended December 31, 1997. In accordance with SFAS No. 128 and the
SEC Staff Accounting Bulletin No. 98, basic earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the convertible
preferred stock (using the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury stock method); common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, all options,
warrants or other potentially dilutive instruments issued for nominal
consideration, prior to the anticipated effective date of an initial public
offering (including the IPO), are required to be included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented.
Diluted net loss per common share for the three months ended March 31,
2000 and 1999 does not include the effects of options to purchase 3,090,483 and
2,346,528 shares of common stock, respectively, 21,360 and 65,860 common stock
warrants, respectively, or 0 and 6,139,640 shares of convertible preferred stock
on an "as if" converted basis, respectively, as the effect of their inclusion is
anti-dilutive during the period.
(k) Recent Accounting Pronouncements
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 About.com as About.com currently does not
engage or plan to engage in derivative instruments or hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Regognition In Financial Statements" ("SAB No. 101") which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will be
required to adopt the accounting provisions of SAB No. 101, no later than the
second quarter of 2000. The Company does not believe that the implementation of
SAB No. 101 will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For
Certain Transactions Involving Stock Compensation" ("FIN No. 44") provides
guidance for applying APS Opinion No. 25. "Accounting For Stock Issued to
Employees." With certain exceptions, FIN No. 44 applies prospectively to new
awards, exchanges of awards in a business combination, modifications to
outstanding awards and changes in grantee status on or after July 1, 2000. The
Company does not believe that the implementation of FIN No. 44 will have
significant effect on its results of operations.
In March 2000, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The consensus is effective for web site development costs in
quarters beginning after June 30, 2000. The Company has not yet analyzed the
impact of this issue on its consolidated financial statements.
(3) Business and Credit Concentrations
Financial instruments which subject About.com to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities. The carrying
amounts of these instruments approximate fair value. The carrying amount of
About.com's capital leases and other equipment financing obligations
approximates the fair value of these instruments based upon management's best
estimate of interest rates which are similar to the rates obtained in its
January and February 1999 lease line of credit.
About.com maintains cash and cash equivalents with a domestic financial
institution. About.com performs periodic evaluations of the relative credit
standing of this institution. From time to time, About.com's cash balances with
this financial institution may exceed Federal Deposit Insurance Corporation
insurance limits.
About.com's customers are concentrated in the United States. About.com
performs ongoing credit evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of each customer, historical trends and other information; to
date, such amounts have been within management's expectations.
For the three months ended March 31, 2000 and 1999, no customers accounted
for over 10% of total revenues generated by About.com and no customers accounted
for over 10% of gross accounts receivable.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
(4) Property and Equipment
Property and equipment consist of the following:
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
Equipment and computer hardware, including
assets under capital leases of $664,700 $ 17,572,900 $ 12,286,300
Leasehold improvements 392,500 405,900
Furniture and fixtures 367,200 328,800
------------ ------------
18,332,600 13,021,000
Less accumulated depreciation and amortization, including
assets under capital leases of $530,300, and $487,200,
respectively (4,829,100) (3,619,800)
------------ ------------
Total $ 13,503,500 $ 9,401,200
============ ============
(5) Non-cash Compensation
In March 1999, About.com recorded a non-cash charge of $3.6 million for
guide compensation. About.com has granted fully vested, non-qualified stock
options to purchase 199,500 shares of common stock at an exercise price of
$25.00 per share to a substantial majority of its guides. The options have a two
year term. Accordingly, such amount was recorded as a non-cash compensation
expense in About.com's statement of operations for the three months ended March
31, 1999 with an offsetting increase in additional paid in capital.
(6) Lease Line of Credit
During the first quarter of 1999, About.com entered into a lease line of
credit for $781,300 to finance capital equipment. Payments due are $268,800 in
2000, $273,300 in 2001 and $7,000 in 2002. The effective rate of the credit
facility is 16%.
(7) Acquisitions
ExpertCentral.com, Inc.
On January 28, 2000, About.com announced a definitive agreement to acquire
ExpertCentral.com, Inc. ("ExpertCentral") pursuant to the terms of an Agreement
and Plan of Reorganization (the "ExpertCentral Agreement") dated as of January
14, 2000, by and among the About.com, ExpertCentral and ExpertCentral
Acquisition Corp. ("ECAC"), a wholly-owned subsidiary of About.com. Subject to
the conditions set forth in the ExpertCentral Agreement, ECAC merged with and
into ExpertCentral, with ExpertCentral as the surviving corporation
ExpertCentral commenced its historical operations in April 1999.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
The acquisition has been accounted for as a purchase business combination.
The consideration paid by About.com in connection with the merger consisted of
496,651 newly issued shares of common stock, par value $0.001, of About.com
valued at approximately $31.2 million and the assumption by the Company of
options to purchase shares of common stock of ExpertCentral which were exchanged
for options to purchase approximately 8,287 of About.com's common stock valued
at approximately $508,000. The Company also incurred acquisition costs of
approximately $200,000. The difference between the fair market value of
ExpertCentral's net tangible assets and the purchase price was accounted for as
goodwill and other purchased intangible assets and will be amortized over the
expected period of benefit of three years.
Sombasa Media Inc.
On March 27, 2000, About.com announced the acquisition of Sombasa Media
Inc. ("Sombasa") pursuant to the terms of an Agreement and Plan of Merger and
Reorganization (the "Sombasa Agreement") dated as of March 20, 2000, by and
among the About.com, Sombasa and BDS Corp. ("BDS"), a wholly-owned subsidiary of
About.com. Subject to the conditions set forth in the Sombasa Agreement, BDS
merged with and into Sombasa, with Sombasa as the surviving corporation. Sombasa
commenced its historical operations in April 1999.
The acquisition has been accounted for as a purchase business combination.
The consideration paid by About.com in connection with the merger consisted of
406,673 newly issued shares of common stock, par value $0.001, of About.com
valued at approximately $35.6 million and the assumption by the Company of
options to purchase shares of common stock of Sombasa which were exchanged for
options to purchase approximately 31,495 shares of About.com's common stock
valued at approximately $2.6 million. These options have ten year terms and vest
over a four year period. The Company also incurred acquisition costs of
approximately $20,000. The difference between the fair market value of Sombasa's
net tangible liabilities and the purchase price has been accounted for as
goodwill and other purchased intangible liabilities and is being amortized over
the expected period of benefit of three years.
Acquisition Net Tangible
Acquired Company Effective Date Costs Assets/(Liabilities) Intangibles/Goodwill
- ---------------- -------------- ----- -------------------- --------------------
ExpertCentral January 14, 2000 $200,000 $(2,716,200) $34,613,600
Sombasa March 24, 2000 $ 20,000 $ 292,300 $37,967,800
The following unaudited pro forma consolidated amounts give effect to the
above acquisitions accounted for by the purchase method of accounting as if they
had occurred at the beginning of the respective period or the date of inception
of the acquired companies, if later, by consolidating the results of operations
of ExpertCentral and Sombasa with the results of About.com for the three months
ended March 31, 2000 and 1999. The acquisitions did not have any effect on the
unaudited pro forma consolidated amounts for the three months ended March 31,
1999 as the operations of the acquired companies commenced subsequent to March
31, 1999. Accordingly, for the three months ended March 31, 1999, the unaudited
pro forma consolidated amounts are equal to the Company's historical results of
operations for the same period. The pro forma adjustments include the
elimination of all intercompany transactions.
ABOUT.COM, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
Three months ended March 31,
2000 1999
---- ----
Revenues $ 15,996,000 $ 2,367,000
Net loss attributable to common stockholders $(17,697,000) $(12,582,000)
Net loss per common share $ (1.03) $ (4.07)
Weighted average shares used in net loss per common share
calculation (1) 17,260,000 3,095,000
- -----------
(1) The weighted average common shares used to compute pro forma basic and
diluted net loss per common share for the three months ended March 31,
2000 includes the actual weighted average common shares outstanding for
the historical period ended March 31, 2000, plus the common shares issued
in connection with the acquisitions of ExpertCentral and Sombasa from
January 1, 1999 or the date of inception of the acquired companies, if
later. The common stock issued in connection with the acquisitions of
ExpertCentral and Sombasa was 496,651 and 406,673 shares, respectively.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.
(8) Supplemental Cash Flow Information
The amount of cash paid for interest was $50,400 and $33,900 for the three
months ended March 31, 2000 and 1999, respectively.
In March 1999, About.com converted all outstanding shares of convertible
preferred stock into 6,139,640 shares of common stock and $341,300 of unsecured
promissory notes payable was forgiven in connection with its IPO.
(9) Subsequent Events - Unaudited
On April 24, 2000, About.com acquired all the assets of AllExperts.com
pursuant to an Asset Purchase Agreement.
The acquisition will be accounted for as an asset purchase. The
consideration paid by About.com in connection with the purchase consisted of
38,968 newly issued shares of common stock, par value $0.001, of About.com
valued at approximately $1.1 million and $45,000 in cash. The difference between
the fair market value of AllExpert's net tangible assets and the purchase price
will be accounted for as goodwill and other purchased intangibles and will be
amortized over the expected period of benefit of three years.
On May 12, 2000, About.com acquired Sitetracker Marketing, Inc.
("Sitetracker") pursuant to the terms of an Agreement and Plan of Merger and
Reorganization (the "Agreement") dated as of May 12, 2000, by and among
About.com, Sitetracker, Jazz II Acquisition Corp. ("Jazz II"), a wholly-owned
subsidiary of About.com, and the shareholders of Sitetracker. Subject to the
conditions set forth in the Agreement, Jazz II merged with and into Sitetracker,
with Sitetracker as the surviving corporation.
The acquisition will be accounted for as a purchase business combination.
The consideration paid by About.com in connection with the merger consisted of
199,726 newly issued shares of common stock, par value $0.001, of About.com
valued at approximately $7.5 million. The Company also incurred
acquisition costs of approximately $25,000. The difference between the fair
market value of Sitetracker's net tangible assets and the purchase price will be
accounted for as goodwill and other purchased intangible assets and will be
amortized over the expected period of benefit of three years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF ABOUT.COM TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS
AND THE NOTES TO SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT ABOUT.COM AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
ABOUT.COM'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 AND ELSEWHERE IN THIS 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
For the period from our incorporation on June 27, 1996 through April 1997,
our operating activities related primarily to the initial development of
About.com, recruitment of employees and guides, and the establishment of our
organizational and technical infrastructure. Since the launch of our network in
April 1997, revenues and operating expenses have increased as we enhanced our
network of guides, expanded our editorial and operating staff, improved
About.com's functions and features and promoted About.com to increase brand
awareness. As part of our marketing efforts, we have conducted online campaigns
and, beginning in June 1998, an offline campaign consisting of a national trade
magazine print campaign, and outdoor and radio advertisements in selected
cities. In the second quarter of 1999, we conducted a significant offline
campaign consisting of a national print and television advertising campaign in
connection with the launch of the About.com brand.
To date, we have derived substantially all of our revenues from the sale
of advertisements on About.com. We expect to derive our revenues principally
from the sale of advertising on About.com for the foreseeable future. We
currently offer advertisers numerous sizes and types of advertising placements,
including banner advertisements, button advertisements and text links. We also
offer sponsorship programs and other promotional opportunities to build brand
awareness and drive user traffic to an advertiser's web site. To date, sales of
advertisements on About.com have been generated primarily by our internal
advertising sales organization.
Advertisers on About.com enter into agreements of typically between two
months and two years in duration. Pursuant to these agreements, we generally
guarantee a minimum number of impressions, or the number of times that an
advertisement is delivered to users of About.com, to be delivered over a
specified period of time at a fixed rate. Revenues from advertising sales are
recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations, at the lesser of the
ratio of impressions delivered over total guaranteed impressions or the straight
line basis over the term of the contract, and collection of the resulting
receivable is probable. Payments received from advertisers prior to displaying
their advertisements on About.com are recorded as deferred revenues and are
recognized as revenues ratably as the advertisements are displayed. To the
extent these minimum guaranteed impression levels are not met ratably over the
contract period, we defer recognition of the corresponding
pro rata portion of the revenues related to such unfulfilled obligation until
the guaranteed impression levels are achieved. When there is no guarantee that
we deliver a minimum number of impressions over a specified period, we recognize
revenue in the period in which the impressions are delivered.
Some agreements with advertisers entitle us to a share of revenues
generated by sales of merchandise and services over a particular threshold
resulting from direct links from About.com. Through March 31, 2000, we had not
recognized any material revenues from these revenue sharing agreements. Any
revenues we derive from these revenue sharing agreements will be recognized upon
notification from our advertisers of sales attributable to About.com.
Our agreements with our channel partners are typically at least 12 months
in duration and generally require our partners to make payments to us for
development, placement and advertising payments. We recognize any development
fees and placement fees ratably over the term of the agreement.
For the three months ended March 31, 2000 and 1999, approximately 5% and
10%, respectively, of our revenues were generated by agreements where we traded
advertisements on About.com in exchange for advertisements on third-party web
sites without receiving any cash payment. The corresponding expenses from these
barter arrangements, which equal the amount of the barter revenues from these
arrangements, are included as a component of cost of revenues. We anticipate
that barter revenues will continue to account for less than 10% of our total
annual revenues.
Guide compensation is included as a component of cost of revenues. We
currently compensate guides at an amount equal to the greater of a monthly
minimum guarantee or a percentage of net advertising revenues generated in the
About.com network. This revenue is distributed among the guides based on the
user traffic on their respective topic-specific sites as a percentage of traffic
for the whole network. Guides are also currently entitled to share a percentage
of net transaction revenues and net syndication revenues.
In connection with our initial public offering, we granted fully vested,
non-qualified stock options to purchase 199,500 shares of common stock to a
substantial majority of our guides. The exercise price per share of these
options was $25.00 and the options have two-year terms. Since the guides are
independent contractors, we recorded non-cash compensation expense of
approximately $3.6 million during the quarter ended March 31, 1999, representing
the fair market value of the options at the date of grant. This amount is
presented in a separate line item above the gross profit (loss) line.
Through December 31, 1999, we had recorded deferred compensation expense
of approximately $4.5 million in connection with the grant of stock options to
employees and directors, representing the difference between the deemed value of
the common stock at the date of grant for accounting purposes and the exercise
price of the related options. We amortize this non-cash expense over the vesting
period, typically four years, of the applicable options. Amortization of
deferred compensation expense was $1.1 million and $478,000 for the years ended
December 31, 1999 and 1998, respectively, of which $19,000 and $27,000 related
to deferred compensation expense for the grant of options to operations
personnel and has been included in the non-cash compensation expense line item
appearing above the gross profit (loss) line. For the three months ended March
31, 2000, amortization of deferred compensation expense was $150,600. We
currently expect to amortize the following amounts of deferred compensation
expense annually: 2000-$0.6 million; 2001-$0.6 million; and 2002-$0.6 million.
Such amount is net of certain options which were forfeited in January 2000 and
resulted in a $1.1 million reduction in deferred compensation.
In June 1999, December 1999, January 2000 and March 2000, we acquired
VantageNet, Inc., North Sky, Inc., ExpertCentral.com, Inc. and Sombasa Media
Inc., respectively. In connection with these acquisitions, we recorded goodwill
and purchased intangibles of $2.5 million, $37.7 million, $34.6 million and
$38.0 million, respectively. We are amortizing the goodwill and purchased
intangibles related to each of these acquisitions over their expected periods of
benefit of three years.
Results of Operations
Revenues
For the three months ended March 31, 2000, revenues grew to approximately
$15.8 million from $2.4 million for the three months ended March 31, 1999. This
growth was primarily attributable to an increase in (1) the number of
advertisers and the average commitment per advertiser, (2) user traffic on
About.com and (3) the number of our sales people. Barter revenue included in
these amounts was $781,000 and $237,000, respectively.
Cost of Revenues
Cost of revenues consists primarily of guide compensation, site hosting
and depreciation costs incurred in connection with developing our service, staff
costs and related expenses of operations personnel and barter advertising
expenses. Cost of revenues were $6.0 million and $2.3 million for the three
months ended March 31, 2000 and 1999, respectively. This period-to-period growth
in cost of revenues was primarily attributable to an increase in the fees paid
to guides, which increased to $2.4 million from $900,000 in 1999 and in site
hosting and operations costs, which increased to $2.1 million from $1.1 million
in 1999, which was due to growth in user traffic on About.com combined with
increased staff costs necessary to support the expansion of our service.
Non-Cash Compensation Expense
For the three months ended March 31, 2000 and 1999, amortization of
deferred compensation expense relating to stock options granted to operations
personnel was $5,000 and $4,000 (excluding $3.6 million related to guides),
respectively.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related
expenses of sales and marketing personnel, sales commissions, advertising,
public relations and research. Sales and marketing expenses were $11.0 million
and $5.4 million for the three months ended March 31, 2000 and 1999,
respectively. This period-to-period increase in sales and marketing expenses was
primarily attributable to increased sales and marketing personnel and related
expenses and the expansion of online advertising efforts.
Product Development
Product development expenses include staff and related costs associated
with the design, development and testing of About.com and our systems and
editorial personnel costs. Product development expenses were $4.7 million and
$1.2 million for the three months ended March 31, 2000 and 1999, respectively.
The increase in product development expense was primarily staff and related
expenses needed to support the growth and development of About.com.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, human
resources, facilities and legal, along with professional fees, bad debt expense
and other general corporate expenses. General and administrative expenses were
$4.0 million, and $1.4 million for the three months ended March 31, 2000 and
1999, respectively. The increase in general and administrative expenses was
primarily attributable to increased salaries and related expenses associated
with hiring additional personnel, increased general corporate expenses and
facility-related expenses necessary to support the growth in our operations.
Non-Cash Compensation Expense
For the three months ended March 31, 2000 and 1999, amortization of
deferred compensation relating to stock options granted to non-operations
personnel amounted to $146,000 and $374,000, respectively.
Other Income (Expense), Net
Other income (expense), net was $2.4 million and $18,000 for the three
months ended March 31, 2000 and 1999, respectively. The period-to-period
increase was primarily related to increased interest income as a result of our
initial public offering and follow-on offering.
Cumulative Dividends and Accretion of Convertible Preferred Stock.
Cumulative dividends and accretion on our convertible preferred stock
amounted to $660,000 for the three months ended March 31 1999.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
private placement of equity securities, the incurrence of indebtedness and the
sale of common stock in our public offerings. In March 1999, we received net
proceeds of approximately $81.0 million from our initial public offering and a
concurrent private placement of shares of our common stock. In October 1999, we
received net proceeds of approximately $140.6 million from a follow-on offering.
In November 1999, the underwriters exercised their over-allotment option. Net
proceeds to About.com from this exercise were approximately $5.1 million.
To date, we have experienced negative cash flows from operating
activities. Net cash used in operating activities was $7.2 million and $6.3
million for the three months ended March 31, 2000 and 1999, respectively. Net
cash used in operating activities resulted primarily from our net losses during
these periods, adjusted for certain non-cash and other working capital items.
Net cash used in investing activities was $20.0 million and $1.7 million
for the three months ended March 31, 2000 and 1999, respectively. For the three
months ended March 31, 2000, net cash used in investing activities consisted
primarily of $16.5 million related to purchases, net of sales of marketable
securities and $4.0 million of capital expenditures, primarily for the
acquisition of equipment. For the three months ended March 31, 1999, net cash
used in investing activities related entirely to the acquisition of equipment.
Net cash (used in) provided by financing activities was ($1.1) million and
$82.4 million for the three months ended March 31, 2000 and 1999, respectively.
For the three months ended March 31, 2000, net cash used in financing activities
consisted primarily of approximately $2.2 million related to the exercise of
stock options, which was offset by the repayment of $2.9 million of bridge loans
which were acquired in connection with the acquisition of ExpertCentral and
$473,000 of payments on capital leases and notes. For the three months ended
March 31, 1999, net cash provided by financing activities consisted primarily of
approximately $81.0 million in net proceeds received by us in connection with
the closing of our initial public offering and concurrent placement in March
1999.
As of March 31, 2000, we had $164.2 million of cash and cash equivalents,
short-term and long-term investments. Our principal capital commitments
consisted of obligations outstanding under capital and operating leases and a
secured credit facility. We have spent approximately $15.9 million on capital
expenditures since inception, excluding capital lease agreements. We anticipate
that we will increase our capital expenditures and lease commitments consistent
with our anticipated growth in operations, infrastructure and personnel. We have
committed to spend $7.7 million for leasehold improvements and furniture and
fixtures related to the relocation of our headquarters office. We currently
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources.
Our ability to generate significant revenues is uncertain. We have
incurred substantial costs to create, launch and enhance About.com and to grow
our business. At March 31, 2000, we had an accumulated deficit of $94.9 million.
We expect losses from operations and negative cash flow to continue for the
foreseeable future as a result of our expansion plans and our continuing
significant increases in operating expenses in the next several years. Although
we have experienced revenue growth in recent periods, our revenues may not
remain at their current level or increase in the future. If our revenues do not
increase substantially, we may not achieve profitability. Even if we achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
We currently believe that the net proceeds of our prior offerings,
together with our existing cash and cash equivalents short-term and long-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. We may
need to raise additional funds in the future in order to fund more aggressive
brand promotion or more rapid expansion, to develop new or enhanced services, to
respond to competitive pressures or to make acquisitions. Any required
additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or not available on acceptable terms, we may
be unable to fund our expansion, successfully promote our brand, develop or
enhance our network, respond to competitive pressures or take advantage of
acquisition opportunities, which could have a material adverse effect on our
business, results of operations and financial condition. If we raise additional
funds by issuing equity securities, stockholders may experience dilution of
their ownership interest and those securities may have rights superior to those
of the holders of the common stock. If we raise additional funds by issuing
debt, we may be subject to certain limitations on our operations, including
limitations on the payment of dividends.
Year 2000 Compliance
To date, our systems and software have not experienced any material
disruption due to the onset of the Year 2000, and we have completed our Year
2000 preparedness activities. However, we cannot assure that we will not
experience disruptions in the future as a consequence of the Year 2000 bug. We
cannot quantify the amount of our potential exposure, but do not believe it to
be material.
New Accounting Pronouncements
We continually assess the effects of recently issued accounting standards.
The impact of all recently adopted and issued accounting standards has been
disclosed in the Unaudited Interim Condensed Consolidated Financial Statements.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Because we have only been in business for a short period of time, there is
limited information upon which you can evaluate our business.
We were incorporated in June 1996 and launched our network in April 1997.
Accordingly, you can only evaluate our business based on our limited operating
history. As a young company, we face risks and uncertainties relating to our
ability to successfully implement our business plan. If we are unsuccessful in
addressing these risks and uncertainties, our business, results of operations
and financial condition will be materially adversely affected.
We have lost money every quarter and every year, and we expect to lose money in
the future.
If our revenues do not increase substantially, we may never become
profitable. We have not generated enough revenues to exceed the substantial
amounts we have spent to create, launch and enhance About.com and to grow our
business. Even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future.
A portion of our historical revenues have been derived from barter
agreements. Approximately 10% of our revenues in 1998 and approximately 7% of
our revenues in 1999 were derived from agreements where we traded advertisements
on About.com in exchange for advertisements on other web sites without receiving
any cash payments. We expect that these barter revenues will account for less
than 10% of our total annual revenues in the future.
Our costs of revenues combined with our operating expenses have exceeded
our revenues for all quarters. We have historically funded our operations by
selling our stock and not by generating income from our business. At March 31,
2000, our accumulated deficit was $94.9 million. We expect to continue to lose
money for the foreseeable future because we plan to continue to incur
significant expenses.
Fluctuations in our operating results may negatively impact our stock price.
Our quarterly operating results may fluctuate significantly in the future
due to a variety of factors that could affect our revenues or our expenses in
any particular quarter. It is possible that in some future periods our results
of operations may be below the expectations of public market analysts and
investors. In this event, the price of our common stock is likely to fall.
You should not rely on our results of operations during any particular
quarter as an indication of our results for a full year or any other quarter.
Factors that may affect our quarterly results include:
o the demand for advertising on About.com;
o the number of Internet users on, and the frequency of their use of,
About.com, since our advertising revenues are typically based on
user traffic;
o our ability to attract and retain advertisers and electronic
commerce partners;
o fees we may pay for distribution or content or other costs we may
incur as we expand our operations;
o our ability to meet the minimum number of advertisements that we are
required to deliver to users by many of our advertising contracts,
since our failure to do this would result in
o our deferring recognition of the related revenues and would reduce
our available advertising inventory in subsequent periods;
o changes in rates paid for advertising on About.com; and
o the timing and amount of our costs related to advertising sales and
marketing efforts.
Our operating expenses are based in part on our expectations of our future
revenues and are relatively fixed in the short term. Given our limited operating
history and our difficulties in accurately estimating the user traffic
historically experienced on our website, user traffic on our website is
difficult to forecast accurately. Consequently, since revenues from Internet
advertising will make up a significant amount of our revenues for the
foreseeable future, our revenues are difficult to forecast accurately. In
particular, we intend to continue to expend significant amounts to build and
enhance brand awareness of About.com. We may be unable to adjust spending
quickly enough to offset any unexpected revenue shortfall. If we have a
shortfall in revenues in relation to our expenses, or if our expenses precede
increased revenues, then our results of operations and financial condition would
be materially adversely affected.
We will only be able to execute our business plan if Internet usage grows.
Our business would be adversely affected if Internet usage does not grow.
Internet usage may be inhibited for any of the following reasons:
o the Internet infrastructure may not be able to support the demands
placed on it, and its performance and reliability may decline as
usage grows;
o security and authentication concerns with respect to the
transmission over the Internet of confidential information, such as
credit card numbers, and attempts by unauthorized computer users,
so-called hackers, to penetrate online security systems; and
o privacy concerns, including those related to the ability of web
sites to gather user information without the user's knowledge or
consent.
We will only be able to execute our business plan if Internet advertising
increases.
Our business, results of operations and financial condition would be
materially adversely affected if the Internet advertising market develops more
slowly than we expect or if we are unsuccessful in increasing our advertising
revenues. Revenues from Internet advertising will make up a significant amount
of our revenues for the foreseeable future. Since the Internet advertising
market is new and rapidly evolving, we cannot yet gauge its effectiveness as
compared to traditional advertising media.
The adoption of Internet advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied
upon other advertising media may be reluctant to advertise on the Internet.
These businesses may find Internet advertising to be less effective than
traditional advertising media for promoting their products and services. Many
potential advertising and electronic commerce partners have little or no
experience using the Internet for advertising purposes. Consequently, they may
allocate only limited portions of their advertising budgets to Internet
advertising.
Advertisers and electronic commerce marketers may not advertise on
About.com or may pay less for advertising on About.com if they do not believe
that they can reliably measure the effectiveness of Internet advertising or the
demographics of the user viewing their advertisements. We use both internal
measurements and measurements provided to us by third parties. If these third
parties are unable to continue to provide these services, we would have to
perform them ourselves or obtain them from another provider. This could cause us
to incur additional costs or cause interruptions in our business while we are
replacing these services. In addition, we are implementing additional systems
designed to record demographic data on our customers. If we do not implement
these systems successfully, we may not be able to accurately evaluate the
demographic characteristics of our customers. Moreover, "filter" software
programs that limit or prevent advertising from being delivered to an Internet
user's computer are available. Widespread adoption of this software could
adversely affect the commercial viability of Internet advertising.
To the extent that minimum guaranteed impression levels are not met over
the contract period, we defer recognition of the corresponding pro rata portion
of the revenues related to such unfulfilled obligation until the guaranteed
impression levels are achieved. Advertising based on impressions, or the number
of times an advertisement is delivered to users, represents substantially all of
our current revenues. To the extent that minimum impression levels are not
achieved for any reason, we may be required to provide additional impressions
after the contract term, which would reduce our advertising inventory.
Our revenues could be adversely affected if we are unable to adapt to
other Internet advertising pricing models if they are adopted. It is difficult
to predict which, if any, pricing models for Internet advertising will emerge as
industry standards. This makes it difficult to project our future advertising
rates and revenues.
We may not be able to adapt as Internet technologies and customer demands
continue to evolve.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing About.com and introducing new services to address our
users' changing demands. We could incur substantial costs if we need to modify
our services or infrastructure in order to adapt to changes affecting providers
of Internet services. Our business, results of operations and financial
condition could be materially adversely affected if we incurred significant
costs to adapt, or cannot adapt, to these changes.
The development of our brand is essential to our future success.
If our brand marketing efforts are unsuccessful, our business, financial
condition and results of operations would be materially adversely affected. In
order to build our brand awareness, we must succeed in our brand marketing
efforts, provide high-quality services and increase user traffic on About.com.
These efforts have required, and will continue to require, significant expenses.
We may not be able to compete successfully.
Competition could result in less user traffic to About.com, price
reductions for our advertising inventory, reduced margins or loss of market
share, any of which would have a material adverse effect on our business,
results of operations and financial condition. We face intense competition for
users and for advertisers. We expect this competition to increase because there
are no substantial barriers to entry in our market. Competition may also
increase as a result of industry consolidation. We may not be able to compete
successfully.
We believe that many of our existing competitors, as well as potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. This may allow them to devote greater resources than we
can to the development and promotion of their services. These competitors may
also engage in more extensive research and development, adopt more aggressive
pricing policies and make more attractive offers to existing and potential
employees, guides, distribution partners and advertisers. Our competitors may
develop services that are equal or superior to About.com or that achieve greater
market acceptance than About.com.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their services to address the needs of advertisers and
electronic commerce marketers. As a result, it is possible that new competitors
may emerge and rapidly acquire significant market share.
We depend on relationships with third parties.
Our business, results of operations and financial condition could be
materially adversely affected if we do not establish and maintain distribution
relationships on commercially reasonable terms or if any of our distribution
relationships do not result in increased user traffic on About.com. A portion of
the users who come to About.com come from third-party web sites with which we
have non-exclusive, short-term distribution relationships. Since these web sites
may not attract significant numbers of users themselves, About.com may not
receive a significant number of additional users from these relationships.
Moreover, we may have to pay significant fees to establish additional
relationships or maintain existing relationships in the future.
We have entered into, and may continue to enter into, agreements with
advertisers or other third-party web sites that require us to exclusively
feature these parties for certain aspects of About.com. These exclusivity
agreements may limit our ability to enter into other advertising or sponsorship
agreements or other strategic relationships. Many companies we may pursue for
strategic relationships also offer competing services. As a result, these
competitors may be reluctant to enter into strategic relationships with us.
We may not effectively manage our growth.
In order to execute our business plan, we must grow significantly. This
growth will place a significant strain on our personnel, management systems and
resources. If we do not manage growth effectively, our business, results of
operations and financial condition would be materially adversely affected. We
expect that the number of our employees, including management-level employees,
will continue to increase for the foreseeable future. In addition, we expect
that the number of guides will continue to increase as new topic-specific sites
are established. We must continue to improve our operational and financial
systems and managerial controls and procedures, and we will need to continue to
expand, train and manage our workforce. We must also maintain close coordination
among our technical, accounting, finance, marketing, sales and editorial
organizations.
Regulatory and legal uncertainties could harm our business.
Any new law or regulation pertaining to the Internet, or the application
or interpretation of existing laws, could decrease the demand for our network,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition. There are, and
will be, an increasing number of laws and regulations pertaining to the
Internet. These laws or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing.
We may be liable for the content we make available on the Internet.
We make content available on About.com and on the web sites of our
advertisers and distribution and syndication partners. The availability of this
content could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement. Other claims may be brought based on the nature, publication and
distribution of our content or based on errors or false or misleading
information provided on About.com, including information deemed to constitute
professional advice such as legal, medical, financial or investment advice. We
could also be exposed to liability for third-party content accessed through
About.com's links to other websites or posted by users in chat rooms or bulletin
boards offered on our topic-specific sites. Our financial condition could be
materially adversely affected if we were found liable for information that we
make available. Implementing measures to reduce our exposure to this liability
may require us to spend substantial resources and limit the attractiveness of
our services to customers.
If we are unable to successfully integrate completed and future acquisitions
into our operation, there could be an adverse effect on our business and results
of operations.
We have and may continue to acquire complementary businesses, products and
technologies in the future. Some of the risks attendant to these acquisitions
are:
o difficulties and expenses of integrating the operations and
personnel of acquired companies into our operations while preserving
the goodwill of the acquired entity;
o the additional financial resources that may be needed to fund the
operations of acquired companies;
o the potential disruption of our business;
o our management's ability to maximize our financial and strategic
position by incorporating acquired technology or businesses;
o the difficulty of maintaining uniform standards, controls,
procedures and policies;
o the potential loss of key employees of acquired companies;
o the impairment of relationships with employees and customers as a
result of changes in management; and
o increasing competition with other entities for desirable acquisition
targets.
Any of the above risks could prevent us from realizing significant
benefits from our acquisitions. In addition, the issuance of our common stock in
acquisitions will dilute our stockholder interests, while the use of cash will
deplete our cash reserves. Finally, if we are unable to account for our
acquisitions under the "pooling of interests" method of accounting, we may incur
significant, one-time write-offs and amortization charges. These write-offs and
charges could decrease our future earnings or increase our future losses.
We could incur significant withholding taxes and employee benefits expenses if
the guides were deemed to be our employees rather than independent contractors.
One or more jurisdictions or taxing authorities, including the Internal
Revenue Service, may seek to treat the guides as our employees rather than
independent contractors. As a result, they may seek to impose taxes, interest or
penalties on us. In addition, employees are generally entitled to healthcare and
other benefits that are typically unavailable to independent contractors. Since
we believe that the guides are independent contractors, we would vigorously
oppose any claim to the contrary. However, our efforts to do so might not be
successful. We are not able to estimate accurately the quantitative effect that
these taxes or employee benefit costs would have on us if the guides were deemed
to be employees. Our business, results of operations and financial condition
would be materially adversely affected if these claims are made and we do not
prevail or if we are required to treat the guides as employees for tax or
employee benefit purposes or otherwise.
We depend on our key executives and will need additional personnel to grow our
business.
Our future success depends, in part, on the continued service of our key
management personnel, particularly Mr. Scott P. Kurnit, our Chief Executive
Officer, and Mr. William C. Day, our President and Chief Operating Officer.
Although we are the beneficiary of a key person life insurance policy on Mr.
Kurnit's life, the loss of his services, or the services of other key employees,
would have a material adverse effect on our business, results of operations and
financial condition. Our future success also depends on our ability to attract,
retain and motivate highly skilled employees, including advertising sales
personnel. Competition for employees in our industry is intense. We may be
unable to attract, assimilate or retain other highly qualified employees in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
The performance of About.com is critical to our business and to our reputation.
Any system failure, including network, software or hardware failure, that
causes an interruption in our network or a decrease in responsiveness of
About.com could result in reduced user traffic on About.com and reduced revenue.
About.com has in the past experienced slower response times and interruptions in
service for a variety of reasons. About.com could also be affected by computer
viruses, electronic break-ins or other similar disruptions. Our insurance
policies have low coverage limits and therefore our insurance may not adequately
compensate us for any losses that may occur due to any interruptions to our
network.
In January 1998, we entered into an Internet-hosting agreement with
GlobalCenter, Inc. to maintain all of our production servers at GlobalCenter's
Manhattan Data Center. This agreement was extended in January 1999 and is
terminable by either party upon 90 days' notice. Our operations depend on
GlobalCenter's ability to protect its and our systems against damage from fire,
power loss, water damage, telecommunications failures, vandalism and other
malicious acts, and similar unexpected adverse events. Any disruption in the
Internet access provided by GlobalCenter could have a material adverse effect on
our business, results of operations and financial condition.
Our users and our guides depend on Internet service providers, online
service providers and other web site operators for access to About.com. Each of
these providers has experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
We may be unable to protect our intellectual property and we may be liable for
infringing the intellectual property rights of others.
Third parties may infringe or misappropriate our patents, trademarks or
other intellectual property, which could have a material adverse effect on our
business, results of operations or financial condition. While we enter into
confidentiality agreements with our material employees, guides, consultants and
strategic partners, and generally control access to and distribution of our
proprietary information, the steps we have taken to protect our intellectual
property may not prevent misappropriation. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is still evolving.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. These claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages. In addition, even if we prevail, litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
Seasonal factors may affect our quarterly operating results.
Seasonality of user traffic on About.com and our advertising revenues may
cause our total revenues to fluctuate. User traffic on web sites has typically
declined during the summer and year-end vacation and holiday periods. We believe
that advertising sales in traditional media, such as television and radio,
generally are lower in the first and third calendar quarters of each year.
Similar seasonal or other patterns may develop in our business.
We cannot predict our future capital needs and we may not be able to secure
additional financing.
We may need to raise additional funds in the future in order to fund more
aggressive brand promotion or more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions. Any
required additional financing may not be available on terms favorable to us, or
at all. If adequate funds are not available on acceptable terms, we may be
unable to fund our expansion, successfully promote our brand, or take advantage
of acquisition opportunities, develop or enhance services, respond to
competitive pressures or take advantage of acquisition opportunities, any of
which could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised by our
issuing equity securities, stockholders may experience dilution of their
ownership interest and the newly issued securities may have rights superior to
those of the common stock. If additional funds are raised by our issuing debt,
we may be subject to limitations on our operations, including limitations on the
payment of dividends. We currently anticipate that the net proceeds from our
latest offering, together with currently available funds, will be sufficient to
meet our anticipated needs through at least 2000.
Our officers and directors may substantially influence us.
Our executive officers and directors, in the aggregate, beneficially own
approximately 14% of the common stock. These stockholders may be able to
exercise substantial influence over all matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of us, which could have a material
adverse effect on our stock price.
Our stock price has been and may continue to be volatile.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the Nasdaq National Market, where most publicly held
Internet companies are traded, has experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation often has been instituted against that company. Litigation
like this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Rate Fluctuations. Our results of operations, financial position and
cash flows are not materially affected by changes in the relative values of
non-U.S. currencies to the U.S. dollar. We do not use derivative financial
instruments to limit our foreign currency risk exposure.
Market Risk. Our accounts receivable are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result, we do not anticipate any material
losses in this area.
Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. We have not used derivative
financial instruments in its investment portfolio. We invest our excess cash in
debt instruments of the U.S. Government and its agencies and high-quality
corporate issuers and, by policy, limit the amount of credit exposure to any one
issuer. We protect and preserve our invested funds by limiting default, market
and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in their interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
On January 27, 2000, About.com issued an aggregate of 496,651 shares
of common stock in exchange for all of the outstanding capital stock of
ExpertCentral.com, Inc. The shares were issued pursuant to an exemption by
reason of Section 4(2) of the Securities Act of 1933. The issuance was
made without general solicitation or advertising. Each of the former
ExpertCentral stockholders was an accredited investor or a sophisticated
investor with access to all relevant information necessary to an
investment decision.
On March 2, 2000 we issued 8,900 shares of common stock to Open Text
Corporation upon the exercise of warrants by Open Text Corporation. The
shares were issued pursuant to an exemption by reason 4(2) of the
Securities Act of 1933. The issuance was made without general solicitation
or advertising. Open Text is an accredited investor with access to all
relevant information necessary to an investment decision.
On March 27, 2000, About.com issued an aggregate of 406,673 shares
of common stock in exchange for all of the outstanding capital stock of
Sombasa Media Inc. The shares were issued pursuant to an exemption by
reason of Section 4(2) of the Securities Act of 1933. The issuance was
made without general solicitation or advertising. Each of the former
Sombasa stockholders was an accredited investor or a sophisticated
investor with access to all relevant information necessary to an
investment decision.
(d) Use of Proceeds
On March 29, 1999, we consummated the initial public offering of
3,450,000 shares of our common stock and a concurrent private placement of
107,527 shares of our common stock (collectively, the "Initial Public
Offering"). Net proceeds from the Initial Public Offering were
approximately $81.0 million.
From March 31, 1999 to March 31, 2000, we used approximately $67
million of the proceeds from the Initial Public Offering for general
corporate purposes, capital expenditures, marketing expenditures related
to marketing and branding campaigns, the payment of debt obligations, cash
paid in connection with the acquisition of VantageNet and cash paid to
retire ExpertCentral bridge loans.
On November 3, 1999 and November 17, 1999, we consummated the
follow-on offering of 3,110,000 shares of our common stock (the "Follow-on
Offering"). Net proceeds from the Follow-on Offering were approximately
$145.7 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
2.1 Agreement and Plan of Merger and Reorganization, dated as of
March 20, 2000, among About.com, Inc., BDS Acquisition Corp.
and Sombasa Media Inc. (incorporated by reference to Exhibit
2.1 of the Company's current report on Form 8-K, dated April
10, 2000).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On February 14, 2000, About.com filed an Amended Current Report on
Form 8-K/A for the purpose of filing the financial statements and pro
forma financial information related to the acquisition of North Sky, Inc.
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 ABOUT.COM, INC.
By: /s/ Todd B. Sloan
------------------------------------
Todd B. Sloan
Chief Financial Officer
(Principal Financial Officer)