ITEM 1. BUSINESS
INTRODUCTION
INT Media Group owns and operates the internet.com and EarthWeb.com network of over 150 Web sites and related Internet media properties, (as of February 28, 2002), focused solely on the Internet industry and information technology ("IT"). In addition to over 150 Web sites, our network includes over 200 e-mail newsletters, which are periodical publications delivered by electronic mail; over 400 online discussion forums, which are electronic message centers where members of specific interest groups review messages left by others and leave their own messages; and over 70 moderated e-mail discussion lists, which are similar to online discussion forums, except that members' messages are transmitted and received by e-mail broadcast. Our network is organized into 16 subject areas, or vertical content channels. These vertical content channels serve our Internet users, which include Internet industry and information technology professionals, Web developers and experienced Internet users. Our INT Media Events Division also produces nearly 40 offline conferences and trade shows on Internet and IT-specific topics that are aligned with our network of Web sites and e-mail newsletters. In addition, our INT Media Research Division publishes research reports analyzing the Internet and information technologies worldwide. We provide our audience, or community of Internet users, with the following resources:
- real-time Internet industry - archives of definitive industry and IT news publications
- market information about emerging - discussion forums products and technologies
- tutorials, training and skills - software downloads development
- buyer's guides and products reviews - expert advice
- Internet and IT market research - Internet and IT conferences and trade shows
We also provide advertisers and vendors with a means through which they can reach our community of Internet industry and information technology professionals, many of whom either make or influence Internet and IT purchasing decisions. We have had over 2,500 advertisers and exhibitors on our network and at our conferences and trade shows.
We have rapidly built a network of Internet media properties through internal development and acquisitions. We have experience identifying, evaluating, acquiring and integrating Internet media properties that are complementary to our content offerings and services. From July 1995 through February 28, 2002, we made 73 acquisitions of Internet media properties, consisting of 102 Web sites, 107 e-mail newsletters, 125 online discussion forums and 162 moderated e-mail discussion lists.
In January 2002, there were over 20 million unique visitors to our network of Web sites that generated over 240 million page views. We distributed over 31 million copies of our e-mail newsletters to over 5 million subscribers in January 2002. We also distributed over 41 million messages to more than 70,000 moderated e-mail discussion list subscribers in January 2002.
Our objective is to maintain and strengthen our position as a provider of business information focused on the Internet industry and information technology. We intend to achieve this objective by continuing to execute the following strategies:
- increase our proprietary content offerings and services;
- expand revenue opportunities;
- grow through targeted acquisitions;
- enhance worldwide brand recognition; and
- increase our international presence.
Prior to the acquisition of Mecklermedia Corporation by Penton Media, Inc. ("Penton Media") in November 1998, we operated since December 1994 as one of three divisions that comprised Mecklermedia. Our predecessor Web sites, mecklerweb.com and iworld.com, were also dedicated to covering the Internet industry and information technology. In connection with this acquisition, Penton Media determined that Mecklermedia's Internet business was not consistent with its planned strategic direction. To address this issue, Alan M. Meckler, Mecklermedia's Chairman and Chief Executive Officer, purchased an 80.1% interest in INT Media Group LLC, a business formed by Penton Media to hold the Internet business acquired from Mecklermedia. As of March 15, 2002, Mr. Meckler beneficially owned approximately 53.5% of our outstanding common stock.
INT Media Group, Incorporated was incorporated on April 5, 1999 in the State of Delaware. internet.com LLC was merged with and into internet.com Corporation upon consummation of our initial public offering in June 1999. On May 24, 2001, internet.com Corporation received approval at its annual meeting of stockholders to change its name from internet.com Corporation to INT Media Group, Incorporated. Our principal executive offices are located at 23 Old Kings Highway South, Darien, Connecticut 06820 and our telephone number is (203) 662-2800.
INDUSTRY BACKGROUND
The Internet has emerged as a global distribution network for real-time news, resources and product and service information, an environment for online communities and a marketplace in which commerce is conducted. International Data Corporation (IDC) estimates that the number of Internet users will grow from 500 million in 2001 to 1.0 billion in 2005. The Business-to-Business (B2B) Internet market is projected to experience rapid growth with notable research firms forecasting trillion dollar markets for worldwide B2B e-commerce by the end of 2004 as businesses increasingly realize that e-commerce technologies offer enormous potential for streamlining purchasing, sales and other transactions. eMarketer charts the 2001 B2B e-commerce market at $450 million with five-fold growth to $2.7 trillion by 2004. IDC forecasts the 2004 market at $2.2 trillion worldwide, while other analyst firms are even more bullish with Forrester predicting $6.3 trillion and Gartner Group $7.9 trillion. With the lines between the Internet and IT markets becoming less distinct each day, another critical indicator to gauge market growth is IT spending, which undoubtedly is driven by Internet/e-commerce initiatives. Gartner/Dataquest projects a robust future for Worldwide IT with spending levels reaching $4.3 trillion in 2005, up 60% from $2.7 trillion in 2001.
To best exploit the growth of the Internet and information technology, businesses must stay abreast of Internet-related technologies and products as well as develop and maintain the skills necessary to utilize these technologies and products. A broader set of executive management and business professionals is increasingly participating in Internet and information technology implementation decisions with information technology professionals. As a result, Internet and IT-related topics need to be addressed from a variety of business and technology perspectives to effectively communicate the value of deploying and integrating Internet and information technologies.
The increasing use of the Internet is dramatically affecting the operating methods of profit and not-for-profit businesses and other organizations. These businesses and organizations are dedicating an increasing amount of personnel and financial resources to integrating and effectively using the Internet and IT to expand and enhance their operations. As a result, these businesses and organizations have a rapidly growing need for personnel with specialized skills and knowledge in technologies that can effectively build and manage their Internet and information technology infrastructures.
THE INT MEDIA GROUP SOLUTION
We provide our community of Internet users with a wide variety of content offerings and services to aid them in their daily work and purchasing decisions. Our solution addresses the needs of three constituencies - Internet users, advertisers and vendors.
BENEFITS FOR OUR COMMUNITY OF INTERNET USERS
CONTENT. Our network of Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists provides Internet and IT news and information, which is updated on a daily basis. This Internet and IT news and information help our community of Internet users to enhance their job performance by providing them with up-to-date information and resources about the Internet industry and information technology. Our network consists of proprietary content as well as services for the Internet industry and information technology, including:
- news;
- analysis;
- tutorials, training and skills development;
- market information about emerging products and technologies;
- buyers' guides and product reviews;
- Internet and IT market research; and
- expert advice.
Unlike traditional media, our network provides our community of Internet users with real-time Internet and IT news and information. These users can easily search our network by using a host of search and navigation tools.
COMMUNITY. Our network of Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists provides our community of Internet users the ability to discuss and solve technical problems and share information by contributing materials and communicating with each other. Users submit and share software code and development tools that are then published and archived on our network. We believe that creating a sense of community through these services fosters loyalty and affinity among our community of Internet users and increases the amount of time they spend using our services. These services include:
- ONLINE DISCUSSION FORUMS. We offer over 400 online discussion forums, categorized by vertical content areas for the Internet industry and information technology, that enable users to share information and resources in order to help each other solve technical problems. We archive these online discussion forums, creating an online knowledge repository for future reference.
- MODERATED E-MAIL DISCUSSION LISTS. We offer over 70 moderated e-mail discussion lists, which have over 70,000 subscribers. These lists, which are moderated by skilled INT Media Group personnel, are categorized by subject or vertical content areas for the Internet industry and information technology and enable subscribers to conveniently share information and resources and solve technical problems.
- QUESTION AND ANSWER SERVICES. We offer question and answer services that enable users to submit technical questions related to the Internet industry and information technology as well as our content offerings and services. Answers from skilled INT Media Group personnel are published online in searchable formats.
- TECHNICAL JOB LISTINGS. Through jobs.internet.com and in conjunction with a commerce agreement with Dice Inc., we provide our community of Internet users with access to Internet industry and information technology job openings. These job openings can be searched by job type, salary range and geographic location.
COMMERCE. Our network of Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists provides our community of Internet users the ability to evaluate, compare and purchase Internet and IT-related products and services provided by e-commerce vendors. We receive either fixed fees for advertising, bounties for new customers or revenue sharing of 10% to 50% of the sales made by the e-commerce vendors as a result of links from our network, or in some cases combinations of advertising, bounties and revenue sharing. Through INT Media Research, we publish research reports analyzing the Internet and information technology sectors worldwide. Through Allnetresearch.com, we sell paid research reports offered by over 90 third party publishers. Through LinuxCentral.com and BSDCentral.com we sell hardware, software and other products geared for the Linux and Open Source community. Through our Career Channel, we offer paid job listings that can be searched by job type, salary range and geographic location. These commerce offerings provide our users with access to the following goods and services, among others:
- domain name registrations;
- software and hardware;
- technical books and training materials;
- Internet and IT research reports;
- employment classifieds;
- opt-in e-mail list brokerage;
- online press release distribution;
- Web site hosting services;
- Web site security services; and
- business to business product and services exchange.
BENEFITS FOR ADVERTISERS AND VENDORS
We provide advertisers and vendors with targeted channels to reach our highly focused community of Internet users, 84% of whom either make or influence purchasing decisions, according to a survey we commissioned from Informative LLC. We believe that our Internet users represent a large and targeted online community of Internet industry and information technology professionals, Web developers and experienced Internet users. We believe our advertisers and vendors can enhance the effectiveness of their advertising by customizing advertisements and placing them on targeted channels and pages on our network. We also provide vendors with a much needed distribution channel and the ability to focus their marketing efforts in a cost effective manner.
Our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists attract a focused community of business and professional Internet users, as compared to more broadly focused Web sites. According to a survey we commissioned from Informative LLC, which was conducted from January 2002 through March 2002, some key demographics of our community of Internet users include:
- 84% are involved in purchasing Internet and information technology products and services for their companies and organizations, including hardware, software, networking and Internet access;
- 81% purchased products online within the past six months;
- 57% have Internet technology or information technology job titles; another 28% are in corporate management;
- the average annual household income of the group exceeds $68,000;
- 65% are in the desirable 25-44 age group; and
- 59% have at least one college degree.
OUR BUSINESS STRATEGY
Our objective is to maintain and strengthen our position as a provider of business information focused solely on the Internet industry and information technology. We intend to achieve this objective by continuing to execute the following key strategies:
INCREASE OUR PROPRIETARY CONTENT OFFERINGS AND SERVICES. We will strengthen our existing content offerings and services by continuing to improve our proprietary content available for our community of Internet users. Our editorial team, comprised of over 60 employees and over 100 freelance contributors as of February 28, 2002, creates proprietary content for our network on a daily basis. We will continue to identify emerging topics of interest and then create and aggregate content for those topics through internal development and acquisitions of additional Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists.
EXPAND REVENUE OPPORTUNITIES. For the year ended December 31, 2001, a majority of our revenues were derived from advertising. We are continuing to develop additional revenue sources, including e-commerce agreements and offerings; conferences and trade shows; permission based opt-in e-mail list rentals; paid subscription services; research reports; postal list rentals; content and brand licensing; online press release distribution services; and venture fund management fees. See "Revenue Opportunities."
GROW THROUGH TARGETED ACQUISITIONS. From July 1995 through February 28, 2002, we made 73 acquisitions, which included 102 Web sites, 107 e-mail newsletters, 125 online discussion forums and 162 moderated e-mail discussion lists. We expect to continue to pursue strategic acquisitions to strengthen our content offerings and services. We may also acquire Internet media properties to obtain valuable brands, expertise or access to new users, advertisers and vendors. We believe that by acquiring Internet media properties, we can integrate them into our network and improve their traffic and revenue results. In addition, we believe that acquiring Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists generally has increased the overall traffic on our existing network. We intend to use the experience gained from our numerous acquisitions in order to identify, evaluate, acquire and integrate Web sites and other media properties, which are complementary to our network.
ENHANCE WORLDWIDE BRAND RECOGNITION. We will continue to expand the combination of online and offline advertising and promotional campaigns to enhance the recognition of internet.com and our other brands. We intend to continue to promote the internet.com brand as a leading source of online content focused on the Internet industry. In addition, we will continue to promote our branded Internet services, such as EarthWeb.com, SearchEngineWatch.com, Web Developer.com and ClickZ.com under the
internet.com and EarthWeb.com network through online and offline advertising and other promotional activities. We also provide access to limited versions of our editorial content to others at no charge to promote our brands and generate traffic. Our marketing and branding campaigns are designed to increase overall brand awareness. This increased brand awareness will help drive additional traffic to our network and create additional advertising impressions, which in turn will create additional advertising, e-commerce and other revenue opportunities. As a result, this growth in user traffic should make our network more valuable to advertisers and vendors. Our marketing and branding campaigns will reinforce to users, advertisers and vendors that the internet.com brand represents technical competence, comprehensiveness, timeliness and objectivity.
INCREASE OUR INTERNATIONAL PRESENCE. The Internet is also rapidly growing internationally and we intend to utilize our experience to continue to develop and acquire Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists with an international focus in order to expand our global presence. We have launched internet.com country and regional Web sites for Asia, Australia Germany, Japan, Korea and Turkey. These international editions are produced by our employees, freelance contributors and, in some cases, licensees in the geographic areas they serve and provide daily Internet and information technology news from the country or region in either English or the primary language.
REVENUE OPPORTUNITIES
ADVERTISING. For the year ended December 31, 2001, a majority of our revenues were generated from advertising on our Web sites, online discussion forums, e-mail newsletters and moderated e-mail discussion lists. These media properties are also expected to contribute to increased advertising revenues in the future.
E-COMMERCE AGREEMENTS AND OFFERINGS. We have entered into a number of e-commerce agreements, which generally include either a fixed fee for advertising, a bounty for new customer accounts or revenue sharing of 10% to 50% of the sales made by the e-commerce vendor as a result of links from our network, or in some cases combinations of advertising, bounties and revenue sharing. E-commerce agreements typically are a minimum of three months in duration.
We also provide our user community with various e-commerce offerings. Through INT Media Research, we publish research reports analyzing the Internet and information technologies sectors worldwide. Through Allnetresearch.com, we sell paid research reports offered by over 90 third party publishers. Through LinuxCentral.com and BSDCentral.com, we sell hardware, software and other products geared for the Linux and Open Source community. Through our CAREERS CHANNEL, we offer paid job listings that can be searched by job type, salary range and geographic location.
CONFERENCES AND TRADE SHOWS. Through our INT Media Events Division, we offer conferences and trade shows focused on Internet and IT-specific topics that are of interest to our community of Internet users. We are able to efficiently promote these conferences and trade shows through our network. We generate revenues from attendee registrations, exhibition space and advertiser and vendor sponsorships. Proceeds from the sale of attendee registrations, exhibition space and advertiser and vendor sponsorships are deferred and recognized as revenue at the time the conferences and trade shows are held.
PERMISSION BASED OPT-IN E-MAIL LIST RENTALS. We currently offer for rental our permission based opt-in e-mail list names relating to over 270 Internet and IT-specific topics. Members of our community of Internet users volunteer, or "opt-in," to be included on these lists to receive e-mail product offerings and information relevant to their Internet interests. Subscribers to these permission based opt-in e-mail lists receive e-mail announcements of special offers relating to each topic subscribed. We generate revenues on a per use basis for the rental of our list names.
PAID SUBSCRIPTION SERVICES. Paid subscription services relate to customer subscriptions to our paid e-mail newsletters and services, SearchEngineWatch.com, TheCounter.com, WinDrivers.com, WallStreetResearchNet.com, UnclaimedDomains.com, DomainBook.com, AlertIPO.com and
NanotechPlanet.com, which are sold through our network and through affiliate relationships. Revenue from subscriptions is recognized ratably over the subscription period. Deferred revenues relate to the portion of collected subscription fees, which has not yet been recognized as revenue.
RESEARCH REPORTS. Through our INT Media Research Division, we publish and sell research reports that analyze the Internet and information technology sectors worldwide. Revenues are recognized upon delivery of the reports to the purchasers.
LICENSING AGREEMENTS. We license our editorial content and brands to third parties for fixed fees and royalties based on the licensee's revenues generated by the licensed content. We license selected portions of our editorial content to print publishers. We license one-time rights to reprint individual articles, online or in print, to third parties through licensing of reprints and copyright permission requests. We also provide access to limited versions of our editorial content to others at no charge, to promote our brands and generate traffic.
ONLINE PRESS RELEASE DISTRIBUTION SERVICES. Through InternetNewsBureau.com, we provide paid e-mail based press release distribution services. These press releases are e-mailed to over 5,900 registered journalists.
VENTURE FUND MANAGEMENT FEES. We are the portfolio manager of internet.com Venture Fund I LLC, a $5.0 million venture fund formed in March 1999, internet.com Venture Fund II LLC, a $15.0 million venture fund formed in September 1999, and internet.com Venture Partners III LLC, a $75.0 million venture fund formed in January 2000, all of which invest in early-stage content-based Internet properties that are not competitive with INT Media Group. We earn management fees for the day-to-day operation and general management of the funds. We are also entitled to 20% of the realized gains on investments made by these funds. We invested $700,000 in the initial fund and $1.8 million in the second fund, which are now fully invested. We committed $10.4 million in the third fund, of which $3.1 million has been invested as of December 31, 2001. The remaining $4.3 million in the initial fund, $13.2 million in the second fund and $64.6 million in the third fund were invested or committed by third party investors.
CONTENT OFFERINGS AND SERVICES
We offer a broad range of content offerings and services to serve the needs of our community of Internet users for content, community and commerce, as well as the needs of advertisers and vendors in targeting our community of Internet users. Our network is organized into the following 16 vertical content categories, or channels:
- INTERNETNEWS CHANNEL - Provides real-time coverage of Internet industry and information technology news events from around the world. Our staff of 13 analysts and journalists file approximately 35 original items daily in the following vertical Internet news categories: business, finance, Internet service provider, or ISP, Web developer, E-commerce, Internet advertising, wireless, network infrastructure and Internet stocks. We enhance our original coverage of Internet industry and IT news events through an agreement with Comtex News Network to carry selected Internet news items.
- INTERNET TECHNOLOGY CHANNEL - Provides access to Internet news, analyses, tutorials, reviews and resource guides to help our users integrate evolving Internet technologies. Internet media properties in the Internet Technology Channel cover many topics, including corporate intranet implementation, Web servers and Internet and information technology products.
- WEB DEVELOPER CHANNEL - Provides our users who are responsible for building and maintaining Web sites with communication services and the latest information and trends for Web site development. We provide tutorials, applets and script downloads and online resource directories
to Web developers. In addition, we provide community-building resources through online discussion forums, frequently asked questions and moderated e-mail discussion lists.
- ECOMMERCE/MARKETING CHANNEL - Provides Internet marketers and e-commerce professionals with information resources, market research and sales and marketing techniques. This channel includes tutorials for gaining better placement in search engines, summaries of the latest Internet market research and information about Internet advertising and promotion.
- INTERNET RESOURCES CHANNEL - Provides access to subscription services to our e-mail newsletters, information about Internet and IT industry events, nanotechnology news and information, and other Internet resources.
- ASP RESOURCES CHANNEL. - Provides news, analysis, commentary and community interaction to help Application Service Provider ("ASP") professionals do their jobs and buy products and services more efficiently.
- ISP RESOURCES CHANNEL - Provides information for professionals in the Internet Service Provider ("ISP") and Competitive Local Exchange Carrier ("CLEC") industries, including ISP-Planet.com, CLEC-Planet.com and ISP-Lists.com, a collection of 33 e-mail discussion lists used by more than 48,000 professionals in the ISP industry to communicate with their colleagues.
- INTERNET INVESTING CHANNEL - Provides stock and financial news, information and analysis about Internet companies. This channel includes the Internet Stock Report, which includes daily analysis of Internet stocks; ISDEX, The Internet Stock Index, a proprietary index of 50 publicly traded Internet stocks; Alert-IPO.com, a subscription service reporting on the market for initial public offerings, WSRN.com (Wall Street Research Net), a subscription service offering financial reports for investors, and VCBuzz.com, an information resource for venture capitalists.
- INTERNATIONAL CHANNEL - Provides Internet and IT news and information for specific countries or regions including Asia, Australia, Germany, Japan, Korea and Turkey.
- DOWNLOAD CHANNEL - Helps experienced Internet users evaluate and retrieve freeware and shareware software in a variety of categories including business, developer, utilities, multimedia and games.
- LINUX/OPEN SOURCE CHANNEL - Provides news, tutorials, information resources and e-commerce services for technology professionals implementing and maintaining Linux and/or open source technologies.
- INTERNET LISTS CHANNEL - A collection of Web-based directories that allow users to find and evaluate ISPs, ASPs, Web design firms, trade shows and online casinos.
- WINDOWS INTERNET TECHNOLOGY CHANNEL - Provides news, tutorials, and information resources for technology professionals implementing and maintaining Internet and intranet applications using Microsoft Corporation technologies including Windows Active Server Pages and Back Office.
- WIRELESS INTERNET CHANNEL - Provides comprehensive coverage of the technologies, services and products for users of wireless networks (including Wi-Fi and 802.11), Personal Digital Assistants (PDAs), wireless communicators (such as RIM Blackberry) as well as daily coverage of innovative products and services for mobile Internet use.
- EARTHWEB CHANNEL - Provides a comprehensive set of solutions to a broad range of IT and Internet professionals including all job titles from CTOs to programmers.
- CAREER CHANNEL - Provides access to Internet and IT job listings posted by thousands of employers across the country.
EDITORIAL
We maintain editorial offices in Darien, Connecticut; New York, New York; South San Francisco, California; and Cambridge, Massachusetts. In addition, editorial personnel work from home offices throughout the United States and in Australia and Singapore. Freelance contributors and analysts are also located both domestically and in 12 countries worldwide.
Our editorial team, comprised of over 60 employees and over 100 freelance contributors as of February 28, 2002, creates considerable proprietary content each month.
MARKETING AND SALES
MARKETING. We employ a combination of online and offline advertising and promotional campaigns to promote our content offerings and services to our community of Internet users, advertisers and vendors. User advertising includes cross-promotion on our network, advertising in trade publications and at trade shows and promotional links from Web sites that attract demographically similar audiences. We believe that this strategy maintains the high quality and unique focus of our community of Internet users. We have participated in various Internet industry events, including Internet World, ISPCON and AdTech trade shows. We have also used print advertising, which has appeared in BOARDWATCH, INTERNET WORLD, TELE.COM, RED HERRING, UPSIDE, WIRELESS WEEK, NANOTECHNOLOGY MAGAZINE, HOSTING TECH, KNOWLEDGE MANAGEMENT, XML JOURNAL and SOFTWARE MAGAZINE, among other publications.
Our marketing efforts are directed largely at acquiring advertising clients and commerce agreements. We principally use offline and online advertising, direct mail and event sponsorships for customer acquisition. ADVERTISING AGE, ADWEEK, B2B MAGAZINE, TECHNOLOGY MARKETING, ONLINE ADVERTISING DISCUSSION LIST and SRDS are among the venues used to deliver our promotional messages. In addition, we have a strategic agreement with Penton Media, which provides for an exchange of services to be provided by each party. This agreement expires on November 23, 2003.
Services provided by Penton Media to us under this agreement include the following:
- one full-page advertisement at no charge in each issue of INTERNET WORLD magazine and BOARDWATCH magazine;
- exhibit and sales office space at no charge for each U.S. Internet World and ISPCON trade show; and
- prominent hanging media banners for Internet World and ISPCON trade shows.
We provide a minimum of 2.3 million advertising impressions each month on our network to Penton Media.
Our conference and trade show marketing initiatives are focused mainly on leveraging the existing users of our network. We extensively cross-promote our events through targeted electronic campaigns that include: Web banners, e-mail newsletter ads, dedicated e-mail messages to select e-mail newsletter subscriber databases and opt-in e-mail messages. To supplement our internal marketing efforts, we also execute highly targeted traditional direct mail campaigns by mailing postcards to select lists in targeted geographic areas. The postcards serve as an event overview and an invitation to visit our Web sites to obtain further information. Mailing lists and print advertisements are bartered with media companies in exchange for a presence at our conferences and trade shows.
ADVERTISING SALES. We believe that we have been able to obtain revenue from advertising on our Web sites, online discussion forums, e-mail newsletters and moderated e-mail discussion lists because we enable clients to efficiently and effectively reach targeted segments of the Internet community. Based on
a survey we commissioned which was conducted from January 2002 through March 2002, 84% of our community of Internet users reports that they either make or influence purchasing decisions. We believe that targeting this influential audience allows us to sell advertising space at rates that are higher than the average rates charged by online services aimed at more general audiences.
Our sales force is organized by geographic regions as follows: East, Northeast, Southeast/Midwest, Northwest/Southwest, West, Canada, Europe, Asia, and Australia.
Over 2,500 advertisers have placed advertisements on our network. For the year ended December 31, 2001, our top 20 advertisers together accounted for 23% of our revenues. Based on revenues, the following were our 20 largest advertisers during the year ended December 31, 2001:
E-COMMERCE SALES, CONFERENCE AND TRADE SHOW SALES AND LICENSING. We offer e-commerce, licensing and other business development arrangements to maximize the potential of our proprietary content and community of Internet users. We identify potential e-commerce vendors, licensees and other potential business development opportunities and generally enter into contracts of three to 12 months' duration. E-commerce agreements generally include an advance against revenue with revenue sharing of 10% to 50% of the sales made by the e-commerce vendor as a result of links from our network.
We offer conferences and trade shows focused on Internet and IT-specific topics that are of interest to our community of Internet users. We are able to efficiently promote these conferences and trade shows through our network. We generate revenues from attendee registrations, exhibition space and advertiser and vendor sponsorships.
Licensing arrangements allow third parties to reproduce our editorial content and brands either for print or online use. We are typically paid per-use in the case of book and print rights, including reprints of articles published on our network, and monthly in cases where our editorial content is published in electronic form.
COMPETITION
We believe we compete on the basis of our brand recognition and our proprietary content offerings and services focused solely on the Internet industry and information technology. We believe that we are differentiated relative to our competitors due to our vertical focus of providing content, community and commerce to Internet industry and information technology professionals, Web developers and experienced Internet users.
The market for Internet-based services is relatively new, intensely competitive and rapidly changing. Since the advent of commercial services on the Internet, the number of online services competing for users' attention and spending has proliferated. We expect that competition will continue to intensify. We compete with other companies, which direct a portion of their overall Web content at the Internet professional community, such as CNET, Inc. and CMP Media Inc. We also compete for circulation and advertising impressions with general interest portal and destination Web sites as well as traditional media.
Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and to devote greater resources to the development, promotion and sale of their products and services than we can. The number of companies competing for the attention and spending of our community of Internet users has increased and we expect it to continue to increase.
TECHNOLOGY AND OPERATIONS
We have developed an expandable operations infrastructure using open standard hardware and software systems. We make our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists available using multiple Sun Microsystems, Inc. and Wintel-based servers that run on Sun Solaris, Microsoft NT, Windows 2000 and Linux operating systems. We license software from the following parties, among others: Web and e-mail servers from Netscape Communications Corporation; Web and database servers from Microsoft Corporation; database servers from Oracle Corporation, Informix Corporation and Microsoft Corporation; an advertising management system from Real Media, Inc.; a content management system from Vignette Corporation; a streaming media server from RealNetworks, Inc.; a spidering, content indexing, personalization and categorization system from Autonomy, Inc.; discussion forums from Web Crossing Inc., and firewalls from Network Associates Inc.
We maintain redundant server capacity in a data center operated by Qwest Communications, Inc. In the event that production servers fail, we can restore service quickly using spare servers. We have redundant Internet circuits diversely routed within Qwest's network and with redundant network equipment configured for automatic fail over. All of our servers are powered by uninterruptible power supplies, and the data center is on multiple power grids. In addition, Qwest maintains a diesel-powered generator and fuel supply in the event of extended outages. All of our production systems are copied each night to backup tapes that are stored at an off-site storage facility. We maintain a quality assurance process to constantly monitor our servers, processes and network connectivity. We have implemented these redundancies and backup systems in order to minimize the risk associated with damage from fire, power loss, telecommunications failure, break-ins, computer viruses and other events beyond our control.
INTELLECTUAL PROPERTY
We seek protection of our proprietary content, logos, brands and software relating to our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists and attempt to protect them by relying on trademark, copyright, trade secret and other laws and restrictions. We currently have no patents or patents pending and do not anticipate that patents will become a significant part of our intellectual property in the foreseeable future. We pursue the registration of our trademarks and service marks in the United States and internationally, and have applied for registration in the United States and numerous other countries for a number of our trademarks and service marks. We also pursue copyright registration of our content in the United States. We might not be able to obtain effective trademark, copyright and trade secret protection in every country in which we distribute our services or make them available through the Internet, and it is difficult for us to police unauthorized use of our proprietary information.
We have applied for registration of our trademarks and service marks in the United States and in over 75 other countries. We have encountered obstacles to registration of some marks in several of these countries.
Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and still evolving. As a result, we cannot assure the future viability or value of our proprietary rights. We might not have taken adequate steps to prevent the misappropriation or infringement of our intellectual property. Any such infringement or misappropriation, should it occur, might harm our business, results of operations and financial condition. In addition, we may have to file lawsuits in the future to perfect or enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of
others. These lawsuits could result in substantial costs and divert our resources and the attention of our management. As a result, our business, results of operations and financial condition would suffer.
Our business activities may infringe upon the proprietary rights of others, and other parties might assert infringement claims against us. From time to time, we have been, and expect to continue to be, subject to claims in the ordinary course of our business including claims of alleged infringement of the trademarks, service marks and other intellectual property rights of third parties. If similar claims are made against us in the future, those claims and any resultant litigation might subject us to liability for damages, result in invalidation of our proprietary rights and, even if not meritorious, could be time consuming and expensive to defend and could result in the diversion of our resources and the attention of our management. As a result, our business, results of operations and financial condition would suffer.
We generally obtain our content and some of our technology from our employees or pursuant to work-for-hire arrangements. We also license technology and content from third parties. In such license arrangements, we generally obtain representations as to origin and ownership of such content and technology and the licensors have generally agreed to defend, indemnify and hold us harmless from any third party claims that such technology or content violates the rights of another. We cannot be sure that these third party technology and content protections will be effective or sufficient or that we will be able to maintain such content or technology on commercially reasonable terms. As a result, our business, results of operations and financial condition would suffer.
We have licensed in the past, and expect to license in the future, proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brands and content are maintained by such licensees, we cannot be sure that such licensees will not take actions that might decrease the value of our brands, proprietary rights or reputation, which would harm our business, prospects, financial condition and results of operations.
DOMAIN NAMES
We own the Internet domain name "internet.com," as well as numerous other domain names both in the United States and internationally. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not acquire or maintain the "internet.com" or comparable domain name in all the countries in which we conduct business.
The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and still evolving. Therefore, we might be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.
EMPLOYEES
The following table sets forth a breakdown of our employees as of February 28, 2002:
We have never had a work stoppage and no personnel are represented under collective bargaining agreements. We consider our relations with our personnel to be good.
ITEM 2.
ITEM 2. PROPERTIES
We lease approximately 25,000 square feet of office space in two facilities in Darien, Connecticut that house our principal administrative, editorial, sales, marketing, and information technology operations. In addition, we lease approximately 11,000 square feet of office space in New York, New York, that is used by editorial, sales, marketing and information technology personnel, and approximately 7,000 square feet of office space in San Francisco, California that is used primarily by sales personnel. We also have domestic operating leases in: Cambridge and Westboro, Massachusetts; Washington, D.C.; and Clinton Township, Michigan. These locations range in size from 1,600 to 2,900 square feet and expire between August 2002 and April 2005. In addition, we have international operating leases in Australia, Germany and Singapore.
We believe that the general condition of our leased real estate is good and that our facilities are suitable for the purposes for which they are being used. We believe that our current facilities will be adequate to meet our needs for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Messrs. Alan M. Meckler and Christopher S. Cardell, who are stockholders, executive officers and directors of INT Media Group, were stockholders, executive officers and directors of Mecklermedia Corporation prior to its acquisition by Penton Media in November 1998. In addition, Messrs. Gilbert F. Bach and Michael J. Davies, who are directors of INT Media Group, were directors of Mecklermedia Corporation prior to its acquisition by Penton Media. A complaint seeking class action status was filed in Delaware Chancery Court on June 16, 1999 by a former stockholder of Mecklermedia Corporation alleging that Messrs. Meckler, Cardell, Bach and Davies, as well as the other directors of Mecklermedia Corporation, breached their fiduciary duties of care, candor and loyalty in connection with the approval of the sale of Mecklermedia Corporation to Penton Media at the price paid by Penton Media and the related sale of 80.1% of the Internet business of Mecklermedia Corporation to Mr. Meckler at the price paid by Mr. Meckler. Among other things, this plaintiff has alleged that the price paid by Penton Media for the purchase of Mecklermedia Corporation, and the price paid by Mr. Meckler for an 80.1% stake in the Internet business of Mecklermedia Corporation, were inadequate. This former stockholder of Mecklermedia Corporation has asserted claims for unspecified damages. The plaintiff also named INT Media Group, Incorporated as a defendant seeking that a constructive trust be established consisting of any benefits derived by the defendants in respect of the allegations set forth in the complaint. On August 20, 1999, all of the defendants, including INT Media Group and Messrs. Meckler, Cardell, Bach and Davies, served an answer to the complaint generally denying the allegations therein, denying that the directors of Mecklermedia Corporation breached any fiduciary duties, and asserting certain affirmative defenses. All of the defendants intend to continue to vigorously defend themselves.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of INT Media Group began trading publicly on the Nasdaq Stock Market on June 25, 1999, under the symbol "INTM". Prior to that date, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low sale prices of our common stock.
As of February 28, 2002, there were 58 holders of record of our common stock, although we believe that the number of beneficial owners of our common stock is substantially higher.
DIVIDEND POLICY
We have never declared or paid a cash dividend and do not anticipate doing so in the foreseeable future. We expect to retain earnings to finance the expansion and development of our business.
RECENT SALES OF UNREGISTERED SECURITIES
On September 8, 2000, we issued an aggregate of 211,382 shares of INT Media Group common stock, with an aggregate market value at such time of approximately $5.8 million, as partial consideration for the acquisition by INT Media Group of substantially all of the assets of ClickZ, Inc., a Massachusetts corporation ("ClickZ"). All of the shares of INT Media Group common stock issued in this transaction were issued to ClickZ in a non-public offering pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"), under Section 4(2) of the 1933 Act. This sale was made without general solicitation or advertising. ClickZ and its principal stockholders represented to us that ClickZ was a sophisticated investor, that it had been given the opportunity to obtain from us all information that it requested to evaluate the investment and that the shares were being acquired for investment purposes only.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial statements of INT Media Group, the accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data of the iWorld division of Mecklermedia for the years ended September 1997 and 1998, and for the period from October 1, 1998 through November 23, 1998, are derived from financial statements of the iWorld division of Mecklermedia. The selected financial data for the period from inception (November 24, 1998) through December 31, 1998 and for the years ended December 31, 1999, 2000 and 2001, as well as the balance sheet data as of December 31, 2000 and 2001, are derived from the financial statements of INT Media Group. These financial statements have been audited by Arthur Andersen LLP, independent public accountants. See "Index to Financial Statements."
The financial information of the iWorld division of Mecklermedia included herein is not necessarily indicative of the results of operations, financial position and cash flows of INT Media Group had it been a stand-alone entity at such times. It is also not necessarily indicative of the results of operations, financial position and cash flows of INT Media Group in the future. The share information reflects the conversion of INT Media Group from a limited liability company into a corporation as if such conversion had occurred at the beginning of each period indicated.
- ---------- (1) Represents the financial data of the iWorld division of Mecklermedia Corporation.
(2) Represents the financial data of INT Media Group.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We own and operate a network of Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists focused solely on the Internet industry and information technology ("IT"). Our network consists of 16 subject areas, or vertical content channels, that contain over 150 Web sites, over 200 e-mail newsletters, over 400 online discussion forums and over 70 moderated e-mail discussion lists focused solely on the Internet industry and IT. During the month of January 2002, we delivered over 240 million page views to over 20 million unique visitors and over 31 million copies of our e-mail newsletters to over 5 million subscribers, and over 41 million messages were distributed to over 70,000 subscribers to our moderated e-mail discussion lists. Our INT Media Events Division produces nearly 40 offline conferences and trade shows on Internet and IT-specific topics that are aligned with our network of Web sites and e-mail newsletters. In addition, our INT Media Research Division publishes research reports analyzing the Internet and information technology sectors worldwide.
We were formed in November 1998 following the acquisition of Mecklermedia by Penton Media. As part of the acquisition, Penton Media agreed to contribute all the assets of Mecklermedia's Internet media business division, iWorld, to a newly formed limited liability company, internet.com LLC. As part of this acquisition agreement, we reserved 4% of our total membership units for discretionary grants to our employees. The grants were completed in March 1999. As these membership units vested upon the completion of our initial public offering, we recorded an $8.0 million compensation charge concurrent with the completion of our initial public offering in June 1999. Prior to the acquisition of Mecklermedia by Penton Media, iWorld operated as one of three business lines, which comprised Mecklermedia. Our predecessor Web sites, MecklerWeb and iWorld.com, were also dedicated to covering Internet and IT developments.
We generate revenues from the following sources:
- advertising on our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists;
- e-commerce agreements and offerings;
- conferences and trade shows;
- permission based opt-in e-mail list rentals;
- paid subscription services;
- research reports;
- licensing of our editorial content and brands;
- online press release distribution services; and
- venture fund management fees.
We barter a portion of the unsold advertising impressions generated by our network for advertising and promotion in media properties owned by third parties. In addition, INT Media Group barters portions of unsold advertising impressions for equity interests in certain of our venture funds' portfolio companies. We did not record the effects of this barter in our financial statements for the year ended December 31, 1999. Beginning in January 2000, in accordance with Emerging Issues Task Force Issue No. 99-17, "Accounting for Advertising Barter Transactions," we have prospectively recorded revenues and expenses from barter transactions at their estimated fair values. Revenues related to barter transactions were approximately $4.1 million and $5.4 million and expenses were $2.1 million and $2.9 million, respectively, for the years ended December 31, 2000 and 2001.
For the years ended December 31, 2000 and 2001, a majority of our revenues were derived from advertising. We recognize advertising revenue ratably in the period the advertising is displayed, provided that no significant company obligations remain outstanding and collection of the resulting receivable is probable. Such obligations typically include guarantees of a minimum number of advertising impressions, or times an advertisement is viewed by users of INT Media Group's Web sites and related Internet media properties. We use a direct sales force to sell advertising to companies and advertising agencies.
Our e-commerce agreements and offerings generally include advertising on our Web sites, bounties for new customers or revenue sharing for sales made by the e-commerce vendors as a result of links from our network, or in some cases combinations of advertising, bounties and revenue sharing. We recognize the advertising component of these agreements ratably in the period the advertising is displayed, provided that no significant company obligations remain and collection of the remaining receivable is probable. Generally, bounties and revenue sharing agreements require a monthly minimum fee from INT Media Group's customers. Revenues from these agreements are recognized in the month they are earned.
Our conferences and trade shows generate revenues from attendee registrations, exhibition space and from advertiser and vendor sponsorships. Proceeds from the sale of attendee registrations, exhibition space and advertiser and vendor sponsorships are deferred and recognized as revenue at the time the conferences and trade shows are held.
We currently offer for rental our permission based opt-in e-mail list names relating to over 270 Internet and IT-specific topics. Members of our community of Internet users volunteer, or "opt-in", to be included on these lists to receive e-mail product offerings and information relevant to their Internet and information technology interests. Subscribers to these permission based opt-in e-mail lists receive e-mail announcements of special offers relating to each topic subscribed. We generate revenues on a per use basis for the rental of our list names. Revenue from permission based opt-in list rentals is recognized at the time of use by the renter.
Paid subscription services relate to customer subscriptions to our paid e-mail newsletters and services, SearchEngineWatch.com, TheCounter.com, WinDrivers.com, WallStreetResearchNet.com, UnclaimedDomains.com, DomainBook.com, AlertIPO.com and NanotechPlanet.com, which are sold through our network and through affiliate relationships. Revenue from subscriptions is recognized ratably over the subscription period. Deferred revenues relate to the portion of collected subscription fees, which has not yet been recognized as revenue.
Through our INT Media Research Division, we publish and sell research reports that analyze the Internet and information technology sectors worldwide. Revenues are recognized upon delivery of the reports to the purchasers.
Our licensing agreements vary in structure, with INT Media Group generating fixed fees, royalties or both for access to our editorial content and brands. We generally license our editorial content and brands to offline and online media companies. Revenues are recognized ratably over the period of the licensing agreements.
Online press release distribution revenues are generated through InternetNewsBureau.com. We distribute e-mail based press releases to over 5,900 registered journalists. Revenue from this service is recorded on a per use basis and recognized at the time of distribution.
Venture fund management fees relate to management fees earned for the day-to-day operation and general management of internet.com Venture Fund I LLC, internet.com Venture Fund II LLC and internet.com Venture Partners III LLC. Management fees are recognized ratably over the period in which services are rendered. In addition, INT Media Group is entitled to 20% of the realized gains earned from portfolio investments, which are recognized at the time of distribution from the venture capital funds.
From July 1995 through February 28, 2002, we made 73 acquisitions of Internet media properties, consisting of 102 Web sites, 107 e-mail newsletters, 125 online discussion forums and 162 moderated e-mail discussion lists. We expect to continue to pursue strategic acquisitions to strengthen our content offerings and services. All of INT Media Group's acquisitions have been accounted for as purchases.
We have sustained losses on a quarterly and annual basis in the past, and because costs are largely fixed in the short term, we expect to be vulnerable to significant fluctuations in operating losses if actual revenues fall below anticipated levels. Furthermore, given the rapidly evolving nature of our business, our operating results are difficult to forecast and period-to-period comparison of our operating results will not be meaningful and should not be relied upon as any indication of future performance. Due to these and other factors, many of which are outside our control, quarterly-operating results may fluctuate significantly in the future.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated:
YEARS ENDED DECEMBER 31, 2000 AND 2001
REVENUES. Revenues were $52.1 million for the year ended December 31, 2000 and $44.0 million for the year ended December 31, 2001, representing a decrease of 16%. This change was primarily due to a reduction in advertising revenues. A majority of our revenues relate to advertising on our network of Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists. While we anticipate that advertising revenues will continue to represent a majority of our revenues for the foreseeable future, we believe that revenues from e-commerce agreements and offerings, conferences and trade shows, permission based opt-in e-mail list rentals, paid subscription services, research reports, licensing, online press release distribution services and venture fund management fees will continue to expand and diversify our future revenue streams.
COST OF REVENUES. Cost of revenues primarily consists of expenses associated with editorial, communications infrastructure, Web site hosting and conferences and trade shows. Cost of revenues was $23.0 million for the year ended December 31, 2000 and $22.1 million for the year ended December 31, 2001, representing a decrease of 4%. This change was primarily due to a reduction of editorial, technology and operations personnel and a decrease in expenses for freelance contributors, partially offset by office and workforce redundancy costs. As a percentage of revenues, cost of revenues was 44% for the year ended December 31, 2000 and 50% for the year ended December 31, 2001.
ADVERTISING, PROMOTION AND SELLING. Advertising, promotion and selling expenses primarily consist of costs related to sales and marketing staff, sales commissions and promotion costs. Advertising, promotion and selling expenses were $18.3 million for the year ended December 31, 2000 and $18.5 million for the year ended December 31, 2001, representing a 1% increase. This change was primarily due to increased conference marketing expenses and workforce redundancy costs offset by a reduction of advertising sales personnel. As a percentage of revenues, advertising, promotion and selling expenses were 35% for the year ended December 31, 2000 and 42% for the year ended December 31, 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily consist of salaries, professional fees, facilities costs and provisions for losses on accounts receivable. General and administrative expenses were $10.2 million for the year ended December 31, 2000 and $12.0 million for the year ended December 31, 2001, representing an 18% increase. This change was primarily due to increased provision for losses on accounts receivable. As a percentage of revenues, general and administrative expenses were 20% for the year ended December 31, 2000 and 27% for the year ended December 31, 2001.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment was $2.1 million for the year ended December 31, 2000 and $2.7 million for the year ended December 31, 2001, representing a 30% increase. As a percentage of revenues, depreciation of property and equipment was 4% for the year ended December 31, 2000 and 6% for the year ended December 31, 2001. Amortization of intangibles was $24.9 million for the year ended December 31, 2000 and $33.8 million for the year ended December 31, 2001, representing a 36% increase. This increase was primarily due to the amortization of acquired Web sites and related Internet media properties. As a percentage of revenues, amortization of intangibles was 48% for the year ended December 31, 2000 and 77% for the year ended December 31, 2001.
IMPAIRMENT OF INTANGIBLES. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the sum of undiscounted expected future cash flows is less than the carrying amount of such assets. The measurement for such impairment loss is based on estimated fair values. Fair values have been determined based upon estimated future cash flows. During 2001, INT Media Group determined that certain intangible assets associated with various acquired Web sites and related Internet media properties were impaired. As a result of this determination, INT Media Group has recorded a non-cash charge of approximately $54.2 million.
MINORITY INTERESTS. Minority interests represent the minority stockholders' proportionate share of losses of INT Media Group's majority-owned consolidated international subsidiaries.
EQUITY LOSSES FROM INTERNATIONAL AND VENTURE FUND INVESTMENTS, NET. Equity losses represent INT Media Group's net equity interests in the investments in internet.com venture funds and international joint ventures.
LOSS ON INVESTMENTS AND OTHER, NET. During the year ended December 31, 2001, INT Media Group determined that the declines in value from INT Media Group's accounting basis for certain of our investments in internet.com venture fund portfolio companies was other than temporary. INT Media Group recognized losses totaling $1.9 million related to investment impairment.
INTEREST INCOME, NET. Interest income was approximately $4.8 million for the year ended December 31, 2000 and $1.4 million for the year ended December 31, 2001.
PROVISION FOR INCOME TAXES. INT Media Group recorded a provision for income taxes of $205,000 for the year ended December 31, 2000 and $2,000 for the year ended December 31, 2001 related to foreign income tax liabilities which were recorded based upon estimated foreign tax rates.
YEARS ENDED DECEMBER 31, 1999 AND 2000
REVENUES. Revenues were $16.1 million for the year ended December 31, 1999 and $52.1 million for the year ended December 31, 2000, representing an increase of 224%. This change was primarily due to an increase in advertising revenues.
COST OF REVENUES. Cost of revenues was $8.4 million for the year ended December 31, 1999 and $23.0 million for the year ended December 31, 2000, representing an increase of 175%. This change was primarily due to the increased hiring of editorial, technology and operations personnel and expenses for freelance contributors. The increase was offset by capitalization of certain costs under the Emerging Issues Task Force Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), of $742,000 for the year ended December 31, 2000. As a percentage of revenues, cost of revenues was 52% for the year ended December 31, 1999 and 44% for the year ended December 31, 2000.
ADVERTISING, PROMOTION AND SELLING. Advertising, promotion and selling expenses were $7.5 million for the year ended December 31, 1999 and $18.3 million for the year ended December 31, 2000, representing an increase of 142%. This change was primarily due to increased hiring of advertising sales personnel and the recording of barter advertising. As a percentage of revenues, advertising, promotion and selling expenses were 47% for the year ended December 31, 1999 and 35% for the year ended December 31, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $4.4 million for the year ended December 31, 1999 and $10.2 million for the year ended December 31, 2000, representing a 129% increase. This change was primarily due to the hiring of additional personnel and increased provisions for losses on accounts receivable. As a percentage of revenues, general and administrative expenses were 28% for the year ended December 31, 1999 and 20% for the year ended December 31, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment was $673,000 for the year ended December 31, 1999 and $2.1 million for the year ended December 31, 2000, representing a 212% increase. As a percentage of revenues, depreciation of property and equipment was 4% for both the year ended December 31, 1999 and 2000. Amortization of intangibles was $9.8 million for the year ended December 31, 1999 and $24.9 million for the year ended December 31, 2000, representing a 154% increase. This increase was primarily due to the amortization of acquired Web sites and related Internet media properties. As a percentage of revenues, amortization of intangibles was 61% for the year ended December 31, 1999 and 48% for the year ended December 31, 2000.
NON-CASH COMPENSATION CHARGE. In March 1999, internet.com LLC granted 4% of its total membership units at the time to certain of its employees. As these membership units vested upon the completion of our initial public offering in June 1999, INT Media Group recorded an $8.0 million compensation charge concurrent with the completion of our initial public offering on June 25, 1999.
MINORITY INTEREST. Minority interest represents the minority stockholders' proportionate share of losses of INT Media Group's majority-owned consolidated international subsidiaries.
EQUITY LOSS FROM INTERNATIONAL AND VENTURE FUND INVESTMENTS, NET. Equity losses represent INT Media Group's net equity interests in the investments in international joint ventures and the internet.com venture funds. Equity losses from international joint ventures were $318,000 for the year ended December 31, 2000. Equity losses from the internet.com venture funds were approximately $1.1 million for the year ended December 31, 2000.
LOSS ON INVESTMENTS AND OTHER, NET. During the year ended December 31, 2000, INT Media Group determined that the declines in value from INT Media Group's accounting basis for certain of our investments in internet.com venture fund portfolio companies was other than temporary. INT Media Group recognized losses totaling $216,000 related to investment impairment, net of a gain on the distribution of GOTO.com common stock received from internet.com Venture Fund I LLC.
INTEREST INCOME, NET. Interest income, net of interest expense, was $688,000 for the year ended December 31, 1999 and $4.8 million for the year ended December 31, 2000.
PROVISION FOR INCOME TAXES. INT Media Group recorded a provision for income taxes of $205,000 for the year ended December 31, 2000 related to foreign income tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded operations primarily with cash from our initial and follow-on public offerings, borrowings under a line of credit and the capital contributions of members of internet.com LLC. On June 25, 1999, we completed our initial public offering of 3,400,000 shares of our common stock at $14.00 per share. Net proceeds to INT Media Group aggregated approximately $43.0 million (net of underwriters' commission and offering expenses of $4.7 million). On June 30, 1999, INT Media Group paid the outstanding balance under its line of credit of approximately $5.0 million and terminated the line of credit. On February 1, 2000, we completed our follow-on public offering of 3,750,000 shares of common stock priced at $60.00 per share, of which 1,750,000 shares were sold by INT Media Group and 2,000,000 shares were sold by Penton Media, Inc. Net proceeds received by INT Media Group from the follow-on offering were approximately $98.3 million. INT Media Group did not receive any of the proceeds from the sale of shares by Penton Media, Inc.
As of December 31, 2001, INT Media Group had total current assets of $32.2 million and total current liabilities of $9.3 million, or working capital of $22.9 million.
Net cash used in operating activities was approximately $3.5 million for the year ended December 31, 1999, $1.4 million for the year ended December 31, 2000 and $5.4 million for the year ended December 31, 2001. Net cash used in operating activities for the year ended December 31, 1999 was primarily a result of our net losses adjusted for a non-cash compensation charge, depreciation and amortization, and increases in accounts receivable and prepaid expenses, offset by an increase in accounts payable, accrued expenses and deferred revenues. Net cash used in operating activities for the year ended December 31, 2000 was a result of our net losses adjusted for depreciation and amortization, non-cash barter transactions, provision for losses on accounts receivable, and increases in accounts payable and accrued expenses offset by increases in accounts receivable and prepaids and other. Net cash used in operating activities for the year ended December 31, 2001 was primarily a result of our net losses adjusted for depreciation and amortization, impairment of intangibles, non-cash barter transactions, provision for losses on accounts receivable and decreases in accounts payable and accrued expenses, offset by decreases in accounts receivable and prepaids and other.
Net cash used in investing activities was approximately $25.0 million for the year ended December 31, 1999, $55.3 million for the year ended December 31, 2000 and $29.5 million for the year ended December 31, 2001. Net cash used in investing activities was primarily a result of acquisitions of Web sites and related Internet media properties and capital expenditures. Capital expenditures were $2.5 million for the year ended December 31, 1999, $3.7 million for the year ended December 31, 2000 and $1.9 million for the year ended December 31, 2001.
Net cash provided by financing activities was approximately $46.3 million for the year ended December 31, 1999, $98.7 million for the year ended December 31, 2000 and $55,000 for the year ended December 31, 2001. Net cash provided by financing activities was a result of our initial public offering, borrowings under our line of credit, a private placement of equity securities, net proceeds from our follow-on public offering and from the exercise of stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2000, the Emerging Issues Task Force reached a consensus on Issue No. 99-17, "Accounting for Advertising Barter Transactions," to be effective for transactions entered into after January 20, 2000. The consensus states that advertising barter transactions should be accounted for at fair value and the fair value recognized disclosed in the financial statements, if there is verifiable objective evidence provided by sufficient cash transactions received by the seller of the advertising or similar advertising. Accordingly, INT Media Group began to record the financial statement effects of barter transactions at their estimated fair value, prospectively, beginning in January 2000.
As of July 1, 2000, INT Media Group adopted Emerging Issues Task Force Issue 00-2, "Accounting for Web Site Development Costs." As a result, INT Media Group is now capitalizing costs incurred for the development of internal Web sites, which had previously been expensed as a component of cost of revenues. INT Media Group continues to expense all costs incurred that relate to the planning and post-implementation phases of development. These charges are included in cost of revenues in the accompanying statements of operations. Amounts capitalized are included in intangible assets in the accompanying balance sheets and the related amortization is included in amortization expense in the accompanying statements of operations. These capitalized costs are being amortized over three years.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their estimated useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. On January 1, 2002, SFAS No. 142 became effective and as a result, INT Media Group will cease to amortize the remaining $5.3 million of net goodwill.
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. INT Media Group's management does not expect the adoption of SFAS No. 143 to have a material impact on INT Media Group's financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard is effective for fiscal years beginning after June 15, 2002. INT Media Group's management does not expect the adoption of SFAS No. 144 to have a material impact on INT Media Group's financial results.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 3 to the consolidated financial statements included in Item 8 of this Form 10-K. Our critical accounting policies are as follows:
REVENUE RECOGNITION. Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses, such as commissions. We follow very specific and detailed guidelines in measuring revenue.
ESTIMATING VALUATION ALLOWANCES. Our management must make estimates of the amount of our accounts receivables that may be not collected. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $6.5 million, net of allowance for doubtful accounts of $1.8 million, as of December 31, 2001.
VALUATION OF LONG-LIVED ASSETS. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
- significant underperformance relative to expected historical or projected future operating results;
- significant changes in the manner of INT Media Group's use of the acquired assets or the strategy for INT Media Group's overall business;
- significant negative industry or economic trends;
- significant decline in INT Media Group's stock price for a sustained period; and
- INT Media Group's market capitalization relative to net book value.
When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on estimated fair values. Fair values have been determined based upon estimated future cash flows. During the year ended December 31, 2001, INT Media Group recognized $54.2 million and $1.9 million of impairment losses related to its goodwill and other long-lived assets, respectively. Net intangible assets and other long-lived assets were $6.8 million and $2.4 million, respectively, as of December 31, 2001.
On January 1, 2002, SFAS No. 142 became effective and as a result, INT Media Group will cease to amortize the remaining $5.3 million of net goodwill.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We have no derivative financial instruments or derivative commodity instruments. We have invested our net proceeds from our follow-on public offering on February 1, 2000 in short-term, interest-bearing, investment grade securities. Our transactions are generally conducted, and our accounts are denominated, in United States dollars. Accordingly, we are not exposed to significant foreign currency risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INT MEDIA GROUP, INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of INT Media Group, Incorporated:
We have audited the accompanying consolidated balance sheets of INT Media Group, Incorporated (a Delaware Corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1999, 2000 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of INT Media Group, Incorporated and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for the years ended December 31, 1999, 2000 and 2001, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the consolidated financial statements, in 2000, the Company changed its accounting for Web site development costs and for barter transactions in accordance with Emerging Issues Task Force Issue No. 00-2 and Issue No. 99-17, respectively.
ARTHUR ANDERSEN LLP
Stamford, Connecticut March 14, 2002
INT MEDIA GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See notes to consolidated financial statements.
INT MEDIA GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Represents the combined financial data of predecessor business and INT Media Group.
See notes to consolidated financial statements.
INT MEDIA GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE:
Immediately prior to the closing of its initial public offering, internet.com LLC converted its business form to a corporation. This reorganization was effected by merging internet.com LLC into a newly formed Delaware corporation called INT Media Group, Incorporated. Each member of internet.com LLC received shares of INT Media Group, Incorporated common stock in exchange for their membership units at a rate of 16,215.891 shares per membership unit. All share and per share data have been retroactively adjusted to reflect the reorganization. The net losses for the year ended December 31, 1999 have been charged to additional paid-in capital to the extent the loss related to the period prior to the initial public offering.
See notes to consolidated financial statements.
INT MEDIA GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
(1) Represents the combined financial data of predecessor business and INT Media Group.
See notes to consolidated financial statements.
INT MEDIA GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
1. THE COMPANY
INT Media Group, Inc. is a leading provider of global real-time news, information and media resources for Internet industry and information technology professionals, Web developers and experienced Internet users. INT Media Group includes the internet.com and EarthWeb.com network of over 150 Web sites and over 200 e-mail newsletters that generate 240 million page views monthly. The network is organized into 16 vertical content channels to serve Internet users, which include Internet industry and information technology professionals, Web developers and experienced Internet users. Our INT Media Events Division includes nearly 40 offline conferences and trade shows on Internet and IT-specific topics that are aligned with our Network of Web sites and e-mail newsletters. In addition, our INT Media Research Division publishes research reports analyzing the Internet and information technologies sectors worldwide.
Since all of INT Media Group's products and services relate to providing Internet-related information to Internet industry and information technology professionals, Web developers and experienced Internet users, its success is dependent on the continued growth of the Internet and information technology.
On June 25, 1999, INT Media Group completed an initial public offering ("IPO") of 3,400,000 shares of common stock at $14.00 per share. Net proceeds to INT Media Group aggregated approximately $42.9 million.
Immediately prior to the closing of its initial public offering, internet.com LLC converted its business form to a corporation. This reorganization was effected by merging internet.com LLC into a newly formed Delaware corporation called internet.com Corporation. On May 24, 2001, internet.com Corporation received approval at its annual meeting of stockholders to change its name from internet.com Corporation to INT Media Group, Incorporated.
These financial statements have been presented as if INT Media Group had always been a corporation.
On February 1, 2000, INT Media Group completed a follow-on offering of 3,750,000 shares of common stock priced at $60.00 per share, of which 1,750,000 shares were sold by INT Media Group and 2,000,000 shares were sold by Penton Media, Inc. Net proceeds received by INT Media Group from the follow-on offering were approximately $98.3 million. INT Media Group did not receive any of the proceeds from the sale of shares by Penton Media, Inc.
2. HISTORY
internet.com LLC was formed as part of the acquisition of Mecklermedia Corporation by Internet World Media, a wholly-owned subsidiary of Penton Media (a publicly-owned corporation). During the negotiation of this acquisition, Penton Media indicated that it did not wish to retain all of iWorld Corporation, Mecklermedia's Internet business, because it believed that the Internet business was inconsistent with its strategic direction. However, Penton Media indicated that it wanted Internet World Media to maintain a minority interest in the Internet business due to its belief that the Internet business had the potential to become profitable in the future. As a result, Alan M. Meckler, Mecklermedia's Chairman and Chief Executive Officer, agreed to purchase an 80.1% interest in the Internet business from Internet World Media for a total of $18.0 million in cash and a warrant valued at $284,000
immediately following the acquisition of Mecklermedia by Internet World Media, which imputed a purchase price of $22.8 million. On November 24, 1998, Mecklermedia was acquired by Internet World Media in an all-cash tender offer. Following its purchase of Mecklermedia, Internet World Media caused iWorld Corporation to be merged into internet.com LLC, a newly-formed Delaware Limited Liability Company. Internet World Media then sold 80.1% of its membership interest in internet.com LLC to Alan M. Meckler (including four trusts for the benefit of his children) for a total of $18.0 million in cash and a warrant. Internet World Media retained a 19.9% interest in internet.com LLC and a warrant to acquire up to an additional 128 membership units in internet.com LLC (representing 2,075,634 shares of our common stock) for up to $3.0 million. For accounting purposes, the warrant was valued at $284,000, which reflected the present value of the strike price using a risk free rate of return over a three-year term, as compared to the cash price per share paid to Penton Media. This warrant was exercised by Penton Media on June 24, 1999.
Immediately prior to the closing of the IPO, internet.com LLC converted its business form to a corporation. This reorganization was effected by merging internet.com LLC into a newly formed Delaware corporation called INT Media Group, Incorporated. Each member of internet.com LLC received shares of INT Media Group, Incorporated common stock in exchange for their membership units at a rate of 16,215.891 shares per membership unit. All share and per share data have been retroactively adjusted to reflect the reorganization.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of INT Media Group, its majority-owned and wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
REVENUE RECOGNITION. INT Media Group generates its revenues from eight primary sources: the sale of advertising on its Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists; e-commerce agreements and offerings; conferences and trade shows; permission based opt-in e-mail list rentals; paid subscription services; research reports; licensing of editorial content and brands; online press release distribution services and venture fund management fees.
ADVERTISING REVENUES. Advertising revenue is recognized ratably in the period the advertising is displayed, provided that no significant company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of a minimum number of advertising impressions, or times that an advertisement is viewed by users of INT Media Group's Web sites and related Internet media properties.
E-COMMERCE REVENUES. Our e-commerce agreements and offerings generally include advertising on our Web sites, bounties for new customers or revenue sharing for sales made by the e-commerce vendors as a result of links from our network, or in some cases combinations of advertising, bounties and revenue sharing. We recognize the advertising component of these agreements ratably in the period the advertising is displayed, provided that no significant company obligations remain and collection of the remaining receivable is probable. Generally, bounties and revenue sharing agreements require a monthly minimum fee from INT Media Group's customers. Revenues from these agreements are recognized in the month they are earned.
CONFERENCES AND TRADE SHOWS. Conferences and trade shows generate revenue from attendee registrations, exhibition space and from advertiser and vendor sponsorships. Revenue for conferences and trade shows is recognized in the period in which the conference and trade show is held. Deferred revenues relate to the portion of collected conference registration fees, exhibition space and advertiser and vendor sponsorships that have been collected prior to the commencement of the conferences and trade shows.
PERMISSION BASED OPT-IN E-MAIL LIST RENTAL REVENUES. Permission based opt-in e-mail list revenue relates to customer subscriptions to our opt-in e-mail lists. Revenue is recorded on a per use basis for the rental of our list names. Revenue from permission based opt-in list rentals is recognized at the time of the use by the renter.
PAID SUBSCRIPTION REVENUES. Paid subscription services relate to customer subscriptions to our paid e-mail newsletters and services, SearchEngineWatch.com, TheCounter.com, WinDrivers.com, WallStreetResearchNet.com, UnclaimedDomains.com, DomainBook.com, AlertIPO.com and NanotechPlanet.com, which are sold through our network and through affiliate relationships. Revenue from subscriptions is recognized ratably over the subscription period. Deferred revenues relate to the portion of collected subscription fees that has not yet been recognized as revenue.
RESEARCH REPORT REVENUES. Through our INT Media Research Division, we publish and sell research reports that analyze the Internet and information technologies sectors worldwide. Revenues are recognized upon delivery of the reports to the purchasers.
LICENSING REVENUES. The licensing agreements vary, with INT Media Group generating fixed fees, royalties or both for access to editorial content and brands produced by INT Media Group. Such amounts are recognized as revenue in the month earned.
ONLINE PRESS RELEASE DISTRIBUTION SERVICES. Online press release distribution revenues are generated through InternetNewsBureau.com. We distribute e-mail based press releases to over 5,900 registered journalists. Revenue from this service is recorded on a per use basis and recognized at the time of distribution.
VENTURE FUND MANAGEMENT FEES. Venture fund management fees relate to management fees earned for the day-to-day operation and general management of internet.com Venture Fund I LLC, internet.com Venture Fund II LLC and internet.com Venture Partners III LLC. Management fees are recognized ratably over the period the services are rendered. In addition, INT Media Group is entitled to 20% of the realized gains from the portfolio investments, which are recognized at the time of distribution from the venture funds.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject INT Media Group to a significant concentration of credit risk consist primarily of cash and accounts receivable. INT Media Group deposits the majority of its cash with a single financial institution. Most of INT Media Group's accounts receivable as of December 31, 2000 and 2001 are from information technology-related businesses.
For the year ended December 31, 1999, one customer accounted for 10% of revenues. No customer accounted for 10% or more of our revenues for the years ended December 31, 2000 and 2001.
CASH AND CASH EQUIVALENTS. INT Media Group considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. At December 31, 2000 and 2001, INT Media Group had no investments with maturities greater than three months.
FINANCIAL INSTRUMENTS. The recorded amounts of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities.
PROPERTY AND EQUIPMENT. Depreciation of computer equipment and software is provided for by the straight-line method over estimated useful lives ranging from three to five years. Depreciation of furniture, fixtures and equipment is provided for by the straight-line method over estimated useful lives ranging from five to ten years. Leasehold improvements are amortized over the shorter of their useful lives or the lease term.
Maintenance and repair expenditures are charged to appropriate expense accounts in the period incurred: replacements, renewals and betterments are capitalized. Upon the sale or other disposition of property, the cost and accumulated depreciation of such properties are eliminated from the accounts and the gains or losses thereon are reflected in operations.
INTANGIBLE ASSETS. Intangible assets are being amortized using the straight-line method over three years.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the sum of undiscounted expected future cash flows is less than the carrying amount of such assets. The measurement for such impairment loss is based on estimated fair values. Fair values have been determined based upon estimated future cash flows. During 2001, INT Media Group determined that certain intangible assets associated with various acquired Web sites and related Internet media properties were impaired. As a result of this determination, INT Media Group has recorded a non-cash charge of approximately $54.2 million.
INVESTMENTS IN INTERNET.COM VENTURE FUNDS. Although INT Media Group has less than a 20% interest in the internet.com venture funds, the investments are accounted for on the equity basis of accounting as INT Media Group has significant influence as the managing member of the funds. These investments are reviewed whenever events or changes in circumstances indicate that the carrying amount of these investments may not be recoverable.
ACCRUED WEB SITE ACQUISITION PAYMENTS. Accrued Web site acquisition payments consist of future amounts payable under purchase agreements for Web sites and related Internet media properties.
ADVERTISING AND PROMOTION EXPENSE. INT Media Group expenses advertising and promotion costs as incurred. Advertising and promotion expense was $670,000, $3.8 million and $3.4 million for the years ended December 31, 1999, 2000 and 2001, respectively. Included in these amounts are expenses related to barter transactions of approximately $2.1 million and $2.9 million for the years ended December 31, 2000 and 2001, respectively.
INCOME TAXES. INT Media Group accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 income tax assets and liabilities of changes in tax recognized in income in the period that includes the date. Valuation allowances have been established torates is deferred tax assets to the amount expected to be realized.
STOCK BASED COMPENSATION. INT Media Group grants to certain employees stock options with an exercise price equal value of the shares at the date of grant. INT Media Group accounts for stock option grants in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for such grants.
In October 1995, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". As permitted under the provisions of SFAS No. 123, INT Media Group (SFAS) changed its method of accounting for
stock-based compensation; however, SFAS No. 123 requires additional footnote disclosures relating to the effect of using a fair value based method of accounting for stock-based compensation cost.
RECENT ACCOUNTING PRONOUNCEMENTS. In January 2000, the Emerging Issues Task Force reached a consensus on Issue No. 99-17, "Accounting for Advertising Barter Transactions," to be effective for transactions entered into after January 20, 2000. The consensus states that advertising barter transactions should be accounted for at fair value and the fair value recognized disclosed in the financial statements, if there is verifiable objective evidence provided by sufficient cash transactions received by the seller of the advertising or similar advertising. Accordingly, INT Media Group began to record the financial statement effects of barter transactions at their estimated fair value, prospectively, beginning in January 2000. Revenues related to barter transactions were approximately $4.1 million and $5.4 million and expenses were $2.1 million and $2.9 million, respectively, for the years ended December 31, 2000 and 2001.
As of July 1, 2000, INT Media Group adopted Emerging Issues Task Force Issue 00-2, "Accounting for Web Site Development Costs." As a result, INT Media Group is now capitalizing costs incurred for the development of internal Web sites, which had previously been expensed as a component of cost of revenues. INT Media Group continues to expense all costs incurred that relate to the planning and post-implementation phases of development. These charges are included in cost of revenues in the accompanying statements of operations. Amounts capitalized are included in intangible assets in the accompanying balance sheets and the related amortization is included in amortization expense in the accompanying statements of operations. These capitalized costs are being amortized over three years. INT Media Group had capitalized $742,000 and $1.2 million as of December 31, 2000 and 2001, respectively, and recorded related amortization expense of $75,000 and $478,000 for the years ended December 31, 2000 and 2001, respectively.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS No. 142. requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their estimated useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. On January 1, 2002, SFAS No. 142 became effective and as a result, INT Media Group will cease to amortize the remaining $5.3 million of net goodwill.
Also in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. INT Media Group's management does not expect the adoption of SFAS No. 143 to have a material impact on INT Media Group's financial results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The standard is effective for fiscal years beginning after June 15, 2002. INT Media Group's management does not expect the adoption of SFAS No. 144 to have a material impact on INT Media Group's financial results.
4. COMPUTATION OF NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Dilutive loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options. Common equivalent shares are excluded from the calculation if their effect is anti-dilutive.
Computations of basic and diluted net loss per share for the years ended December 31, 1999, 2000 and 2001, respectively as follows. (in thousands, except per share amounts):
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
6. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of", an impairment review is performed whenever events or circumstances indicate that the carrying value of long-lived assets, including goodwill, may not be recoverable. Certain factors that INT Media Group considers important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends.
The carrying value of long-lived assets, including goodwill, is considered to be impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value. Fair value is determined based upon estimated future cash flows.
During 2001, INT Media Group determined that certain intangible assets associated with various acquired Web sites and related Internet media properties were impaired. As a result of this determination, INT Media Group has recorded a non-cash charge of approximately $54.2 million, which reduced the carrying value goodwill in the above table.
7. ACQUISITIONS
For the years ended December 31, 2000 and 2001, INT Media Group made 28 and two acquisitions of Web sites and related Internet media properties for a total of $40.3 million and $9.7 million, respectively. These acquisitions were accounted for as purchases. Fifteen of these acquisitions for the year ended December 31, 2000 provided for contingent payments to be made after the acquisition date based upon the achievement of certain objectives. The acquired Web sites and related Internet media properties have minimal tangible assets or liabilities.
On September 8, 2000, INT Media Group consummated the acquisition of all the assets of ClickZ, Inc., a Massachusetts corporation ("ClickZ"), pursuant to an asset purchase agreement, dated September 8, 2000, by and among INT Media Group and the stockholders of ClickZ. The consideration paid in the acquisition of ClickZ consisted of cash in the amount of $10.0 million and 211,382 restricted shares of INT Media Group's common stock.
On December 22, 2000, INT Media Group agreed to acquire certain assets and to assume certain liabilities of EarthWeb Inc., a Delaware corporation ("EarthWeb"), pursuant to an asset purchase agreement, dated December 22, 2000, by and between INT Media Group and EarthWeb. The consideration paid in the acquisition of EarthWeb consisted of $500,000 in cash plus the assumption of certain de minimus liabilities of EarthWeb. In addition, INT Media Group agreed to provide EarthWeb with advertising impressions on INT Media Group's network of Web sites over a three-year period. INT Media Group valued this barter agreement at $2.7 million, which is included as a component of deferred revenue at December 31, 2000 and 2001.
On March 5, 2001, INT Media Group completed its acquisition of Intermedia Group, Inc., a Massachusetts corporation ("IMG"), pursuant to a stock purchase agreement by INT Media Group and the stockholders of IMG. IMG is an integrated conference, consulting and event management firm specializing in emerging information technology markets.
A substantial majority of the purchase price of all the acquisitions made during the years ended December 31, 2000 and 2001 has been recorded as an intangible asset on a preliminary basis and is being amortized over an estimated useful life of three years. On January 1, 2002, SFAS No. 142 became effective and as a result, INT Media Group will cease to amortize the remaining net intangible asset. The purchase accounting for these acquisitions is finalized at a later date not to exceed one year from the purchase date of the acquisitions.
The unaudited pro forma information below presents results of operations as if all the acquisitions occurred as of January 1, 2000. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined companies had these events occurred at the beginning of the period presented nor is it indicative of future results (in thousands, except per share amounts):
8. INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following (in thousands):
internet.com Venture Fund I LLC ("Fund I"), internet.com Venture Fund II LLC ("Fund II") and internet.com Venture Partners III LLC ("Fund III") (or collectively referred to as the "Funds") were organized on March 23, 1999, September 7, 1999 and January 7, 2000, respectively, as Delaware limited liability companies. I-Venture Management LLC, a wholly owned subsidiary of INT Media Group, is the managing member and acts as the Funds' investment manager and makes all investment decisions on behalf of both Funds. INT Media Group is responsible for the day-to-day operation of the Funds.
The Funds' investment objective is to maximize capital appreciation through investments in Internet related companies that have a broad focus on content outside the areas of e-business and Internet technology and are believed to have high growth potential.
As of December 31, 2000 and 2001, INT Media Group had a 14%, 12% and 14% investment in each of Fund I, Fund II and Fund III, respectively. Acting as the managing member of the Funds, INT Media Group has significant influence over the operations of the funds, and accordingly, INT Media Group accounts for these investments on the equity basis of accounting, subject to review for impairment. As of December 31, 2001, INT Media Group was fully invested in Fund I and Fund II and had approximately $7.3 million of capital commitments to Fund III.
INT Media Group is entitled to approximately a 2% management fee for the day-to-day management of the Funds, which amounted to $107,000, $1.1 million and $1.3 million for the years ended December 31, 1999, 2000 and 2001, respectively. As of December 31, 2000 and 2001, amounts owed to INT Media Group for management fees were $47,000 and $11,000, respectively.
INT Media Group has entered into barter advertising agreements with certain portfolio companies of Fund I, Fund II and Fund III. In exchange for advertising on INT Media Group's network of Web sites, INT Media Group has received equity interests in these portfolio companies. INT Media Group's equity interest is less than 20%, accordingly INT Media Group accounts for these investments on the cost basis of accounting. The cost has been determined based upon the value of the equity interests received. These investments are reviewed for impairment by the management of INT Media Group on a quarterly basis.
9. PREFERRED STOCK
On June 25, 1999, in conjunction with its IPO, INT Media Group authorized the issuance of 4,000,000 shares of preferred stock, $.01 par value (the "Preferred Stock").
The Board of Directors has the authority, without further vote or action by the stockholders, to issue the undesignated shares of Preferred Stock in one or more series and to fix all rights, qualifications, preferences, limitations and restrictions of each series, including dividend rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series.
10. NON-CASH COMPENSATION CHARGE
In March 1999, internet.com LLC granted 4% of its total membership units at the time to certain of its employees. As these membership units vested upon the completion of the IPO, INT Media Group recorded an $8.0 million compensation charge concurrent with the completion of the IPO on June 25, 1999.
11. INCOME TAXES
No benefit for federal and state income taxes was reported in the financial statements for the period from inception (November 24, 1998) through December 31, 1998, as internet.com had elected to be taxed as a partnership prior to the reorganization of internet.com LLC into a subchapter C-Corporation that took effect immediately prior to the closing of the IPO. The federal and state income tax effects of INT Media Group's results of operations were recorded by the members of internet.com LLC in their respective income tax returns for the period from inception (November 24, 1998) through the consummation of the IPO on June 25, 1999.
INT Media Group did not provide for any current or deferred United States federal or state income taxes for any of the periods presented because it has experienced operating losses since inception.
As of December 31, 2000 and 2001, INT Media Group had future federal and state income tax benefits as follows (in thousands):
INT Media Group has a valuation allowance as of December 31, 2000 and 2001, which fully offsets its deferred income tax assets. Due to INT Media Group's brief operating history and recent historical losses, there is no assurance that INT Media Group will generate sufficient taxable income in the future to be able to realize any or all of the deferred tax assets.
As of December 31, 2001, INT Media Group has approximately $21.9 million of net operating losses for federal income tax purposes, which begin to expire in 2018. INT Media Group also has $5.4 million of net operating loss carryforwards for state income tax purposes, which begin to expire in 2003.
A reconciliation setting forth the difference between INT Media Group's effective income tax rate and the U.S. Federal statutory income tax rate is as follows (in thousands):
12. COMMITMENTS AND CONTINGENCIES
INT Media Group has entered into various operating leases for each of its office facilities. Generally under the lease agreements, INT Media Group is obligated to pay a proportionate share of all electricity, heating, ventilation and air conditioning costs for these premises. Rent expense for leased facilities was $460,000, $1.5 million and $1.8 million for the years ended December 31, 1999, 2000 and 2001, respectively.
Future annual minimum lease payments under all operating leases are as follows (in thousands):
INT Media Group has entered into employment agreements with two of its officers with terms ranging from six months to one year.
A complaint seeking class action status was filed in Delaware Chancery Court on June 16, 1999 by a former shareholder of Mecklermedia Corporation alleging that certain officers and directors of Mecklermedia Corporation breached their fiduciary duties in connection with the sale of Mecklermedia Corporation to Penton Media. This former shareholder of Mecklermedia Corporation has asserted claims for damages against the officers and directors and has also named INT Media Group, Incorporated as a defendant seeking that a constructive trust be established. All of the defendants deny such allegations and intend to vigorously defend themselves.
INT Media Group is subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of INT Media Group.
13. EMPLOYEE BENEFIT PLAN
INT Media Group has a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code for employees meeting certain service requirements. The plan allows eligible employees to contribute up to 15% of their compensation to the plan. At the discretion of the board of directors, INT Media Group may also make contributions each year for the benefit of all eligible employees under the plan. There were no discretionary contributions for the years ended December 31, 1999, 2000 and 2001, respectively.
14. STOCK INCENTIVE PLAN
In April 1999, INT Media Group established a stock incentive plan under which INT Media Group may issue qualified incentive or nonqualified stock options to employees, including officers, consultants and directors up to an aggregate of 10,000,000 shares of common stock of which 592,350 options were granted immediately prior to the IPO. The exercise price of the options granted under the stock incentive plan will not be less than the fair market value of the shares of INT Media Group's common stock on the date of grant. The plan will terminate on April 15, 2009.
A summary of the status of INT Media Group's stock option plan as of December 31, 2000 and 2001, and changes during the years ending December 31, 2000 and 2001 are presented below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2000 and 2001: risk-free interest rates of 5.96% and 4.09% respectively; expected lives of 3 years; expected dividend rate of zero; and expected volatility of 150% and 146%, respectively.
The following table summarizes information about stock options outstanding at December 31, 2001:
INT Media Group applies Accounting Principles Board Opinion No. 25 in accounting for its stock option plan. Accordingly, no compensation expense has been recognized for its stock option plan.
The following table reflects pro forma net loss and loss per share had INT Media Group elected to adopt the fair value approach of SFAS No. 123 (in thousands, except per share amounts):
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
15. RELATED PARTY TRANSACTIONS
INT Media Group, Internet World Media, Inc. and Penton Media, Inc. entered into a services agreement, whereby INT Media Group agreed to provide certain services to Internet World Media, Inc. and Penton Media, Inc. in return for services to be provided to INT Media Group by Internet World Media, Inc. and Penton Media, Inc. This services agreement expires November 23, 2003.
I-Venture Management LLC, a wholly owned subsidiary of INT Media Group serves as the managing member of internet.com Venture Fund I LLC, internet.com Venture Fund II LLC and
internet.com Venture Partners III LLC. Certain directors and officers of INT Media Group serve as directors and officers of I-Venture Management LLC.
INT Media Group made a $180,000 non-interest-bearing loan to one of its stockholders in 1997, which is still outstanding and is included in other assets as of December 31, 2001.
16. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to INT Media Group's Proxy Statement for its Annual Meeting of Stockholders to be held in 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to INT Media Group's Proxy Statement for its Annual Meeting of Stockholders to be held in 2002.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to INT Media Group's Proxy Statement for its Annual Meeting of Stockholders to be held in 2002.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to INT Media Group's Proxy Statement for its Annual Meeting of Stockholders to be held in 2002.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS
(a)
(1) FINANCIAL STATEMENTS: See INT Media Group, Incorporated -- Index to Consolidated Financial Statements at Item 8 on page 28 of this report.
(2) FINANCIAL STATEMENT SCHEDULE: Schedule II -- Valuation and Qualifying Accounts
(3) INDEX TO EXHIBITS
* Incorporated herein by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-76331). ** Incorporated herein by reference to the Registrant's Current Report on Form 8-K filed on September 11, 2000. *** Filed herewith. + Compensatory plans and arrangements for executives and others.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 29, 2002
INT Media Group, Incorporated
By: /s/ Alan M. Meckler ----------------------------------- Name: Alan M. Meckler Title: Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Alan M. Meckler Chairman of the Board, Chief Executive -------------------------------- Officer and Director (Principal Alan M. Meckler Executive Officer)
/s/ Christopher S. Cardell President, Chief Operating Officer and -------------------------------- Director Christopher S. Cardell
/s/ Christopher J. Baudouin Chief Financial Officer (Principal -------------------------------- Financial and Accounting Officer) Christopher J. Baudouin
/s/ Gilbert F. Bach Director -------------------------------- Gilbert F. Bach
/s/ Michael J. Davies Director -------------------------------- Michael J. Davies
/s/ William A. Shutzer Director -------------------------------- William A. Shutzer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of INT Media Group, Incorporated:
We have audited in accordance with generally accepted auditing standards the consolidated financial statements of INT Media Group, Incorporated included in this Form 10-K and have issued our report thereon dated March 14, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. Schedule II has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut March 14, 2002
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
INT MEDIA GROUP, INCORPORATED (IN THOUSANDS)
S-2