ITEM 1. BUSINESS
Overview
Jupitermedia is a leading global provider of images, original information and events for information technology (“IT”), business and creative professionals. We provide access to one of the largest online image libraries and develop and disseminate vertically focused, original content, all of which provide our users with the knowledge and tools that they need to accomplish their day-to-day job functions. We deliver our content through a number of our proprietary channels, including our extensive online images networks, our online media networks and our events.
We operate two interrelated and complementary businesses through some of the most well known brands targeted at IT, business and creative professionals:
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Jupiterimages, our online images business, is one of the leading images companies in the world with over 7.0 million images online serving creative professionals with brands like BananaStock, Workbook Stock, Brand X Pictures, FoodPix, Botanica, Nonstock, The Beauty Archive, IFA Bilderteam, Comstock Images, Creatas Images, PictureQuest, Liquid Library, Thinkstock Images, Thinkstock Footage, Bigshot Media, Goodshoot, ITStockFree, Stock Image, Pixland, Photos.com, Ablestock.com, PhotoObjects.net, Clipart.com, FlashFoundry.com, AnimationFactory.com, RoyaltyFreeMusic.com, StudioCutz.com, JupiterGreetings.com and Stockxpert.com; and
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The media segment of Jupitermedia consists of the internet.com online division, which operates four distinct networks: internet.com and EarthWeb.com for IT and business professionals; DevX.com for developers; and Graphics.com for creative professionals. In addition, the media segment includes internet.com events, which produces offline conferences and trade shows focused on IT and business-specific topics.
We have developed and branded these businesses in a manner that enables us to cross-leverage and cross-promote the content and users of each. For example, many of the users of our online media networks also attend our events and utilize our images products. Similarly, many of our event attendees use our online networks.
Our Strategy
Our objective is to strengthen our position as a leading provider of images, original information and events for IT, business and creative professionals. We intend to achieve this objective by continuing to execute on the following strategies:
Create and Monetize New Offerings and Services. We expect to strengthen our existing offerings of products and services by continuing to improve our images, original content and events available for our users, clients and customers. We expect to continue to identify emerging technologies and topics of interest and then create images, original content and events for those topics through internal development and strategic acquisitions. We expect to continue to develop additional revenue sources through the launch of new images, content areas and events coverage topics.
Grow Through Targeted Acquisitions. We have made a number of acquisitions since our inception and we expect to continue to pursue strategic acquisition opportunities to strengthen our offerings and services. We may also acquire images and graphics related properties, and IT and Internet related media properties to obtain valuable content, images, brands, expertise and access to new users, advertisers and vendors. Although we are currently considering potential strategic acquisitions, we have no binding commitments or agreements with respect to any such acquisitions other than those that have been reported by us from time to time in our filings made pursuant to the Securities Exchange Act of 1934. We intend to use the experience gained from our
numerous acquisitions to identify, evaluate, acquire and integrate other image and media properties that are complementary to our business. Our acquisitions of Stock Image, The Beauty Archive, Crank City Music, Steve Shapiro Music Library, IFA Bilderteam, Workbook Stock, RoyaltyFreeMusic.com, Cover Images, HAAP Media and JustTechJobs.com in 2006 are complementary to our other online properties and have expanded and diversified our revenue sources.
Identify and Define Emerging Technologies and New Business Opportunities. We continually search for emerging technologies and topics that are of interest to IT, business and creative professionals. We believe that our creative and entrepreneurial culture enables us to identify technology and business shifts before these changes are apparent to most of our users and competitors.
Leverage Our Interrelated and Complementary Business Segments. We operate in two interrelated and complementary business segments. We will continue to cross-leverage and cross-promote our various products and service offerings among the users of our images and online networks and attendees to our events.
Segments
We operate in two business segments under the following brands:
Segment financial data for the years ended December 31, 2004 through 2006 appears in the Notes to the Consolidated Financial Statements.
Online images
Jupiterimages, our Online images business, is one of the leading images companies in the world with over 7.0 million images online serving professions with brands like BananaStock, Workbook Stock, Brand X Pictures, FoodPix, Botanica, Nonstock, The Beauty Archive, IFA Bilderteam, Comstock Images, Creatas Images, PictureQuest, Liquid Library, Thinkstock Images, Thinkstock Footage, Bigshot Media, Goodshoot, ITStockFree, Stock Image, Pixland, Photos.com, Ablestock.com, PhotoObjects.net, Clipart.com, FlashFoundry.com, AnimationFactory.com, RoyaltyFreeMusic.com, StudioCutz.com, JupiterGreetings.com and Stockxpert.com. We believe that Clipart.com is the largest paid subscription-based graphics resource on the Web with over 6.0 million clipart images, animations, photos, fonts and sounds.
We generate our Online images revenues from paid subscriptions that provide access to our image libraries, licensing of single image downloads and sale of CD-ROMs. Our images are licensed online through our
networks, through our direct sales force and through third party relationships. We also have agreements with a number of distributors of digital images and footage clips, whereby the distributors make sales to third party customers and remit a percentage of the sales to us. We also license a portion of our images to third parties for royalties based on the licensee’s revenues generated by the licensed images.
Online media
The following is a brief description of each of our Online media networks:
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internet.com provides enterprise IT and business professionals with the news, original information resources and community they need to succeed in today’s rapidly evolving IT and business environment.
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EarthWeb.com’s sites are organized into five “channels” targeting the needs of IT management, hardware and systems professionals, networking and communications administrators and Web and software developers.
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DevX.com is a provider of original technical information and services that enables corporate application development teams to efficiently address development challenges and projects.
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Graphics.com provides creative professionals with news, resources and the community they need to succeed.
We generate our Online media revenues primarily from advertising sold on our Web sites, e-mail newsletters and online discussion forums. We typically provide guarantees of a minimum number of advertising impressions or times that users of our Web sites and related media properties view an advertisement. Revenues from advertising on our Online media networks were 38%, 22% and 17% of consolidated revenues for the years ended December 31, 2004, 2005 and 2006, respectively.
We also generate media revenues from the following:
Custom Online Publishing. We offer custom online publishing programs developed in conjunction with our customers to help them achieve their marketing objectives. Depending on customer requirements, these programs offer prominent placement within the most relevant sections of our networks, which ensures that our customers’ messages and offers are seen by the appropriate audience.
E-commerce Agreements. We enter into a number of e-commerce agreements, which generally provide for a fixed advertising fee. E-commerce agreements typically are a minimum of three months in duration.
Webcasts. We offer Webcasts, which are objective, educational online forums that provide focused research findings and analysis from notable analysts, journalists and industry experts. Our Webcasts are free to qualified professionals. We generate revenue from advertiser sponsorships.
Paid Subscription Services. We offer paid subscription services to our customers for our e-mail newsletters and services TheCounter.com, TheGuestbook.com, WinDrivers.com and DevXPremierClub. These subscription services are sold through our own networks and through third party relationships.
Permission Based Opt-in E-Mail List Rentals. We offer for rental our permission based opt-in e-mail list names relating to over 200 IT and Internet-specific topics. Our users volunteer, or opt-in, to be included on these lists to receive e-mail product offerings and information relevant to their interests. Subscribers to these permission based opt-in e-mail lists receive e-mail announcements of special offers relating to each topic subscribed.
Licensing Agreements. We license certain editorial content, software and brands to third parties for fixed fees and royalties. 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. We also license software to third parties that is used for Web site development.
Events. We produce offline events focused on IT and business-specific topics that are aligned with our online media properties. We generate revenues from attendee registrations, the purchase of exhibition space by exhibitors who pay a fixed price per square foot of booth space and advertiser and vendor sponsorships.
Venture Fund Investments
We were the portfolio manager of, and an investor in, internet.com Venture Fund I LLC, or Fund I, a $5.0 million venture fund formed in March 1999, internet.com Venture Fund II LLC, or Fund II, a $15.0 million venture fund formed in September 1999, and internet.com Venture Partners III LLC, or Fund III, a $75.0 million venture fund formed in January 2000. All of these funds invested in early-stage content-based Internet properties that are not competitive with our business. In October 2002, the operating agreement of Fund III was amended to reduce Fund III’s committed capital from $75.0 million to $22.5 million and to provide for the dissolution of the fund and the distribution of the fund’s assets following year-end 2003. In February 2003, the operating agreement of Fund II was amended to provide for the dissolution of the fund and distribution of the fund’s assets following year-end 2003. Both Fund II and Fund III were dissolved in December of 2004 and final distributions were made following such dissolutions. Fund I was dissolved in 2006 as it had reached the end of its seven year life. The final distribution was made following the dissolution.
Corporate Information
Prior to the acquisition of Mecklermedia Corporation (“Mecklermedia”) 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 IT and the Internet industry. 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 internet.com LLC, a business formed by Penton Media to hold the Internet business acquired from Mecklermedia. As of February 28, 2007, Mr. Meckler beneficially owned 34.8% of our outstanding common stock.
internet.com LLC 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 changed its name from internet.com Corporation to INT Media Group, Incorporated. On August 12, 2002, INT Media Group, Incorporated changed its name to Jupitermedia Corporation.
Our principal executive offices are located at 23 Old Kings Highway South, Darien, Connecticut 06820 and our telephone number is (203) 662-2800.
Our Web site address is http://www.jupitermedia.com. We make available free of charge, through a link on our Web site to the Securities and Exchange Commission’s (“SEC”) Internet site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.
Marketing and Sales
Our marketing efforts are directed largely at acquiring image and advertising clients, and subscribers to our paid subscription products.
We employ a combination of online and offline advertising and promotional campaigns to promote our content offerings and services to our users, advertisers and vendors. User advertising includes cross-promotion on our networks, advertising in trade publications and promotional links from Web sites that attract demographically similar audiences. We use public relations, user groups, and speaking engagements to generate publicity for our products and services. We also use print advertising in various industry related trade publications, highly targeted traditional direct mail campaigns by mailing postcards and/or brochures to select lists in targeted geographic areas.
We sell most of our Online images and Online media products through separate direct sales forces. Our U.S. sales forces operate from our New York, McLean, Peoria, South Pasadena, San Francisco, Chicago and Darien offices, and we also maintain local representatives in various locations throughout the United States. Our Online images direct sales force also operates from our offices in the U.K., France, Germany, Spain and Australia. We also have sales employees and sales representatives in Canada and a number of European countries. Sales employees receive a base salary and are eligible for commissions based on sales and revenue goals. Sales representatives receive commissions based on a percentage of sales. Our Online images products are also sold on our Web sites.
Geographic Financial Information
Revenue is summarized below based on the country that generates the sale to the customer with countries having total revenue of 10% or more in a reportable period shown separately:
Intellectual Property
We seek protection of our proprietary images, content, logos, brands, domain names and software relating to our Web sites, e-mail newsletters, online discussion forums, moderated e-mail discussion lists and events 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 over 50 other countries for a number of our trademarks and service marks. We have encountered obstacles to registration of some marks in several of these countries. We also pursue copyright registration of our content in the United States. We might not be able to obtain effective trademark, copyright, domain name 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 rights and information.
Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are 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, financial condition and cash flows would suffer.
Our business activities may infringe upon the rights of others, and other parties might assert legal 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, content, copyright, images, issues related to model or property releases for images that we license and other 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, financial condition and cash flows would suffer.
We generally obtain ownership of our content, images and some of our technology from our employees or pursuant to work-for-hire arrangements. We also license technology, content and images from third parties. In such license arrangements, we generally obtain representations as to the origin and ownership of such content, images and technology and the licensors have generally agreed to defend, indemnify and hold us harmless from any third party claims that such content, images or technology violates the rights of another. We cannot be sure that these third party content, images and technology protections will be effective or sufficient or that we will be able to maintain such content, images or technology on commercially reasonable terms. As a result, our business, results of operations, financial condition and cash flows would suffer.
We have licensed in the past, and expect to license in the future, proprietary rights, such as trademarks, brands, content, images or other copyrighted material, to third parties. While we attempt to ensure that the quality of our content, software and brands are maintained by such licensees, we cannot be sure that such licensees will not take actions that might decrease the value of our trademarks, brands, content, images or rights or other copyrighted material, which would harm our business, prospects, financial condition, results of operations and cash flows.
We indemnify certain customers from claims related to alleged infringements of the intellectual property or other rights of third parties, such as claims arising from a photographer’s failure to secure model or property releases for an image we license. The standard terms of these indemnities require us to defend those claims and pay related damages, if any. We mitigate this risk by contractually requiring our contributing photographers and other image and content providers to secure all necessary rights, including all model or property releases prior to submitting any images or content to us, and by requiring them to indemnify us in the event a claim arises in relation to an image or content they have provided.
Domain Names
We own numerous domain name registrations, 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 internationally is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for registering or maintaining domain names. As a result, we might not be able to acquire or maintain comparable domain names in all the countries in which we conduct business or prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. As a result, our business, results of operations, financial condition and cash flows could suffer.
Seasonality and Cyclicality
Advertisers generally place fewer advertisements during the first and third calendar quarters of each year, which directly affects our Online media business.
Expenditures by our customers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns.
Customers
Our customer base is a diverse group of individuals and companies, many of which are focused on IT, the Internet and graphics.
The following table sets forth, for the periods indicated, a year-over-year comparison of the percentage of our revenues derived from the 20 largest customers in each segment. One customer accounted for 13% of our Online media revenues in 2006. No customer accounted for more than 10% of our consolidated revenues during any of the periods presented.
If we were to lose one or more of our significant customers, our future financial results could be negatively affected.
Backlog
The following is a summary of our backlog for each of our segments as of December 31, 2005 and 2006 (in thousands):
Our Online images backlog consists primarily of subscriptions to certain of our Jupiterimages products. Our Online media backlog consists of commitments for advertising, opt-in e-mail, list rental, e-commerce and licensing arrangements on our networks and subscriptions to our paid subscription services.
Substantially all of our backlog as of December 31, 2006 will be recognized as revenue in 2007.
Competition
Online images
The market for visual content is highly competitive. Competitive factors in this industry include the quality, relevance and diversity of our image library, the quality of our contributing photographers, customer service, pricing, accessibility of our images and our speed of fulfillment. Our primary competitors include Getty Images, Inc. and Corbis Corporation. We also compete with smaller image aggregators throughout the world.
Online media
The market for Internet-based services is 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. Competitive factors in this industry include editorial quality, quantity and quality of the users of our networks, customer service, pricing and the strength of our complementary offerings. We compete with other companies, which direct a portion of their
overall Web content at the IT and Internet professional community, such as CNET, Inc., CMP Media Inc., International Data Group, Open Source Technology Group, TechTarget, Inc. and Ziff Davis Media Inc. We also compete for circulation and advertising impressions with general interest portal and destination Web sites as well as traditional media.
Employees
The following is a summary of our employees by segment as of December 31, 2005 and 2006:
ITEM 1A.
ITEM 1A. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THE FOLLOWING RISKS, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
Risks Related to Our Business
We may not successfully develop or acquire new and quality images which may inhibit the growth of our online images business.
The growth of our online images business depends in part upon our ability to provide our customers ready access to a large database of quality clipart, photos, animations and other images and content. Although our strategy is to continue to improve and increase the quality and number of our online images, we may not be able to develop or acquire new and quality content due to intense competition, lack of availability or other factors. Furthermore, the growth of our content and its overall quality may not keep pace with that of our competitors or the needs of our customers. Even if we are able to develop or acquire new content, we may not be able to successfully integrate that content into our existing inventory and systems. Failure to develop or acquire and successfully integrate new and quality content could inhibit the growth and success of our online images business.
We have a limited history operating our combined businesses which could result in business decisions that may harm our operations and cause our stock price to fluctuate or decline.
We have a limited history operating our combined businesses, which makes it difficult to predict future revenues and operating expenses. The Jupiterimages business was not initially integrated into our business until June 2003. We continue to integrate recent acquisitions within our Jupiterimages business, including the acquisition of Stock Image S.A.S. on February 2, 2006, IFA Bilderteam GmbH on May 2, 2006, Workbook Stock on June 5, 2006, RoyaltyFreeMusic.com on August 7, 2006, Cover-Imagen y Publicaciones, S.L. on October 26, 2006 and HAAP Media Ltd. on December 19, 2006. Accordingly, the past performance of these businesses and our company as a whole on a combined basis may not be indicative of the future performance of these businesses or our company as a whole under current management. Furthermore, our management has limited experience operating the Jupiterimages business, as well as our combined businesses as a whole. This limited operating experience could require additional management resources, and may disadvantage us in relation to competitors with more experienced management in these industry segments. Such factors could result in increased expenses, reduced revenues and loss of market share, any of which could cause our stock price to fluctuate or decline.
We may fail to identify or successfully acquire businesses, content and images that would otherwise enhance our product offerings to our customers and users, and as a result our revenue may decrease or fail to grow.
We have acquired and intend to continue to acquire, where appropriate opportunities arise, businesses, content and images as a key component of our growth strategy. We may not be successful in identifying, appropriate acquisition opportunities and, as a result, our growth strategy could be adversely affected. If we identify an appropriate acquisition opportunity, we might not be able to negotiate the terms of the acquisition successfully or finance the transaction. In order to finance any strategic acquisitions, one or more of which may be very significant to our company, we may have to incur additional indebtedness, use our existing cash or credit
facilities and/or issue securities. We may be unable to obtain adequate financing for acquisitions on terms and conditions acceptable to us. In order to finance acquisitions, we may sell equity securities at a discount to our common stock’s market value. Any issuance of equity securities may result in substantial dilution to existing stockholders, which may be increased as a result of any discount to our common stock’s market price. Any future acquisition or investment may result in amortization expenses related to intangible assets. If the market price for acquisition targets increases, or if we fail to acquire desired targets for this or any other reason, our business may fail to grow at historical rates or at all, and as a result our stock price could fluctuate or decline.
We may fail to successfully integrate or achieve expected synergies from recent or future acquisitions, which could result in increased expenses, diversion of management’s time and resources and a reduction in expected revenues, any of which could cause our stock price to fluctuate or decline.
We have recently acquired new businesses, content and images, in particular for our Jupiterimages business, and expect to continue to make acquisitions in the future. With respect to recent and any future acquisitions, we may fail to successfully integrate our financial and management controls, technology, reporting systems and procedures, or adequately expand, train and manage our work force. The process of integration could take a significant period of time and will require the dedication of management and other resources, which may distract management’s attention from our other operations. If we make acquisitions outside of our core businesses, assimilating the acquired technology, services or products into our operations could be difficult and costly. Our inability to successfully integrate any acquired company, or the failure to achieve any expected synergies, could result in increased expenses and a reduction in expected revenues or revenue growth, and as a result our stock price could fluctuate or decline.
Given the tenure and experience of our CEO and President, and their guiding roles in developing our business and growth strategy since our inception, our growth may be inhibited or our operations may be impaired if we were to lose the services of either of them.
Our growth and success depends to a significant extent on our ability to retain Alan M. Meckler, our Chairman and Chief Executive Officer, and Christopher S. Cardell, our President and Chief Operating Officer. These persons have developed, engineered and stewarded the growth and operation of our business since its inception. The loss of the services of either of these persons could inhibit our growth or impair our operations and cause our stock price to decline.
Our CEO, President and other employees with specialized knowledge and expertise in the operation of one or more of our businesses could use that knowledge and expertise to compete against us, which could reduce our market share.
We do not have a non-competition agreement with Mr. Meckler or Mr. Cardell, or with any other member of management or any of our sales or technical personnel. As a result, we may not have any recourse if one or more of them were to terminate their employment and join a competitor or start up a competing venture. Competition from key employees or a defection by one or more of them to a competitor could harm our business and results of operations by strengthening our competitors and, as a result, reducing our market share and revenues.
Our quarterly operating results are subject to fluctuations, and our stock price may decline if we do not meet the expectations of investors and analysts.
Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside of our control. We believe that our online media revenues are subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year. Furthermore, Internet user traffic typically drops during the summer months, which reduces the number of advertisements to sell and deliver.
Expenditures by advertisers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. Our overall revenues could be materially reduced in any period by a decline in the economic prospects of advertisers, IT professionals, business professionals and creative professionals or the economy in general, which could alter current or prospective customers’ spending priorities or budget cycles or extend our sales cycle for the period. Finally, we have engaged in a number of significant acquisitions in recent years which make it difficult to analyze our results and to compare them from period to period, including the acquisitions of HAAP Media Ltd. on December 19, 2006, Cover-Imagen y Publicaciones, S.L. on October 26, 2006, RoyaltyFreeMusic.com on August 7, 2006, Workbook Stock on June 5, 2006, IFA Bilderteam GmbH on May 2, 2006, Stock Image S.A.S. on February 2, 2006, Animation Factory on December 23, 2005, Bananastock Limited on October 13, 2005, PictureArts Corporation on July 18, 2005, Goodshoot S.A.S. on May 18, 2005 and Creatas, LLC on March 7, 2005. Any future acquisitions will also make our results difficult to compare from period to period. Due to such risks, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results.
Because a limited number of advertisers constitute a significant portion of our revenues, our revenues could decline significantly if one or more of these advertisers were to cease advertising with us.
For the year ended December 31, 2006, our top 20 advertisers accounted for 66% of our online media revenues. We expect that a limited number of advertisers will continue to account for a significant portion of our revenues. Moreover, we typically sell advertisements under purchase order agreements. Generally, these agreements are subject to cancellation by our advertisers with no minimum notice requirement. From time to time, our content may focus on areas that some of our advertisers find contrary to their commercial interests. In the event that this occurs, an advertiser may choose to reduce or terminate their commercial relationship with us. If we lose one or more of the advertisers that represent a material portion of the revenues we have generated to date, our business, results of operations and financial condition would suffer. In addition, if a significant advertiser fails to pay amounts it owes us, or does not pay those amounts on time, our revenues and our stock price could decline.
Our business may suffer if we are unable to maintain or enhance awareness of our brands or if we incur excessive expenses attempting to promote our brands.
Promoting and strengthening the Jupiterimages, internet.com, EarthWeb.com and DevX.com brands is critical to our efforts to attract and retain users of our online media networks, advertisers, customers and clients for our content products, and to increase attendance at our events. We believe that the importance of brand recognition will likely increase due to the increasing number of competitors entering our markets. In order to promote these brands, in response to competitive pressures or otherwise, we may find it necessary to increase our marketing budget, hire additional marketing and public relations personnel or otherwise increase our financial commitment to creating and maintaining brand loyalty among our clients. If we fail to effectively promote and maintain our brands, or incur excessive expenses attempting to promote and maintain our brands, our business and financial results may suffer.
We have generated significant losses since inception and may not report positive net income in the future.
As of December 31, 2006, we had an accumulated deficit of $33.9 million. 2003 was the first year in which we achieved profitability on an annual basis to date. Any failure to achieve profitability could deplete our current capital resources and reduce our ability to raise additional capital in the future. Our advertising, promotion and selling and general and administrative expenses are based on expectations of future revenues and are relatively fixed in the short term. These expenses totaled $40.2 million for the year ended December 31, 2005 and $57.1 million for the year ended December 31, 2006. If our revenues are lower than expected, we might not be able to quickly reduce spending. Any shortfall in revenues would have a direct impact on operating results for a particular quarter and these fluctuations could affect the market price of our common stock.
The impairment of a significant amount of goodwill and intangible assets on our balance sheet could result in a decrease in earnings and, as a result, our stock price could decline.
In the course of our operating history, we have acquired numerous assets and businesses. Some of our acquisitions have resulted in the recording of a significant amount of goodwill and/or intangible assets on our financial statements. We had $276.9 million of goodwill and net intangible assets as of December 31, 2006. The goodwill and/or intangible assets were recorded because the fair value of the net tangible assets acquired was less than the purchase price. We may not realize the full value of the goodwill and/or intangible assets. As such, we evaluate goodwill and other intangible assets with indefinite useful lives for impairment on an annual basis or more frequently if events or circumstances suggest that the asset may be impaired. We evaluate other intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. If goodwill or other intangible assets are deemed to be impaired, we would write off the unrecoverable portion as a charge to our earnings. If we acquire new assets and businesses in the future, as we intend to do, we may record additional goodwill and/or intangible assets. The possible write-off of the goodwill and/or intangible assets could negatively impact our future earnings and, as a result, the market price of our common stock could decline.
Our business, which is dependent on centrally located communications and computer hardware systems, is vulnerable to natural disasters, telecommunication failures, terrorism and similar problems, and we are not fully insured for losses caused by all of these incidents.
Our operations are dependent on our communications systems and computer hardware, most of which is located in data centers operated by Qwest Communications, Inc, Login Inc. and in our facility in Peoria, IL. These systems could be damaged by fire, floods, earthquakes, power loss, telecommunication failures and similar events. Our insurance policies have limited coverage levels for loss or damages in these events and may not adequately compensate us for any losses that may occur. In addition, terrorist acts or acts of war may cause harm to our employees or damage our facilities, our clients, our clients’ customers and vendors, or cause us to postpone or cancel, or result in dramatically reduced attendance at, our events, which could adversely impact our revenues, costs and expenses and financial position. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot be presently predicted, and could cause our stock price to fluctuate or decline. We are predominantly uninsured for losses and interruptions to our systems or cancellations of events caused by terrorist acts and acts of war.
System failures and other events may prohibit users from accessing our networks or Web sites, which could reduce traffic on our networks or Web sites and result in decreased capacity for advertising space.
Our networks and Web sites must accommodate a high volume of traffic and deliver frequently updated information. They have in the past experienced, and may in the future experience, slower response times or decreased traffic for a variety of reasons. Since we became a public company in 1999, there have been instances where our online networks as a whole, or our Web sites individually, have been inaccessible. Also, slower response times, which have occurred more frequently, can result from general Internet problems, routing and equipment problems involving third party Internet access providers, problems with third party advertising servers, increased traffic to our servers, viruses and other security breaches. We also depend on information providers to provide information and data feeds on a timely basis. Some of the services in our networks or Web sites could experience temporary interruptions in service due to the failure or delay in the transmission or receipt of this information. In addition, our users depend on Internet service providers and online service providers for access to our online networks or Web sites. Those providers have experienced outages and delays in the past, and may experience outages or delays in the future. Moreover, our Internet infrastructure might not be able to support continued growth of our online networks or Web sites. Any of these problems could result in less traffic to our networks or Web sites or harm the perception of our networks or Web sites as reliable sources of information. Less traffic on our networks and Web sites or periodic interruptions in service could have the effect of reducing demand for advertising on our networks or Web sites, thereby reducing our advertising revenues.
Our network operations may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable.
Internet usage could decline if any well-publicized compromise of security occurs. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service. We may be required to expend capital and other resources to protect our Web sites against hackers. Our online networks could also be affected by computer viruses or other similar disruptive problems, and we could inadvertently transmit viruses across our networks to our users or other third parties. Any of these occurrences could harm our business or give rise to a cause of action against us. Providing unimpeded access to our online networks is critical to servicing our clients and providing superior customer service. Our inability to provide continuous access to our online networks could cause some of our clients to discontinue purchasing our products and services and/or prevent or deter our users from accessing our networks.
Our intellectual property is important to our business, and our failure to protect that intellectual property could result in increased expenses and adversely affect our future growth and success.
Trademarks, copyrights, domain names and other proprietary rights are important to our success and competitive position. Our failure to protect our existing intellectual property rights may result in the loss of exclusivity or the right to use our content and technologies. If we do not adequately ensure our freedom to use certain content and technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement or misappropriation, and/or be enjoined from using this intellectual property.
We seek protection of our digital images, content, logos, brands, domain names and software relating to our businesses, including the registration of our trademarks, service marks and copyrights both in the United States and in certain foreign countries. However, our actions may be inadequate to protect our trademarks, copyrights, domain names and other proprietary rights or to prevent others from claiming violations of their trademarks and other proprietary rights. We might not be able to obtain effective trademark, copyright, domain name and trade secret protection in every country in which we distribute our products and services or make them available through the Internet. For instance, it may be difficult for us to enforce certain of our intellectual property rights against third parties who may have inappropriately acquired interests in our intellectual property rights by filing unauthorized trademark applications in foreign countries to register our marks. It is also difficult and costly for us to police unauthorized use of our proprietary rights and information, particularly in foreign countries. We may not have, in all cases, conducted formal evaluations to confirm that our technology and products do not or will not infringe upon the intellectual property rights of third parties. As a result, we cannot be certain that our technology and products and services do not or will not infringe upon the intellectual property rights of third parties. If we were found to have infringed on a third party’s intellectual property rights, the value of our brands and our business reputation could be impaired, and sales of our products and services could suffer.
Although we generally obtain our content, including images for our Jupiterimages business, from our employees or through work-for-hire arrangements, we also license content from third parties. In these license arrangements, we generally obtain representations as to origin and ownership of this content and the licensors have generally agreed to defend, indemnify and hold us harmless from any third party claims that this content violates the rights of another. However, we cannot be sure that these protections will be effective or sufficient or that we will be able to maintain our content on commercially reasonable terms.
In seeking to protect our trademarks, copyrights and other proprietary rights, or defending ourselves against claims of infringement brought by others, with or without merit, we could face costly litigation and the diversion of our management’s attention and resources, which could result in increased expenses and operating losses, any of which could cause our stock price to fluctuate or decline.
If we fail to maintain an effective direct sales force, our revenues could decline significantly.
We depend primarily on our direct sales force to sell advertising on our online networks. We also depend on our sales force to license images and to enter into e-commerce agreements. This dependence involves a number of risks, including:
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the need to increase the size of our direct sales force;
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the need to hire, retain, integrate and motivate additional sales and sales support personnel;
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lack of experience of our new sales personnel; and
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competition from other companies in hiring and retaining sales personnel.
Our revenues could decline if we fail to maintain an effective direct sales force, and as a result our stock price could decline.
Intense competition in each of our businesses could reduce our market share, which could result in a decrease in revenue.
The market for visual content and related products and services is highly competitive. We believe that the principal competitive factors are: name recognition; company reputation; the quality, relevance and diversity of the images in a company’s collections; the quality of contributing photographers, filmmakers and other imagery providers under contract with a company; maintenance of existing, and establishment of new, relationships with image distributors; effective use of current and emerging technology; customer service; pricing policies and practices; accessibility of imagery; and speed and ease of search and fulfillment. Some of our existing and potential competitors may have or may develop products, services or technology superior to ours, or other competitive advantages. If we are not able to compete effectively, or if a significant image provider or distributor were to terminate or fail to renew an agreement with us, we could lose market share, which could have an adverse effect on our revenues and operating results. Our current and potential competitors include: other general visual content providers such as Getty Images, Inc. and Corbis Corporation; specialized visual content companies that are well established in their local, content or product-specific market segments; stock film footage businesses such as Corbis Motion; and commissioned photographers. There are also many of small stock photography and film footage agencies and image content aggregators and distributors throughout the world.
The market for Internet-based services is 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 IT and Internet professional community, such as CNET, Inc., CMP Media Inc., International Data Group, Open Source Development Network, Inc., Tech Target, Inc. and Ziff Davis 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. As a result, we could lose market share to our competitors in one or more of our business and our revenues could decline.
We may not be able to attract and retain qualified personnel, which could impact the quality of our content and services and the effectiveness and efficiency of our management, resulting in increased costs and losses in revenue.
Our success also depends on our ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, legal and other managerial personnel. The competition for personnel
in the industries in which we operate is intense. Our personnel may terminate their employment at any time for any reason. Loss of personnel may also result in increased costs for replacement hiring and training. If we fail to attract new personnel or retain and motivate our current personnel, we may not be able to operate our businesses effectively or efficiently, serve our customers properly or maintain the quality of our content and services.
We face potential liability for information and images that we publish, distribute or provide at events.
Due to the nature of content published on our online networks, including content placed on our online networks by others, and as a publisher and distributor of both images and original information, we face potential liability based on a variety of theories, including defamation, negligence, copyright or trademark infringement, personal injury or other legal theories based on the nature, publication or distribution of this information. Such claims may also include, among others, claims that by providing hypertext links to Web sites operated by third parties, we are liable for wrongful actions by those third parties through these Web sites. Similar claims have been brought, and sometimes successfully asserted, against online services. It is also possible that users could make claims against us for losses incurred in reliance on information provided on our networks. Such claims, whether brought in the United States or abroad, could divert management time and attention and result in significant cost to investigate and defend, regardless of the merit of these claims. In addition, if we become subject to these types of claims and are not successful in our defense, we may be forced to pay substantial damages. Our insurance may not adequately protect us against these claims. The filing of these claims may also damage our reputation as a high-quality provider of unbiased, timely analysis and result in client cancellations or overall decreased demand for our products and services.
Our stock price could continue to be extremely volatile, making an investment in our common stock less predictable and more risky, and could spur costly litigation against us.
The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile. For example, the market price of our common stock has ranged from $0.96 per share to $72.25 per share since our initial public offering in June 1999. The stock market has experienced extreme price and volume fluctuations and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of our management’s attention and resources.
Because our stock ownership is heavily concentrated in Alan M. Meckler, our Chairman and CEO, Mr. Meckler will be able to influence matters requiring stockholder approval.
As of February 28, 2007, Alan M. Meckler beneficially owned 34.8% of our outstanding common stock. As a result of his beneficial ownership, Mr. Meckler, acting alone or with others, is able to influence matters requiring stockholder approval, including the election of directors and approval of significant transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company, which some investors might deem to be in the best interests of the stockholders.
Our charter documents and the Delaware General Corporation Law may inhibit a takeover, even if such takeover would be beneficial to our stockholders.
Our Amended and Restated Certificate of Incorporation, bylaws and the Delaware General Corporation Law could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our stockholders. Our Amended and Restated Certificate of Incorporation allows our board of directors to issue preferred stock that may have rights and preferences that are superior to those of our common stock, which could deter a potential acquiror. Our bylaws provide that a special meeting of stockholders may only be called by our Board, Chairman of the Board, Chief Executive Officer or President or at the request of the holders of a majority
of the outstanding shares of our common stock, which could deter a potential acquiror or delay a vote on a potentially beneficial change in control transaction until the annual meeting of stockholders.
Risks Related to the Information Technology and Internet Industries
A lack of continued growth in the use of information technology and the Internet could inhibit the growth of our business.
Our market is relatively new and rapidly evolving. If information technology or Internet usage does not continue to grow or declines, the use of our networks could decrease or fail to increase and the growth of our business could decline. Information technology and Internet usage may be inhibited for a number of reasons, including:
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inadequate network infrastructure;
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security concerns;
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inconsistent quality of service;
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lack of availability of cost-effective and high-speed service; and
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changes in government regulation and other law.
If information technology and Internet usage grows, the Internet infrastructure might not be able to support the demands placed on it by this growth or its performance and reliability may decline. In addition, future outages and other interruptions occurring throughout the Internet could lead to decreased use of our networks and would therefore harm our business.
If we are unable to adapt to the relatively new and rapidly changing Internet advertising environment, we may be unable to attract advertisers to our networks and our revenues could suffer.
The Internet is a relatively new advertising medium and advertisers that have historically relied upon traditional advertising media may be reluctant to advertise on the Internet. In addition, advertisers that have already invested substantial resources in other advertising methods may be reluctant to adopt a new strategy. Moreover, filtering software programs that limit or prevent advertising from being delivered to an Internet user’s computer are now more effective and widely available. Widespread adoption of this filtering software by Internet users could impair the commercial viability of Internet advertising. Our business would suffer a decrease in revenues if the market for Internet advertising fails to recover from its recent downturn or develops more slowly than expected.
In addition, several pricing models have emerged for selling advertising on the Internet. A substantial majority of our advertising is sold on a cost-per-impression basis. We also offer advertising based on certain cost-per-action models. Pricing models continue to emerge and our advertising revenue could suffer if we are unable to adapt to this evolving environment.
Legal uncertainties could add additional costs and risks to doing business on the Internet, which would cause an increase in the costs and risks associated with operating our business.
Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses and digital rights are 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 decrease the value of our intellectual property and undermine our competitive advantage with respect to such property, resulting in impairment of 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, which could reduce our earnings and cause our stock price to decline.
Regulation could reduce the registration or value of our domain names.
We own registrations for the Internet domain names “Jupitermedia.com,” “JupiterWeb.com,” “Jupiterimages.com,” “internet.com,” “EarthWeb.com,” “DevX.com,” “Photos.com,” “Clipart.com,” “ArtToday.com”, “Comstock.com,” “PictureArts.com,” “Creatas.com,” “liquidlibrary.com,” “thinkstock.com” and “goodshoot.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 “Jupitermedia.com,” “Jupiterweb.com,” “Jupiterimages.com,” “internet.com,” “EarthWeb.com,” “DevX.com,” “Photos.com,” “Clipart.com,” “ArtToday.com”, “Comstock.com,” “PictureArts.com,” “Creatas.com,” “liquidlibrary.com,” “thinkstock.com” and “goodshoot.com” domain names, or comparable domain names, in all the countries in which we conduct business. Because our domain names are important assets which increase our value and contribute to our competitive advantage through name recognition, reputation, user and search engine traffic, a failure to acquire or maintain such domain names in certain countries could inhibit our growth. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is 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. Any impairment in the value of these important assets could cause our stock price to decline.
Changes in laws and standards relating to data collection and use practices and the privacy of Internet users and other individuals could impair our efforts to advertise our products and services and thereby decrease our advertising revenue.
We collect information from our customers that register for services, purchase products or respond to surveys. With our customers’ permission, we may use this information to inform our customers of products and services that may be of interest to them. We may also share this information with our advertising clients if our customers have elected to receive additional promotional materials on a specified topic and have granted us permission to do so. The U.S. federal and various state governments have recently adopted or proposed limitations on the collection, distribution and use of personal information of Internet users. The European Union adopted a directive that may limit our collection and use of information from Internet users in Europe. In addition, public concern about privacy and the collection, distribution and use of personal information has led to self-regulation of these practices by the Internet advertising and direct marketing industry and to increased federal and state regulation. Since many of the proposed laws, regulations and practices are still being developed, we cannot yet determine the impact these issues may have on our business. Changes to federal or state laws or regulations, or industry practices, including consumer privacy laws, could lead to additional costs and could impair our ability to collect customer information which helps us to provide more targeted advertising for our customers, thereby impairing our ability to maximize advertising revenue from our advertising clients.
Taxation of online commerce in certain states or jurisdictions could result in a decrease in sales and an increase in compliance costs, either of which could cause our stock price to decline.
Tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and other taxes. If one or more local, state or foreign jurisdictions impose sales tax collection obligations on us, we may suffer decreased sales into such state or jurisdiction as the effective cost of purchasing goods from us increases for those residing in these states or jurisdictions. We pay value added
taxes on subscription sales in the European Union. We may also be subject to value added and other taxes if we sell other merchandise to customers located in the European Union and we may incur significant financial and organizational burdens in order to set up the infrastructure required to comply with applicable tax regulations.
The information technology and Internet industries are characterized by rapid technological change, which could require frequent and costly technological improvements and, if we fail to continually improve our content offerings and services, we could cease to be competitive in our businesses.
Rapid technological developments, evolving industry standards and user demands, and frequent new product introductions and enhancements characterize the market for Internet products and services. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. Our future success and competitive edge will depend on our ability to continually improve our content offerings and services. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature, viability and measurability of Internet-based advertising, which could harm our advertising revenues.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth a list of our current office locations:
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
On August 3, 2004, Mario Cisneros and Michael Voight filed a class action lawsuit in the Superior Court of the State of California, County of San Francisco, on behalf of themselves and all others situated and/or the general public against Jupitermedia and twelve co-defendant companies that operate Internet search engines. Cisneros et al. allege that defendants posting of paid advertising providing links to Internet gambling Web sites constitutes unfair competition and unlawful business acts and practices under California law. Plaintiffs seek declaratory and injunctive relief, disgorgement of profits and restitution. On September 3, 2004, Jupitermedia blocked all advertisements from being published on its Web properties from third-party search engines for the gambling-related terms specified in the Complaint. Moreover, Jupitermedia does not accept advertisements for gambling-related Web sites directly from companies that operate them. Jupitermedia has demanded contractual indemnity from two companies that supplied advertisements that are the subject matter of the lawsuit. Neither of these two companies, however, has stated a final position as whether it will provide indemnity. Jupitermedia intends to vigorously defend itself.
On or about November 13, 2006, Robert Lange, who identifies himself as a shareholder of Jupitermedia, commenced a purported shareholder’s derivative action in the United States District Court for the District of Connecticut, purportedly on behalf of Jupitermedia, against all of Jupitermedia’s current directors and against Jupitermedia’s former Chief Financial Officer. Jupitermedia is named in the suit as a “nominal defendant” on whose behalf recovery is purportedly sought. Mr. Lange did not make a litigation demand on Jupitermedia’s board of directors prior to commencing the action, and alleges that such demand should be excused as a matter of law. The complaint alleges, based primarily on a statistical analysis, that certain stock options granted to certain of the defendants in 1999, 2000 and 2001 were backdated, and asserts on behalf of Jupitermedia various causes of action against the defendants arising out of such alleged backdating, including securities fraud, breach of fiduciary duty and unjust enrichment. Jupitermedia and the individual defendants have not yet filed their responses to the complaint.
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
Our common stock 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. In September 2002, effective with the change in the name of the company to Jupitermedia Corporation, our ticker symbol was changed to “JUPM”. The following table sets forth for the periods indicated the high and low sale prices of our common stock.
As of March 23, 2007, there were 68 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. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition, results of operations and capital requirements.
EQUITY COMPENSATION PLAN INFORMATION
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the financial statements of Jupitermedia, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(1) 2002 and 2003 amounts have been restated from amounts previously reported. See note 16 to the consolidated financial statements included in Item 8.
As discussed above at pages 10 and 11 in the risk factor entitled “Our quarterly operating results are subject to fluctuations, and our stock price may decline if we do not meet the expectations of investors and analysts,” we have engaged in a number of significant acquisitions in recent years which make it difficult to analyze our results and to compare them from period to period, including the acquisitions of HAAP Media Ltd. on December 19, 2006, Cover-Imagen y Publicaciones, S.L. on October 26, 2006, RoyaltyFreeMusic.com on August 7, 2006, Workbook Stock on June 5, 2006, IFA Bilderteam GmbH on May 2, 2006, Stock Image S.A.S. on February 2, 2006, Animation Factory on December 23, 2005, Bananastock Limited on October 13, 2005, PictureArts Corporation on July 18, 2005, Goodshoot S.A.S. on May 18, 2005 and Creatas, LLC on March 7, 2005. Any future acquisitions will also make our results difficult to compare from period to period. Due to such risks, you should not rely on year-to-year comparisons of the Statement of Operations Data provided in the selected consolidated financial data above as an indicator of our future results.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global provider of images, original information and events for information technology (“IT”), business and creative professionals. Our operations are classified into two principal segments: Online images and Online media.
Online images. Jupiterimages, our Online images business, is one of the leading images companies in the world with over 7.0 million images online serving creative professionals with brands like BananaStock, Workbook Stock, Brand X Pictures, FoodPix, Botanica, Nonstock, The Beauty Archive, IFA Bilderteam, Comstock Images, Creatas Images, PictureQuest, Liquid Library, Thinkstock Images, Thinkstock Footage, Bigshot Media, Goodshoot, ITStockFree, Stock Image, Pixland, Photos.com, Ablestock.com, PhotoObjects.net, Clipart.com, FlashFoundry.com, AnimationFactory.com, RoyaltyFreeMusic.com, StudioCutz.com, JupiterGreetings.com and Stockxpert.com.
We generate our Online images revenues from paid subscriptions that provide access to our image libraries. Customers may purchase subscriptions, which are offered based on a variety of prices and terms, to access our image libraries. Once a customer becomes a subscriber, they have the ability to obtain copies of images within our image libraries.
We also derive revenue from granting rights to use images that are downloaded or delivered on CD-ROMs. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Delivery occurs upon shipment or the availability of the image for downloading by the customer.
Our images are licensed online through our networks, through our direct sales force and through third party relationships. We also have agreements with a number of distributors of digital images and footage clips, whereby the distributors make sales to third party customers and remit a percentage of the sales to us. We recognize the revenue from the sale by the distributor at the time of the sale.
We also license a portion of our images to third parties for royalties based on the licensee’s revenues generated by the licensed images.
The principal costs of our Online images business relate to commissions paid to third party image suppliers, payroll costs for production personnel, sales and marketing personnel, technology infrastructure, lead generation fees for sales referrals and credit card processing fees.
Online media. The media segment of Jupitermedia consists of the internet.com online division, which operates four distinct networks: internet.com and EarthWeb.com for IT and business professionals; DevX.com for developers; and Graphics.com for creative professionals. The internet.com online division includes more than 150 Web sites and 150 e-mail newsletters that are viewed by over 20 million users and generate over 350 million page views monthly. Online media also includes the STEP Inside Design and Dynamic Graphics print magazines. These magazines are geared towards graphic design professionals and provide the reader with ideas and information to help them with both online and offline graphic design and publishing projects.
We generate our Online media revenues from:
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advertising and custom publishing on our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists;
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e-commerce agreements, which generally include a fixed advertising fee;
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advertiser sponsorships for our Webcasts;
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advertising, subscriptions and newsstand sales for our print magazines;
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paid subscription services for our paid e-mail newsletters and services;
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renting our permission based opt-in e-mail list names; and
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licensing our editorial content, software and brands to third parties for fixed fees and royalties based on the licensee’s revenues generated by the licensed property.
The principal costs of our Online media business relate to payroll for our editorial, technology and sales personnel as well as technology related costs for facilities and equipment.
Recent Acquisitions and Dispositions
On February 2, 2006, Jupitermedia acquired all of the shares of Stock Image S.A.S for $11.1 million in cash. Located in Paris, France, Stock Image is a leading resource for rights-managed images through its Stock Image brand and royalty-free images through its Pixland brand. This acquisition has been integrated into our Online images business.
In March 2006, Jupitermedia announced that it sold its JupiterResearch division for $10.1 million in cash and the assumption of certain liabilities by the purchaser, subject to certain post-closing adjustments. The purchaser is JupiterResearch, LLC a subsidiary of JupiterKagan, Inc., which is a portfolio company of MCG Capital Corporation (Nasdaq: MCGC). As a result of this sale, Jupitermedia’s Research segment is now being presented as a discontinued operation in accordance with Statement of Financial Accounting Standards No. 144.
In 2006, we also made various other acquisitions to complement our current product and service offerings.
During 2005, we made five significant acquisitions, which have been integrated into our Online images business.
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On March 7, 2005, Jupitermedia acquired Creatas, L.L.C., the parent company of Dynamic Graphics, Inc. and PictureQuest Acquisition Company, L.L.C., and their many stock photo and related graphics brands (“Dynamic Graphics Group”), for $38.2 million in cash and 1,483,074 restricted shares of Jupitermedia common stock valued at $21.6 million when issued.
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On May 19, 2005, Jupitermedia acquired all of the shares of Goodshoot S.A.S (“Goodshoot”) for $9.9 million in cash. Goodshoot, based in Annecy-le-Vieux, France, is a leading resource for royalty free digital images for business users and creative professionals.
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On July 18, 2005, Jupitermedia acquired PictureArts Corporation (“PictureArts”) for $63.2 million in cash, subject to certain post-closing adjustments. The acquisition included PictureArts’ brands: Brand X Pictures, FoodPix, Botanica and Nonstock, as well as its image distribution business.
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On October 13, 2005, Jupitermedia acquired all of the shares of Bananastock Limited (“BananaStock”) for $19.1 million in cash, subject to certain post-closing adjustments. BananaStock is a resource for royalty free digital images for business users and creative professionals.
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On December 23, 2005, Jupitermedia acquired the assets of Animation Factory, Inc. (“Animation Factory”) for $9.35 million in cash and the assumption of certain liabilities. Animation Factory, based in Sioux Falls, South Dakota, offers paid online subscriptions for royalty-free 3D clipart, animated graphics, video backgrounds, Microsoft PowerPoint templates, and e-mail, and Web page backgrounds for business and personal use.
On August 5, 2005, Jupitermedia sold its Search Engine Strategies events and its ClickZ.com Network of Web sites (collectively known as “SES”) to Incisive Media plc, a London Stock Exchange listed media company, for $43.0 million in cash, subject to certain post-closing adjustments.
In 2005, we also made various smaller acquisitions to complement our current product and service offerings.
During 2004, we made three significant acquisitions which have been integrated into our Online images business.
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On April 1, 2004, Jupitermedia acquired substantially all of the assets and certain liabilities of Comstock, Inc. (“Comstock Images”) for $20.85 million in cash (the “Comstock Acquisition”).
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On July 28, 2004, Jupitermedia acquired the assets of the Thinkstock Images and Thinkstock Footage businesses from Thinkstock, LLC (“Thinkstock”) for $4.0 million in cash, the assumption of certain limited liabilities and 50,000 restricted shares of Jupitermedia common stock valued at $541,000 when issued (the “Thinkstock Acquisition”).
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On November 12, 2004, Jupitermedia acquired all of the stock of Hemera Technologies Inc. and its subsidiaries (“Hemera”) for $7.3 million in cash (the “Hemera Acquisition”).
In 2004, we also made various smaller acquisitions to complement our current product and service offerings.
We expect to continue to develop and expand our current offerings through internal development and, where appropriate opportunities are identified, through acquisitions to drive revenue and earnings growth.
Results of Operations
Revenues
The following table sets forth, for the periods indicated, a year-over-year comparison of our revenues by segment (dollars in thousands):
Online images. We acquired the assets of Comstock Images on April 1, 2004 and the assets of Thinkstock on July 28, 2004. We also acquired the stock of Hemera on November 12, 2004, Dynamic Graphics Group on March 7, 2005, Goodshoot on May 19, 2005, PictureArts on July 18, 2005, BananaStock on October 13, 2005, the assets of Animation Factory, Inc. on December 23, 2005 and the stock of Stock Image S.A.S. on February 2, 2006 and, therefore, there are no financial results for these businesses prior to these respective dates. The increase in revenues for each of the periods presented is due primarily to the numerous acquisitions made by the company.
The following table sets forth, for the years ended December 31, 2004, 2005 and 2006 the components of our Online images revenues (in thousands):
We expect our Online images revenues to increase in the future.
Online media. We acquired Dynamic Graphics Group on March 7, 2005, which contributed $1.4 million and $1.1 million to Online media revenues during the years ended December 31, 2005 and 2006, respectively. The remaining increase in revenues during the year ended December 31, 2005 is due primarily to an increase in revenues from our e-commerce partners, as well as an increase in the average amount of advertising purchased by our customers. The decrease in revenues during the year ended December 31, 2006 is primarily due to the sale of the ClickZ.com network of Web sites on August 5, 2005, which had revenues of $1.8 million in 2005.
The following table sets forth, for the periods indicated, the number of our Online media advertisers and the average revenue derived from each advertiser (dollars in thousands):
We expect our Online media revenues to increase in the future.
Other. Other revenues represent management fees from our management of the internet.com venture funds. The year-over-year reduction in revenues from 2004 to 2006 was due to the decrease in the value of the investments within the venture funds and due to the liquidation and dissolution of internet.com Venture Fund II LLC and internet.com Venture Partners III LLC in December 2004. During 2006, internet.com Venture Fund I LLC reached the end of its seven year life and was dissolved.
Cost of revenues
The following table sets forth, for the periods indicated, a year-over-year comparison of our cost of revenues by segment (dollars in thousands):
Cost of revenues
Online images. Cost of revenues primarily consists of commissions paid to third party image suppliers, payroll and benefits costs for production personnel, communications infrastructure, Web site hosting and storage for our image library. Cost of revenues excludes depreciation and amortization. The year-over-year increase in cost of revenues from 2004 to 2005 was due to the acquisitions made in 2005, as well as the full year impact
from the acquisitions of Comstock, Thinkstock and Hemera in 2004. The year-over-year increase in cost of revenues from 2005 to 2006 is primarily due to an increase in commission expense to third party image suppliers of $7.5 million and an increase in employee related costs of $4.3 million. These increases were primarily a result of acquisitions made by the company. Stock-based compensation expense was $208,000 for the year ended December 31, 2006.
We intend to make investments through internal development and, where appropriate opportunities arise, acquisitions to continue to expand our image library and to substitute licensed images with images that we own that will result in reduced commission expense in the future. As we continue to make investments to increase the size of our image library, we may need to increase our spending for Web site hosting and storage costs.
Online media. Cost of revenues primarily consists of payroll and benefits costs for editorial personnel, freelance costs, communications infrastructure and Web site hosting. Cost of revenues excludes depreciation and amortization. The increase in cost of revenues from 2004 to 2005 was due primarily to increased costs resulting from the acquisition of Dynamic Graphics Group. The acquisition of Dynamic Graphics Group added $1.1 million and $788,000 to cost of revenues in 2005 and 2006, respectively. The decrease in cost of revenues from 2005 to 2006 was due primarily to the sale of the ClickZ.com Network of Web sites. Cost of revenues includes $258,000 in stock-based compensation expense for the year ended December 31, 2006.
We intend to make investments through internal development and, where appropriate opportunities arise, acquisitions to continue to expand our content offerings. We may need to increase our spending in order to create additional content related to new topics or offerings.
Advertising, promotion and selling
The following table sets forth, for the periods indicated, a year-over-year comparison of our advertising, promotion and selling expenses by segment (dollars in thousands):
Online images. Advertising, promotion and selling expenses primarily consist of payroll and benefit costs for sales and marketing personnel and advertising. The year-over-year increase in advertising, promotion and selling expense from 2004 to 2005 was due to the acquisitions made in 2005, as well as the full year impact from the acquisitions of Comstock, Thinkstock and Hemera. The year-over-year increase in advertising, promotion and selling expense from 2005 to 2006 is due to an increase in employee related costs of $6.4 million and an increase in advertising expense of $1.7 million. These increases were primarily due to the expansion of our direct sales team and the impact of acquisitions. Stock-based compensation expense was $148,000 for the year ended December 31, 2006.
Online media. Advertising, promotion and selling expenses primarily consists of payroll and benefits costs for sales and marketing personnel. The increase in advertising, promotion and selling expenses from 2004 to 2005 relates primarily to increased costs resulting from the acquisition of Dynamic Graphics. In addition, advertising, promotion and selling expenses includes costs related to marketing activities. Advertising, promotion and selling expenses include $359,000 in stock-based compensation expense for the year ended December 31, 2006.
General and administrative
The following table sets forth, for the periods indicated, a year-over-year comparison of our general and administrative expenses by segment (dollars in thousands):
Online images. General and administrative expenses primarily consist of payroll and benefit costs for administrative personnel, office related costs and professional fees. The year-over-year increase in general and administrative expense from 2004 to 2005 was due to the acquisitions made in 2005, as well as the full year impact from the acquisitions of Comstock, Thinkstock and Hemera. The increase from 2005 to 2006 in general and administrative expense is due to an increase in employee related expenses of $1.2 million, an increase in office related costs of $1.0 million, an increase in bad debt expense of $319,000 and an increase in accounting fees of $218,000. These increases were primarily due to the impact of acquisitions made by the company.
Online media. General and administrative expenses primarily consist of office related costs and provisions for losses on accounts receivable. The decrease in general and administrative expense from 2004 to 2005 was due to a decrease in office related costs of $84,000 in 2005. The increase in general and administrative expenses from 2005 to 2006 was due primarily to an increase in bad debt expense of $263,000 offset by a decrease in office related costs of $146,000.
Other. General and administrative expenses primarily consist of payroll and benefit costs for administrative personnel, office related costs and professional fees. The increase in general and administrative expenses from 2004 to 2005 relates to the acquisition of Dynamic Graphics Group and PictureArts, which added $2.7 million and $776,000, respectively, to general and administrative costs during the year ended December 31, 2005. The remaining increase during the year ended December 31, 2005 relates to an increase in payroll related costs of $1.3 million and professional fees of $346,000. The increase in general and administrative expenses from 2005 to 2006 is due to $2.7 million in stock-based compensation expense and an increase in professional fees of $2.1 million. The increase in professional fees in 2005 and 2006 was caused primarily by increased audit, consulting and tax related services due to the increase in the size of our business.
Depreciation and amortization
The following table sets forth, for the periods indicated, a year-over-year comparison of our depreciation and amortization expenses (dollars in thousands):
Depreciation and amortization expense increased year-over-year from 2004 through 2006 due primarily to the acquisitions made by the Company.
Our depreciation and amortization expenses may vary in future periods based upon a change in our capital expenditure levels, any changes in any purchase accounting adjustments relating to our acquisitions or any future acquisitions.
Gain on sale of assets, net
The following table sets forth, for the periods indicated, a comparison of our gain on sale of assets and other, net (dollars in thousands):
As part of the sale of SES on August 5, 2005, we sold our ClickZ.com network of Web sites to Incisive Media plc, which resulted in a gain of $13.3 million.
Interest income and interest expense
The following table sets forth, for the periods indicated, a year-over-year comparison of our interest income and interest expense (dollars in thousands):
The increase in interest income from 2004 to 2005 was due to a higher average cash balance resulting from the completion of our follow-on public offering of common stock in May 2004, increased cash flows and profitability and higher interest rates. The increase in interest income from 2005 to 2006 was due primarily to higher interest rates.
Interest expense relates primarily to borrowings under a senior credit facility with JPMorgan Chase Bank N.A. (See Liquidity and Capital Resources.)
Provision (benefit) for income taxes
In connection with the sale of the JupiterResearch division in March 2006, Jupitermedia was able to utilize all its capital loss carry forwards of $1.1 million. The reversal of the valuation allowance related to the capital loss carry forwards was recorded during the year ended December 31, 2006 and is included in the gain on sale of discontinued operations in the accompanying consolidated statements of operations. In addition, Jupitermedia reversed the valuation allowance of $1.5 million related to certain foreign deferred tax assets during the year ended December 31, 2006.
In connection with the gain on the sale of the Search Engine Strategies events and the ClickZ.com network of Web sites, Jupitermedia utilized its remaining federal net operating loss carryforwards and accordingly, reversed the valuation allowance of $14.1 million related to those net operating loss carryforwards during the year ended December 31, 2005.
During 2005, Jupitermedia determined that it is more likely than not that the remaining deferred tax assets, consisting primarily of amortization and impairment of intangible assets, will be realized. As a result, Jupitermedia recorded a reversal of the valuation allowance of $27.0 million related to its remaining deferred tax assets during the year ended December 31, 2005. Included in this amount is $4.6 million related to tax benefits
from employee stock option purchases. The benefit for this portion of the valuation allowance reversal was credited to additional paid-in capital.
Minority interests
Minority interests represent the minority stockholders’ proportionate share of profits or losses of our majority-owned Japanese and Hungarian subsidiaries. Japan.internet.com KK and Jupiterimages Japan represent our online media and online images businesses focused on Japan. HAAP Media Ltd. is our micro-payment online images business based in Hungary.
Equity income (loss) from investments, net
Equity income (loss) represents our net equity interests in the investments in internet.com venture funds and joint ventures. As a result of the dissolution of internet.com Venture Fund II LLC and internet.com Venture Partners III LLC during 2004, and internet.com Venture Partners I LLC in December 2006, the remaining carrying value of our venture fund investments is $0 as of December 31, 2006. Equity income for the years ended December 31, 2005 and 2006 relates solely to our joint ventures.
Gain on sale of discontinued operations, net of taxes
As part of the sale of SES on August 5, 2005, we sold our Search Engine Strategies events, which resulted in a gain on sale of discontinued operations of $15.8 million, net of income taxes of $11.1 million in 2005.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our liquidity and capital resources (dollars in thousands):
Since inception, we have funded operations through various means including our initial and follow-on public offerings of our common stock in June 1999, January 2000 and May 2004, the sale of our Events and Research businesses, through various credit agreements and through cash flows from operating activities. Cash decreased in 2006 primarily due to acquisitions of businesses partially offset by cash flows from operations. Cash decreased in 2005 primarily due to the acquisition of Dynamic Graphics Group, which resulted in a cash payment of $38.2 million, the acquisition of PictureArts, which resulted in a cash payment of $63.2 million and the acquisition of BananaStock, which resulted in a cash payment of $19.0 million. This decrease was partially offset by a $30.0 million term loan and borrowings of $8.0 million under a revolving credit facility obtained in
connection with the acquisitions of Dynamic Graphics and PictureArts, cash proceeds from sale of SES of $43.0 million, along with cash inflows from operating activities of $26.3 million. Cash increased in 2004 primarily due to proceeds from our May 2004 public offering of common stock, cash flows from operations and proceeds from the exercise of stock options.
Cash provided by operating activities decreased in 2006 primarily due to a decrease in income from continuing operations, an increase in accounts receivable and a decrease in accounts payable and accrued expenses. In 2006, deferred revenues increased primarily due to increased bookings of subscription products for our Online images business. Cash provided by operating activities increased in 2005 due primarily to increases in income from continuing operations offset by increases in accounts receivable and prepaid expenses as well as decreases in accounts payable and accrued expenses. In 2005, accounts receivable increased primarily due to the increased distribution sales for our Online images business as a result of acquisitions. Cash provided by operating activities increased in 2004 due primarily to increases in our net income and deferred revenues. In 2004, deferred revenues increased primarily due to the increased bookings for our Online images business.
The amounts of cash used in investing activities vary in correlation to the value of the acquisitions consummated. Net cash used in investing activities in 2006 decreased from cash used in 2005 primarily due to larger acquisitions, such as Dynamic Graphics Group and PictureArts, being consummated in 2005. Net cash used in investing activities in 2005 increased from cash used in 2004 primarily due to the acquisitions of Dynamic Graphics Group, PictureArts and BananaStock.
Cash provided from financing activities in 2005 and 2006 relates primarily to borrowings under a senior credit facility with JPMorgan Chase Bank N.A.
On December 22, 2005, Jupitermedia entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank N.A., as Administrative Agent and lender. The Credit Agreement provides for a $100.0 million senior credit facility (comprised of a $50.0 million term loan facility and a $50.0 million revolving credit facility). Substantially all of Jupitermedia’s domestic assets are currently pledged as security under the Credit Agreement.
The future minimum payments under the Credit Agreement are $16.0 million and $49.9 million for the years ended December 31, 2007 and 2008, respectively. Jupitermedia’s outstanding debt, relating to the Credit Agreement, as of December 31, 2005 and 2006, respectively, is reflected in the Consolidated Balance Sheet. Jupitermedia made four quarterly debt payments on its term loan totaling $16.0 million during the year ended December 31, 2006. In addition, Jupitermedia made an additional $5.0 million payment in May 2006 with proceeds from the sale of its JupiterResearch division. On November 7, 2006, Jupitermedia’s Credit Agreement was amended to increase the maximum amount of Consolidated Capital Expenditures, as defined, to $3.5 million for the fiscal year ending December 31, 2006 and to $4.5 million for the fiscal year ending December 31, 2007. In addition, the amendment also revised the definition of the term “Consolidated EBITDA”.
The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants including, among others, limitations on incurrence of additional indebtedness, limitations on mergers and asset sales, limitations on investments, guarantees and acquisitions, other than Permitted Acquisitions (as defined in the Credit Agreement), limitations on dividends, share redemptions and other restricted payments, and limitations on the amount of capital expenditures. The Credit Agreement also includes a leverage ratio covenant, a covenant prohibiting Consolidated Adjusted Net Income (as defined in the Credit Agreement) from being negative in each of any two fiscal quarters during any period of four fiscal quarters and a minimum net worth covenant. Jupitermedia is in compliance with its debt covenants relating to the Credit Agreement as of December 31, 2006. The Credit Agreement contains customary events of default, including among others, non payment of principal, interest or other amounts when due, inaccuracy of representations and warranties, violation of covenants, cross defaults with other indebtedness, a Change of Control (as defined in the Credit Agreement), certain undischarged judgments, material adverse change or the occurrence of certain
bankruptcy or ERISA events. Upon the occurrence and during the continuance of an event of default under the Credit Agreement, the Lenders may declare the loans and all other obligations under the Credit Agreement immediately due and payable. A bankruptcy event of default causes such obligations automatically to become immediately due and payable.
We expect to continue our investing activities, which includes the potential to strategically acquire companies, content and images that are complementary to our business. We expect to finance future acquisitions through a combination of long-term and short-term financing including debt, equity and cash and internally generated cash flow. We may obtain additional long-term financing through the issuance of equity securities and the incurrence of long-term secured or unsecured debt.
Our existing cash and investment balances may decline during 2007 in the event of a downturn in the general economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.
Off-Balance Sheet Arrangements and Contractual Obligations
We have not entered into off-balance sheet arrangements or issued guarantees to third parties.
The following table represents our expected cash requirements for contractual obligations outstanding as of December 31, 2006 (in thousands):
Jupitermedia has an employment agreement with its President and Chief Operating Officer. This provides twelve months of severance to be paid upon termination and is not reflected in the above table.
Related Party Transactions
I-Venture Management LLC, a wholly-owned subsidiary of Jupitermedia, served as the managing member of internet.com Venture Fund I LLC, internet.com Venture Fund II LLC and internet.com Venture Partners III LLC prior to their dissolutions. Certain directors and officers of Jupitermedia serve as directors and officers of I-Venture Management LLC.
During 2005, Jupitermedia’s Board of Directors granted lifetime post-employment medical benefits to Jupitermedia’s Chairman and Chief Executive Officer and his spouse. The cost accrued for these benefits was $35,000 and $69,000 for the years ended December 31, 2005 and 2006, respectively, and is included in general and administrative expenses in the accompanying consolidated statement of operations.
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”-an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 and prescribes a recognition
threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are in the process of evaluating the impact of adopting FIN 48 and we presently do not anticipate a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”). Due to diversity in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. We do not believe SAB No. 108 will have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating whether the adoption of SFAS No. 157 will have an impact on our consolidated financial position, results of operations or cash flows.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. Our critical accounting policies are as follows:
Revenue recognition. The following is a summary of critical revenue recognition policies for each of our reporting segments:
Online images
Revenue from subscriptions to our images products 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.
We also derive revenue from granting rights to use images that are downloaded or are delivered on CD-ROMs. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Delivery occurs upon shipment (CD-ROMs and transparencies) or the availability of the image for downloading by the customer.
We have agreements with a number of distributors of digital image and footage clips, whereby the distributors make sales to third party customers and remit a percentage of the sales to us. We recognized the revenue from the sale by distributor based on the amount to be remitted to Jupiterimages from the distributor.
We license a portion of our images to third parties for royalties based on the licensee’s revenues generated by the licensed images. Such amounts are recognized as revenue in the period earned.
Online media
Advertising revenue is recognized ratably in the period in which 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 number of times that an advertisement is viewed by users of our Web sites and related media properties.
Valuation of long-lived assets. Goodwill and other intangible assets are tested for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and all other long-lived assets are tested for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal 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 our use of the acquired assets or the strategy for our overall business;
•
significant negative industry or economic trends;
•
significant decline in our stock price for a sustained period; and
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our 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. Long-lived assets, including goodwill and intangible assets, were $276.9 million as of December 31, 2006. The annual impairment analysis is considered critical because of the significance of long-lived assets to our consolidated balance sheet.
Image library. The estimated useful lives of our image library are determined based on the average life of those that are currently generating revenue. Periodically, we perform analyses of the library that have shown that the average life of contemporary images approximate seven years and that the average life of archival images approximate fifteen years. Historical revenue may not be indicative of future revenue, and therefore, these estimated useful lives are inherently uncertain and require management’s most difficult judgments.
Stock-Based Compensation. Effective January 1, 2006, we adopted SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123R”). Among its provisions, SFAS No. 123R requires us to recognize compensation expense for equity awards over the vesting period based on the award’s grant-date fair value.
Historically, we offered stock option awards as our primary form of long-term incentive compensation. These stock option awards generally vest over three years and have a 10 year term. We use the Black-Scholes option valuation model to value stock option awards. The fair value of stock option awards is based on the fair value of Jupitermedia stock on the date of grant.
The Black-Scholes valuation model for our stock option awards estimates the potential value the employee will receive based on current interest rates, expected time at which the employee will exercise the award and the expected volatility of Jupitermedia’s stock price. These assumptions are based on historical experience and future expectations of employee behavior and stock price.
Another significant assumption utilized in calculating our share-based compensation is the amount of awards that we expect to forfeit. Compensation expense is recognized only for share-based payments expected to vest and we estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on our historical experience and future expectations.
Changes in our assumptions utilized to value our stock options and forfeiture rates could materially affect the amount of share-based compensation expense recognized in the consolidated statement of operations.
Income Taxes. Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations and tax planning strategies available to us in the various jurisdictions in which we operate. The tax bases of our assets
and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. We establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized. A significant portion of deferred tax assets consists of net operating loss carryforwards (“NOLs”). We have NOLs totaling $30.3 million at December 31, 2006, which are available to reduce future taxes in the United States, Australia, Canada, Japan, Germany and the United Kingdom. Of these NOLs, $0 expire in 2007, $29.0 million expire at various times between 2008 and 2025 and $1.3 million have indefinite lives.
Significant management judgment is required in determining our effective tax rate and in evaluating our tax position. We establish tax reserves when, based on the applicable tax law and facts and circumstances relating to a particular transaction or tax position, it becomes probable that the position will not be sustained when challenged by a taxing authority. A change in our tax reserves could have a significant impact on our results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We have no derivative financial instruments or derivative commodity instruments. We invest our excess cash in debt instruments of the U.S. Government and its agencies.
We invest in equity instruments of privately held, online media and technology companies for business and strategic purposes. These investments are included in investments and other assets and are accounted for under the cost method, as we do not have the ability to exert significant influence over the companies or their operations. For these non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses on long-lived assets when events and circumstances indicate that such assets might be impaired.
We were the portfolio manager of, and an investor in, internet.com Venture Fund I LLC, or Fund I, a $5.0 million venture fund formed in March 1999, internet.com Venture Fund II LLC, or Fund II, a $15.0 million venture fund formed in September 1999, and internet.com Venture Partners III LLC, or Fund III, a $75.0 million venture fund formed in January 2000. All of these funds invested in early-stage content-based Internet properties that are not competitive with our business. In October 2002, the operating agreement of Fund III was amended to reduce Fund III’s committed capital from $75.0 million to $22.5 million and to provide for the dissolution of the fund and the distribution of the fund’s assets following year-end 2003. In February 2003, the operating agreement of Fund II was amended to provide for the dissolution of the fund and distribution of the fund’s assets following year-end 2003. Both Fund II and Fund III were dissolved in December of 2004 and final distributions were made following such dissolutions. Fund I was dissolved in 2006 as it had reached the end of its seven year life. The final distribution was made following the dissolution.
We are also subject to interest rate fluctuations related to our borrowings under the Credit Agreement with JPMorgan Chase Bank N.A.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Jupitermedia Corporation
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Jupitermedia Corporation
Darien, Connecticut
We have audited the accompanying consolidated balance sheets of Jupitermedia Corporation and subsidiaries (the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” effective January 1, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 26, 2007
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Jupitermedia Corporation and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal controls over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s internal controls over financial reporting and testing of the operational effectiveness of its internal controls over financial reporting.
Based on our assessment, management has determined that, as of December 31, 2006, the Company maintained effective internal control over financial reporting.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report and Deloitte & Touche LLP has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting as of December 31, 2006.
/s/ ALAN M. MECKLER
Alan M. Meckler
Chairman and Chief Executive Officer
Jupitermedia Corporation
/s/ CHRISTOPHER S. CARDELL
Christopher S. Cardell
President and Chief Operating Officer
Jupitermedia Corporation
March 26, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Jupitermedia Corporation
Darien, CT
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Jupitermedia Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated March 26, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004) “Share-Based Payment.”
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 26, 2007
Jupitermedia Corporation
Consolidated Balance Sheets
December 31, 2005 and 2006
(in thousands, except share and per share amounts)
See notes to consolidated financial statements.
Jupitermedia Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2004, 2005 and 2006
(in thousands, except per share data)
See notes to consolidated financial statements.
Jupitermedia Corporation
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2004, 2005 and 2006
(in thousands, except share amounts)
See notes to consolidated financial statements.
Jupitermedia Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2005 and 2006
(in thousands)
See notes to consolidated financial statements.
Jupitermedia Corporation
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2005 and 2006
1. THE COMPANY
Jupitermedia Corporation (“Jupitermedia”) is a global provider of images, original information and events for information technology (“IT”), business and creative professionals. Jupitermedia includes Jupiterimages, one of the leading images companies in the world with over 7.0 million images online serving creative professionals with brands like BananaStock, Workbook Stock, Brand X Pictures, FoodPix, Botanica, Nonstock, The Beauty Archive, IFA Bilderteam, Comstock Images, Creatas Images, PictureQuest, Liquid Library, Thinkstock Images, Thinkstock Footage, Bigshot Media, Goodshoot, ITStockFree, Stock Image, Pixland, Photos.com, Ablestock.com, PhotoObjects.net, Clipart.com, FlashFoundry.com, AnimationFactory.com, RoyaltyFreeMusic.com, JupiterGreetings.com and Stockxpert.com. The media segment of Jupitermedia consists of the internet.com online division, which operates four distinct networks: internet.com and EarthWeb.com for IT and business professionals; DevX.com for developers; and Graphics.com for creative professionals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the accounts of Jupitermedia and its majority-owned and wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
Revenue recognition. Jupitermedia generates its revenues from two reportable segments: Online images and Online media.
Online images
Jupiterimages provides creative professionals with online access to photos, photo objects, clipart, animations, illustrations, Web graphics, footage clips, fonts, Flash movies and music. Paid subscription sites include JupiterimagesUnlimited.com, ComstockComplete.com, Photos.com, Ablestock.com, Clipart.com, LiquidLibrary.com, PhotoObjects.net, AnimationFactory.com, FlashFoundry.com and JupiterGreetings.com.
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.
Jupiterimages also derives revenue from granting rights to use images that are downloaded or delivered on CD-ROMs. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Delivery occurs upon shipment (CD-ROMs and transparencies) or the availability of the image for downloading by the customer.
Jupiterimages has agreements with a number of distributors of digital images and footage clips, whereby the distributors make sales to third party customers and remit a percentage of the sales to Jupiterimages. Jupiterimages recognizes the revenue from the sale by the distributor based on the amount to be remitted to Jupiterimages from the distributor.
We license a portion of our images to third parties for royalties based on the licensee’s revenues generated by the licensed images. Such amounts are recognized as revenue in the period earned.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Online media
Advertising revenues. Advertising revenue is recognized ratably in the period in which 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 number of times that an advertisement is viewed by users of Jupitermedia’s Web sites and related media properties.
E-commerce revenues. Our e-commerce agreements and offerings generally provide for a fixed fee for advertising on our Web sites. We recognize the fixed advertising fees ratably in the period the advertising is displayed provided that no significant company obligations remain and collection of the remaining receivable is probable. Revenues from these agreements are recognized in the period in which they are earned.
Webcast revenues. Webcasts are objective, educational online forums that provide focused research findings and analysis from highly respected analysts, journalists and industry experts. Webcasts are free to qualified professionals. We generate revenue from advertiser sponsorships. Revenue is recognized in the period in which the Webcast occurs.
Paid subscription revenues. Paid subscription services relate to customer subscriptions to our paid e-mail newsletters and services, TheCounter.com, The Guestbook.com, WinDrivers.com and DevXPremierClub which are sold through our networks 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.
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.
Licensing revenues. Licensing agreements vary with Jupitermedia generating fixed fees, royalties or both for access to editorial content, software and brands produced by Jupitermedia. Such amounts are recognized as revenue in the period earned.
Use of estimates in the financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 Jupitermedia to a significant concentration of credit risk consist primarily of cash and accounts receivable. We have no derivative financial instruments or derivative commodity instruments. We invest our excess cash in debt instruments of the U.S. Government and its agencies.
No customer accounted for 10% or more of our consolidated revenues for the years ended December 31, 2004, 2005 or 2006.
Cash and cash equivalents. Jupitermedia considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. At December 31, 2005 and 2006, Jupitermedia had no investments with maturities greater than three months.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Financial instruments. The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short-term maturities. The carrying value of long-term debt approximates fair value because current rates offered to Jupitermedia for debt with similar remaining maturities are approximately the same.
Foreign currency translation. Jupitermedia translates assets and liabilities of foreign subsidiaries, whose functional currency is the local currency, at exchange rates in effect as of the balance sheet date. Jupitermedia translates results of operations at the average rates of exchange prevailing during the year. Jupitermedia includes the adjustment resulting from translating the financial statements of such foreign subsidiaries in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity.
Property and equipment. Depreciation of computer equipment and software is provided for by the straight-line method over estimated useful lives of three 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. Amortization of leasehold improvements is included in depreciation expense.
Image library. The estimated useful lives of Jupitermedia’s image library are determined based on the average life of those that are currently generating revenue. Periodically, Jupitermedia performs analyses of the library that have shown that the average life of contemporary images approximate seven years and that the average life of archival images approximate fifteen years.
Goodwill and other intangible assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill and other intangibles with indefinite useful lives are no longer amortized but are reviewed periodically for impairment.
The provisions of SFAS No. 142 require that an intangible asset that is not subject to amortization be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The provisions also require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value, including goodwill. If the fair value exceeds the carrying value then goodwill is not impaired and no further testing is performed. If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. We conducted our annual impairment test of goodwill, and determined that there was no impairment of goodwill at December 31, 2006.
SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Intangible assets with definite lives are amortized using the straight line method over their expected useful lives ranging from three to fifteen 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. Goodwill and certain other intangibles are tested for impairment under SFAS No. 142 and all other long-lived assets are tested for impairment under SFAS No. 144.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Advertising and promotion expense. Jupitermedia expenses advertising and promotion costs as incurred. Advertising and promotion expense was $3.8 million, $6.3 million and $8.1 million for the years ended December 31, 2004, 2005 and 2006, respectively.
Income taxes. Jupitermedia accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” 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 presently enacted statutory tax rates. The effect on deferred income tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-based compensation. Effective January 1, 2006, Jupitermedia adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123R”). Among its provisions, SFAS No. 123R requires Jupitermedia to recognize compensation expense for equity awards over the vesting period based on their grant-date fair value. Prior to the adoption of SFAS No. 123R, Jupitermedia utilized the intrinsic-value based method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under the intrinsic value based method of accounting, compensation expense for stock options granted to Jupitermedia’s employees was measured as the excess of the quoted market price of common stock at the grant date over the amount the employee must pay for the stock. Jupitermedia’s policy is to grant stock options with an exercise price equal to or greater than the fair value on the date of grant and as a result no compensation expense was historically recognized for stock options.
Jupitermedia adopted SFAS No. 123R in the first quarter of 2006 using the modified prospective approach. Under this transition method, the measurement and method of amortization of costs for stock-based payments granted prior to, but not vested as of January 1, 2006, would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our SFAS No. 123 pro forma disclosure. Results for prior periods have not been restated as provided for under the modified prospective approach. For equity awards granted after the date of adoption, Jupitermedia will amortize stock-based compensation expense on a straight-line basis over the vesting term.
Compensation expense is recognized only for stock-based payments expected to vest. Jupitermedia estimates forfeitures at the date of grant based on Jupitermedia’s historical experience and future expectations. Prior to the adoption of SFAS No. 123R, the effect of forfeitures on the pro forma expense amounts was recognized based on actual forfeitures.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The following table shows the effect on net income and earnings per share for the years ended December 31, 2004 and 2005 had compensation expense been recognized based upon the estimated fair value on the grant date of awards, in accordance with SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” (in thousands, except per share amounts):
Recent accounting pronouncements. In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”-an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Jupitermedia is in the process of evaluating the impact of adopting FIN 48 and Jupitermedia presently does not anticipate a material impact on its consolidated financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”). Due to diversity in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Adoption of SAB No. 108 did not have a material impact on Jupitermedia’s consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”). The Statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Jupitermedia is currently evaluating whether the adoption of SFAS No. 157 will have an impact on Jupitermedia’s consolidated financial position, results of operations or cash flows.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
3. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Dilutive earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares that may be issued 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 earnings per share for the years ended December 31, 2004, 2005 and 2006 are as follows (in thousands, except per share amounts):
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The following table summarizes the number of outstanding stock options excluded from the calculation of diluted earnings per share for the periods presented because the result would have been anti-dilutive (in thousands, except weighted average exercise price):
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
5. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill include the preliminary allocation of the purchase prices relating to the acquisition of Stock Image S.A.S. on February 2, 2006. Jupitermedia is in the process of obtaining a third party valuation of certain intangible assets, thus the allocation of the purchase price relating to this acquisition is subject to refinement. See Note 9 for additional disclosure information.
Amortized Intangible Assets
The following table sets forth the intangible assets that are subject to amortization, including the related accumulated amortization (in thousands):
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Intangibles that are subject to amortization are amortized on a straight-line basis over their expected useful lives. The image library is amortized over seven and fifteen years, customer and distributor relationships are amortized over periods ranging from three to eight years, Web site development costs are amortized over three or five years and trademarks are amortized over three years. Supplier and contributor contracts are amortized over seven years. Non-compete agreements are amortized over the period of the agreements. Estimated amortization expense for intangible assets subject to amortization is as follows (in thousands):
Unamortized Intangible Assets
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Goodwill
The changes in the carrying amount of goodwill for each of the two years in the period ended December 31, 2006 are as follows (in thousands):
Purchase accounting adjustments pertain primarily to adjustments made in finalizing the valuations of the fair value of certain assets purchased in conjunction with the acquisitions of Dynamic Graphics Group, Goodshoot S.A.S., PictureArts Corporation and Bananastock Limited.
6. 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 Jupitermedia, is the managing member and acts as the Funds’ investment manager and makes all investment decisions on behalf of the Funds. Jupitermedia 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.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
In October 2002, the operating agreement of internet.com Venture Partners III was amended to reduce the fund’s committed capital from $75.0 million to $22.5 million and to provide for the dissolution of the fund and the distribution of the fund assets following December 31, 2003. In February 2003, the operating agreement of internet.com Venture Fund II LLC was amended to provide for dissolution of the fund and distribution of the fund assets following December 31, 2003. Both Fund II and Fund III have been dissolved and final distributions were made during the fourth quarter of 2004. Fund I was dissolved in 2006 as it had reached the end of its seven year life. The final distribution was made following the dissolution.
As of December 31, 2005, Jupitermedia had a 14% investment in Fund I. Acting as the managing member of the Funds, Jupitermedia had significant influence over the operations of the Funds and accordingly, Jupitermedia accounted for these investments on the equity basis of accounting, subject to review for impairment.
Jupitermedia was entitled to approximately a 2% management fee for the day-to-day management of the Funds, which amounted to $46,000, $30,000 and $6,000 for the years ended December 31, 2004, 2005 and 2006, respectively. These amounts are included in revenues in the consolidated statements of operations.
Jupitermedia determined that the declines in value from Jupitermedia’s accounting basis for certain of its investments in internet.com venture fund portfolio companies were other than temporary. During the years ended December 31, 2004, 2005 and 2006, Jupitermedia recognized losses of $16,000, $0 and $207,000, respectively, related to investment impairment. These amounts are a component of income (loss) on investments and other in the consolidated statements of operations.
7. DEFERRED REVENUES
The components of deferred revenues by segment are as follows (in thousands):
8. SEGMENT INFORMATION
Jupitermedia has two reportable segments: Online images and Online media. The following tables summarize the results of the segments of Jupitermedia for the years ended December 31, 2004, 2005 and 2006. Online images consists of the Jupiterimages business that includes BananaStock, Workbook Stock, Brand X Pictures, FoodPix, Botanica, Nonstock, The Beauty Archive, IFA Bilderteam, Comstock Images, Creatas Images, PictureQuest, Liquid Library, Thinkstock Images, Thinkstock Footage, Goodshoot, ITStockFree, Stock Image, Pixland, Photos.com, Ablestock.com, PhotoObjects.net, Clipart.com, FlashFoundry.com, AnimationFactory.com, RoyaltyFreeMusic.com, JupiterGreetings.com and Stockxpert.com. Online media includes the internet.com, EarthWeb.com, DevX.com and Graphics.com Networks. Jupitermedia evaluates segment performance based on income or loss from operations. Other includes corporate overhead, depreciation, amortization and venture fund
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
related activities. With the exception of goodwill, Jupitermedia does not identify or allocate assets by operating segment. See Note 5 for the allocation of goodwill to Jupitermedia’s reportable segments.
Summary information by segment for the years ended December 31, 2004, 2005 and 2006 is as follows (in thousands):
Revenues from advertising on Jupitermedia’s Online media properties were 38%, 22% and 17% of consolidated revenues for the years ended December 31, 2004, 2005 and 2006, respectively.
Revenues are summarized below based on the country that generates the revenue with countries having total revenue of 5% or more in a reportable period shown separately (in thousands):
Long-lived assets include property plant and equipment, intangible assets and goodwill. These assets are shown below, net of accumulated depreciation and amortization with countries containing 10% or more of the total of these assets shown separately (in thousands).
9. ACQUISITIONS
On March 7, 2005, Jupitermedia acquired Creatas, L.L.C., the parent company of Dynamic Graphics, Inc. and PictureQuest Acquisition Company, L.L.C., and their many stock photo and related graphics brands (“Dynamic Graphics Group”), for $38.2 million in cash and 1,483,074 restricted shares of Jupitermedia common stock valued at $21.6 million when issued. The common stock was valued in accordance with Emerging Issues Task Force Issue 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”. The purchase price was subject to certain post closing adjustments.
The primary reason for the acquisition of Creatas was that the Dynamic Graphics Group provided Jupitermedia with a sales force to sell imagery directly to third party customers. Prior to this acquisition, Jupitermedia’s primary means of selling images was by online sales and through the use of third party distributors. To help its Jupiterimages business grow, Jupitermedia believed that it was essential to have its own sales force to sell its own imagery and, therefore, Jupitermedia acquired Creatas. Jupitermedia believed that by having its own sales force Jupitermedia would be able to better compete against the much larger companies in the stock imagery business such as Getty Images, Inc. (“Getty”) and Corbis Corporation (“Corbis”) which have their own direct sales forces.
At the time of the acquisition, Dynamic Graphics Group offered a variety of resources for the graphic design community including: royalty-free and rights-managed stock image content; a royalty-free subscription image service; trade publications; and creative services events and training. Dynamic Graphics Group distributed royalty-free content (photography, footage, illustration, typography and other design tools) through its Creatas brand (www.creatas.com). Dynamic Graphics Group also included PictureQuest (www.picturequest.com), an image resource distributing more than 500,000 royalty-free and rights-managed images from over 50 of the world’s leading photo agencies, many exclusive to PictureQuest. Dynamic Graphics Group also provided images through its professional subscription images service, Liquid Library (www.liquidlibrary.com). Dynamic Graphics Group published STEP Inside Design Magazine, Dynamic Graphics Magazine, SBS Digital Design newsletter and Photoshop Fix newsletter. In addition, the company offered design workshops and seminars conducted by industry leaders through its Dynamic Graphics Training. Dynamic Graphics Group was also represented through a third party distribution network in 46 countries.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The following table summarizes the final purchase price allocation of the acquisition of Dynamic Graphics Group (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. A portion of the goodwill associated with acquisition of Dynamic Graphics Group is not deductible for tax purposes.
The primary reason for a large portion of the purchase price of Creatas being allocated to goodwill is that the most significant asset being acquired, the Dynamic Graphics Group sales team, is not an asset that is considered to be separately identifiable under SFAS No. 141. The Dynamic Graphics Group sales team consisted of approximately 90 individuals who had significant experience and training in selling stock imagery. These individuals had worked together for many years and there was familiarity within the members of the team. They had established a well known reputation of customer service within the industry.
Jupitermedia believes that it would have taken many years and considerable effort to build such a team of individuals itself. Jupitermedia faces competitive disadvantages in competing with the much larger companies in the stock imagery business such as Getty and Corbis and therefore, believed it was in its best interests to acquire an organization with an established sales team rather than building such a team over many years.
Jupitermedia had made many image acquisitions prior to the acquisition of the Dynamic Graphics Group as Jupitermedia began to invest in the stock image industry. Jupitermedia believes that owning its own image content is critical to its success. As Jupitermedia continued to acquire content, Jupitermedia realized that to fully realize the benefits of the collections it had acquired, Jupitermedia could not rely on the very large stock image distributors such as Getty. The Dynamic Graphics Group sales team provided Jupitermedia the opportunity to
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
have greater control over its own sales. The Dynamic Graphics Group sales team also provided Jupitermedia the opportunity to distribute its wholly owned imagery that previously had never been sold by Dynamic Graphics and to expand its reach.
On May 19, 2005, Jupitermedia acquired all of the shares of Goodshoot S.A.S (“Goodshoot”) for $9.9 million in cash. Goodshoot, based in Annecy-le-Vieux, France, is a leading resource for royalty free digital images for business users and creative professionals. The acquisition of Goodshoot has expanded Jupitermedia’s Online images segment.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
The following table summarizes the final purchase price allocation of the acquisition of Goodshoot (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. The goodwill associated with acquisition of Goodshoot is not deductible for tax purposes.
The acquisition of Goodshoot added a high quality collection of European wholly-owned digitized stock photos to Jupitermedia’s image offerings. Goodshoot’s operations in France complement Jupitermedia’s existing direct sales operations in the U.K. and Germany, and will enable further expansion of its Jupiterimages business throughout Europe. These factors contributed to a significant portion of the purchase price of Goodshoot being allocated to goodwill.
On July 18, 2005, Jupitermedia acquired PictureArts Corporation (“PictureArts”) for $63.2 million in cash, subject to certain post-closing adjustments. The acquisition included PictureArts’ brands: Brand X Pictures,
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
FoodPix, Botanica and Nonstock, as well as its image distribution business. The acquisition of PictureArts has expanded Jupitermedia’s Online images segment.
The primary reason for the acquisition of PictureArts was to acquire high quality rights-managed and royalty-free image collections and imagery. Jupitermedia believed that in order to compete in the image industry with the much larger stock imagery businesses, such as Getty and Corbis, it needed to increase its ownership of high quality rights-managed and royalty-free image collections and images. PictureArts distributes its own Brand X Pictures brand (www.brandxpictures.com), a collection of high-end, royalty-free stock photography. PictureArts’ FoodPix brand (www.foodpix.com), is a specialty library of rights-managed food and beverage images. PictureArts also includes the Botanica collection (www.botanica.com), a rights-managed photography collection that focuses on botanical images mixed with current lifestyle concepts and trends. PictureArts’ Nonstock brand (www.nonstock.com) is a rights-managed photography collection with one focus: avoiding the ordinary. In addition, PictureArts was one of the most significant remaining independent owners of high quality rights-managed collections and images. These factors contributed to a significant portion of the purchase price of PictureArts being allocated to goodwill.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
The following table summarizes the final purchase price allocation of the acquisition of PictureArts (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. The goodwill associated with acquisition of PictureArts is not deductible for tax purposes.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
On October 13, 2005, Jupitermedia acquired all of the shares of Bananastock Limited (“BananaStock”) for $19.1 million in cash, subject to certain post-closing adjustments. BananaStock is a resource for royalty free digital images for business users and creative professionals. The acquisition of BananaStock has expanded Jupitermedia’s Online images segment.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
The following table summarizes the final purchase price allocation of the acquisition of BananaStock (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. The goodwill associated with acquisition of BananaStock is not deductible for tax purposes.
The primary reason for the acquisition of BananaStock was to acquire a high quality royalty-free image collection and images. Jupitermedia believed that in order to compete in the image industry with larger stock imagery businesses, such as Getty and Corbis, it needed to increase its ownership of high quality royalty-free image collections and images. This acquisition has enabled Jupitermedia to increase its sales of contemporary royalty-free images in the U.S. and throughout Europe. These factors contributed to a significant portion of the purchase price of BananaStock being allocated to goodwill.
On December 23, 2005, Jupitermedia acquired the assets of Animation Factory, Inc. (“Animation Factory”) for $9.35 million in cash and the assumption of certain liabilities. Animation Factory, based in Sioux Falls, South
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Dakota, offers paid online subscriptions for royalty-free 3D clipart, animated graphics, video backgrounds, Microsoft PowerPoint templates, and e-mail, and Web page backgrounds for business and personal use. The acquisition of the assets of Animation Factory has expanded Jupitermedia’s Online images segment.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
The following table summarizes the final purchase price allocation of the acquisition of Animation Factory (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. The goodwill associated with acquisition of Animation Factory is deductible for tax purposes.
On February 2, 2006, Jupitermedia acquired all of the shares of Stock Image S.A.S. (“Stock Image”) for $11.1 million in cash, subject to certain post-closing adjustments. Stock Image, based in Paris, France, is a leading resource for rights-managed images through its Stock Image brand and royalty-free images though its Pixland brand. The acquisition of Stock Image has expanded Jupitermedia’s Online images segment.
The total purchase price has been allocated to the assets and liabilities based on estimates of their respective fair values.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The following table summarizes the preliminary purchase price allocation of the acquisition of Stock Image (in thousands):
The intangible assets subject to amortization are being amortized on a straight-line basis over periods ranging from three to fifteen years. Jupitermedia is in the process of obtaining a third party valuation of certain intangible assets, thus the allocation of the purchase price relating to acquisition of Stock Image is subject to refinement. The goodwill associated with acquisition of Stock Image is not deductible for tax purposes.
The following table summarizes Jupitermedia’s additional acquisitions during the years ended December 31, 2004, 2005 and 2006 (dollars in thousands):
The results of Dynamic Graphics Group, Goodshoot, PictureArts, BananaStock, Animation Factory and Stock Image have been included in the consolidated financial statements of Jupitermedia since their respective dates of acquisition of March 7, 2005, May 19, 2005, July 18, 2005, October 13, 2005, December 23, 2005, and February 2, 2006, respectively.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The unaudited pro forma information below presents results of operations as if the 2006 acquisitions had occurred on the first day of the periods presented. 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 year presented nor is it indicative of future results (in thousands, except per share amounts):
10. DISPOSITIONS AND DISCONTINUED OPERATIONS
On March 28, 2006, Jupitermedia sold its JupiterResearch division. As a result of the sale of the JupiterResearch division, the Research segment is now reflected as a discontinued operation in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Income from discontinued operations for the year ended December 31, 2006 was $67,000 net of income taxes of $48,000. Prior year financial results have been presented to reflect Jupitermedia’s Research segment as a discontinued operation.
The following table summarizes the revenue and income before income taxes of the discontinued Research operation (in thousands):
Assets and liabilities of discontinued operations were as follows (in thousands):
On August 5, 2005, Jupitermedia sold its Search Engine Strategies events and its ClickZ.com Network of Web sites (collectively known as “SES”) to Incisive Media plc, a London Stock Exchange listed media company, for $43.0 million in cash, subject to certain post-closing adjustments. The carrying value of the net assets of SES
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
at the time of sale was $727,000 and the sale of SES resulted in a gain of $29.1 million, net of income taxes. As a result of the sale of the Search Engine Strategies events, the Events segment is reflected as a discontinued operation in accordance with SFAS No. 144. Income from discontinued operations for the year ended December 31, 2005 was net of income taxes of $1.6 million. The gain on the sale of discontinued operations for the year ended December 31, 2005 was net of income taxes of $15.8 million. Prior year financial results have been adjusted to reflect Jupitermedia’s Events segment as a discontinued operation.
The following table summarizes the revenue and income (loss) before income taxes of discontinued Events operations (in thousands):
11. DEBT
On December 22, 2005, Jupitermedia entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank N.A. (“JPMorgan”), as Administrative Agent and lender. The Credit Agreement provides for a $100.0 million senior credit facility (comprised of a $50.0 million term loan facility and a $50.0 million revolving credit facility). At Jupitermedia’s option, loans bear interest at a rate per annum equal to (i) the Adjusted LIBOR Rate, plus a margin of between 1.50% and 2.75%, depending on Jupitermedia’s ratio of consolidated indebtedness to consolidated EBITDA as calculated pursuant to the Credit Agreement (the “Leverage Ratio”), or (ii) the prime rate, as announced from time to time by JPMorgan, plus a margin of between 0.50% and 1.75%, depending on the Leverage Ratio. Substantially all of Jupitermedia’s domestic assets are currently pledged as security under the Credit Agreement.
If an Event of Default has occurred and is continuing under the Credit Agreement, JPMorgan may declare the loans and all other obligations under the Credit Agreement immediately due and payable. Overdue amounts under the Credit Agreement bear interest at a rate per annum equal to (i) in the case of overdue principal of any loan, 2% plus the rate otherwise applicable to such loan or (ii) in the case of any other amount, 2% plus the rate applicable to prime rate loans. In addition, Jupitermedia is required to pay a commitment fee at a rate per annum of between 0.25% and 0.50%, depending on the Leverage Ratio, on the average daily amount of the unused revolving credit facility commitments. In addition, the Credit Agreement requires mandatory prepayment with a portion of the net cash proceeds of certain equity offerings, asset sales and recovery events, subject to certain reinvestment rights in the case of asset sales, and all the net cash proceeds of certain indebtedness. Proceeds from the Credit Agreement will be used to refinance borrowings under the Amended and Restated Credit Agreement, for working capital needs and general corporate purposes.
The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants including, among others, limitations on incurrence of additional indebtedness, limitations on mergers and asset sales, limitations on investments, guarantees and acquisitions, other than Permitted Acquisitions (as defined in the Credit Agreement), limitations on dividends, share redemptions and other restricted payments, and limitations on the amount of capital expenditures. The Credit Agreement also includes a leverage ratio covenant, a covenant prohibiting Consolidated Adjusted Net Income (as defined in the Credit Agreement) from being negative in each of any two fiscal quarters during any period of four fiscal quarters and a minimum net worth covenant. Jupitermedia is in compliance with its debt covenants relating to the Credit Agreement as of December 31, 2006.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
The Credit Agreement contains customary events of default, including among others, non payment of principal, interest or other amounts when due, inaccuracy of representations and warranties, violation of covenants, cross defaults with other indebtedness, a Change of Control (as defined in the Credit Agreement), certain undischarged judgments, material adverse change or the occurrence of certain bankruptcy or ERISA events. Upon the occurrence and during the continuance of an event of default under the Credit Agreement, the Lenders may declare the loans and all other obligations under the Credit Agreement immediately due and payable. A bankruptcy event of default causes such obligations automatically to become immediately due and payable.
Jupitermedia made four quarterly debt payments on its term loan totaling $16.0 million during the year ended December 31, 2006. In addition, Jupitermedia made an additional $5.0 million payment in May 2006 with proceeds from the sale of its JupiterResearch division. On November 7, 2006, Jupitermedia’s Credit Agreement was amended to increase the maximum amount of Consolidated Capital Expenditures, as defined, to $3.5 million for the year ended December 31, 2006 and to $4.5 million for the year ending December 31, 2007. In addition, the amendment also revised the definition of the term “Consolidated EBITDA”. The future minimum payments under the Credit Agreement are $16.0 million and $49.9 million for the years ending December 31, 2007 and 2008, respectively.
12. STOCKHOLDERS’ EQUITY
On June 25, 1999, in conjunction with its initial public offering, Jupitermedia 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.
On May 28, 2004, Jupitermedia completed a follow-on public offering of common stock that generated net proceeds of $30.3 million for Jupitermedia. Of the 4,830,000 shares sold in the offering, 3,830,000 shares were sold by Jupitermedia and 1,000,000 shares were sold by certain stockholders of Jupitermedia.
In June 2006, Jupitermedia’s stock incentive plan was amended to increase the number of shares of Jupitermedia common stock and options to purchase shares of Jupitermedia common stock available for issuance thereunder by 2,000,000 shares.
13. INCOME TAXES
Jupitermedia’s income tax provision (benefit) for each of the years presented is determined in accordance with SFAS No. 109.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Income before income taxes is attributable to the following tax jurisdictions (in thousands):
The components of income tax provision for continuing operations as shown in the consolidated statements of operations are as follows (in thousands):
A summary of Jupitermedia’s deferred tax assets and liabilities as of December 31, 2005 and 2006 is as follows (in thousands):
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
In connection with the sale of the JupiterResearch division in March 2006, Jupitermedia was able to utilize all of its capital loss carry forwards of $1.1 million. The reversal of the valuation allowance related to the capital loss carryforwards was recorded during the year ended December 31, 2006, and is included in the gain on sale of discontinued operations in the accompanying consolidated statements of operations. In addition, Jupitermedia reversed a valuation allowance of $1.5 million related to certain foreign deferred tax assets during 2006.
In connection with the gain on the sale of the Search Engine Strategies events and the ClickZ.com network of Web sites, Jupitermedia utilized its remaining federal net operating loss carryforwards and accordingly, reversed a valuation allowance of $14.1 million related to net operating loss carryforwards during the year ended December 31, 2005.
During 2005, Jupitermedia determined that it is more likely than not that the remaining deferred tax assets, consisting primarily of amortization and impairment of intangible assets, will be realized. As a result, Jupitermedia recorded a reversal of the valuation allowance of $27.0 million related to its remaining deferred tax assets during the year ended December 31, 2005. Included in this amount is $4.6 million related to tax benefits from employee stock option exercises. The benefit for this portion of the valuation allowance reversal was credited to additional paid-in capital.
Our deferred tax assets at December 31, 2006 with respect to net operating losses expire as follows (in thousands):
Jupitermedia’s domestic net operating losses are subject to limitation on future utilization under IRC Section 382, which imposes limitations on the availability of a corporation’s net operating losses after a more than 50 percentage point ownership change occurs. All remaining net operating losses carried forward were incurred by Dynamic Graphics Group prior to being acquired by Jupitermedia. Therefore, Dynamic Graphics Group experienced 100% ownership changes during 2005. The utilization of these losses to offset Jupitermedia’s taxable income in future periods is limited to specific amounts in each year based on a formula prescribed by Internal Revenue Code Section 382, which formula is based on the value of the acquired loss companies as of the ownership change date. It is not expected that such limitations will restrict Jupitermedia from utilizing the net operating loss carryforwards prior to their expiration.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
A reconciliation setting forth the difference between the amount of taxes computed at Jupitermedia’s effective income tax rate and the U.S. federal statutory income tax rate is as follows (in thousands):
Deferred U.S. federal income taxes are not provided for unremitted foreign earnings of our foreign subsidiaries because we expect those earnings will be permanently reinvested. It is not practicable to calculate the unrecognized deferred tax liability for temporary differences related to these investments.
14. COMMITMENTS AND CONTINGENCIES
Jupitermedia has entered into various operating leases for each of its office facilities. Generally under the lease agreements, Jupitermedia is obligated to pay a proportionate share of all operating costs for these premises. Rent expense, net of sublease income, for leased facilities was $1.4 million, $1.7 million and $2.5 million for the years ended December 31, 2004, 2005 and 2006, respectively.
Future annual minimum lease payments under all operating leases are as follows (in thousands):
The total minimum rentals to be received in the future under noncancelable subleases as of December 31, 2006 are $30,000.
Jupitermedia has an employment agreement with its President and Chief Operating Officer that provides for twelve months of severance to be paid upon termination.
On August 3, 2004, Mario Cisneros and Michael Voight filed a class action lawsuit in the Superior Court of the State of California, County of San Francisco, on behalf of themselves and all others situated and/or the general public against Jupitermedia and twelve co-defendant companies that operate Internet search engines.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
Cisneros et al. allege that defendants posting of paid advertising providing links to Internet gambling Web sites constitutes unfair competition and unlawful business acts and practices under California law. Plaintiffs seek declaratory and injunctive relief, disgorgement of profits and restitution. On September 3, 2004, Jupitermedia blocked all advertisements from being published on its Web properties from third-party search engines for the gambling-related terms specified in the Complaint. Moreover, Jupitermedia does not accept advertisements for gambling-related Web sites directly from companies that operate them. Jupitermedia has demanded contractual indemnity from two companies that supplied advertisements that are the subject matter of the lawsuit. Neither of these two companies, however, has stated a final position as whether it will provide indemnity. Jupitermedia intends to vigorously defend itself.
On or about November 13, 2006, Robert Lange, who identifies himself as a shareholder of Jupitermedia, commenced a purported shareholder’s derivative action in the United States District Court for the District of Connecticut, purportedly on behalf of Jupitermedia, against all of Jupitermedia’s current directors and against Jupitermedia’s former Chief Financial Officer. Jupitermedia is named in the suit as a “nominal defendant” on whose behalf recovery is purportedly sought. Mr. Lange did not make a litigation demand on Jupitermedia’s board of directors prior to commencing the action, and alleges that such demand should be excused as a matter of law. The complaint alleges, based primarily on a statistical analysis, that certain stock options granted to certain of the defendants in 1999, 2000 and 2001 were backdated, and asserts on behalf of Jupitermedia various causes of action against the defendants arising out of such alleged backdating, including securities fraud, breach of fiduciary duty and unjust enrichment. Jupitermedia and the individual defendants have not yet filed their responses to the complaint.
Jupitermedia is subject to other 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 statements of Jupitermedia.
15. EMPLOYEE BENEFIT PLAN
Jupitermedia has a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code for employees meeting certain service requirements. Jupitermedia may also make contributions each year for the benefit of all eligible employees under the plan. There was no discretionary contribution for the year ended December 31, 2004. Discretionary contributions to the plan totaled $211,000 and $419,000 in 2005 and 2006, respectively, and are included in selling, general and administrative expenses.
16. STOCK INCENTIVE PLAN
In April 1999, Jupitermedia established a stock incentive plan under which Jupitermedia may issue qualified incentive or nonqualified stock options to employees, including officers, consultants and directors. In June 2006, Jupitermedia’s stock incentive plan was amended to increase the number of shares of Jupitermedia common stock and options to purchase shares of Jupitermedia common stock available for issuance thereunder to 12,000,000 shares. 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 Jupitermedia’s common stock on the date of grant.
Each stock option has a ten-year term from date of grant except for stock options granted to the Chairman and Chief Executive Officer, which have a five-year term. Stock option grants vest equally on each of the first three anniversaries of their respective grant dates. The stock incentive plan will terminate on April 15, 2009. As of December 31, 2006, there were 2,646,459 options remaining for future issuance under the stock incentive plan.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
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 during the periods presented:
The expected stock price volatility is based on the historical volatility of Jupitermedia’s common stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.
The weighted-average grant-date fair value of options granted during the years 2004, 2005 and 2006 was $5.30, $8.22 and $7.04, respectively. The total intrinsic value of options exercised during the years ended December 31, 2004, 2005 and 2006, was $23.6 million, $10.9 million and $7.9 million, respectively.
The following table summarizes nonvested option activity for the year ended December 31, 2006:
The following table summarizes option activity during the year ended December 31, 2006:
The aggregate intrinsic value in the table above is before income taxes, based on Jupitermedia’s closing stock price of $7.92 as of December 31, 2006.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
During the year ended December 31, 2006, the total intrinsic value of stock options exercised was $7.9 million.
The adoption of SFAS No. 123R reduced our basic and diluted earnings per share by $0.06 and $0.06, respectively, for the year ended December 31, 2006. Total stock-based compensation expense recognized in continuing and discontinued operations was $3.7 million and $177,150, respectively, for the year ended December 31, 2006, which is before an income tax benefit of $1.6 million, resulting in a decrease to net income of $2.2 million.
As of December 31, 2006, there was approximately $5.0 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the stock incentive plan. That cost is expected to be recognized over a weighted-average period of twelve months.
Jupitermedia received $2.8 million from the exercise of stock options during the year ended December 31, 2006. The tax benefit realized from the exercise of stock options totaled $3.0 million for the year ended December 31, 2006.
Cash provided by operating activities decreased and cash provided by financing activities increased by $1.3 million related to excess tax benefits from stock-based payment arrangements for the year ended December 31, 2006.
Stock Option Analysis
Subsequent to the issuance of Jupitermedia’s December 31, 2005 consolidated financial statements and in response to the public interest in stock option practices, Jupitermedia commenced a voluntary review of its stock option granting practices. As a result of this review, Jupitermedia determined that it had granted (a) stock options to consultants that had been inappropriately accounted for under APB Opinion No. 25, but should have been accounted for in accordance with SFAS No. 123 and related Emerging Issues Task Force 96-18, “Accounting for Equity Investments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and (b) stock options in connection with business combinations in 1999 and 2000 that had not been properly accounted for in purchase accounting.
As a result of that determination, Jupitermedia has recorded an adjustment of $1.7 million in the accompanying consolidated statements of changes in stockholders’ equity as of January 1, 2004 to increase both additional paid-in capital and accumulated deficit from the amounts previously reported to properly reflect the cumulative impact of the non-cash expense associated with these stock options.
17. RELATED PARTY TRANSACTIONS
I-Venture Management LLC, a wholly-owned subsidiary of Jupitermedia, serves as the managing member of internet.com Venture Fund I LLC. Certain directors and officers of Jupitermedia serve as directors and officers of I-Venture Management LLC.
During 2005, Jupitermedia’s Board of Directors granted lifetime post-employment medical benefits to Jupitermedia’s Chairman and Chief Executive Officer and his spouse. The cost accrued for these benefits for years ended December 31, 2005 and 2006 was approximately $35,000 and $69,000, respectively, and is included in general and administrative expenses in the accompanying consolidated statement of operations.
Jupitermedia Corporation
Notes to Consolidated Financial Statements-(Continued)
For the Years Ended December 31, 2004, 2005 and 2006
18. QUARTERLY FINANCIAL SUMMARY (unaudited)
Quarters Ended
(in thousands, except per share data)
(a) Includes gain of $13.3 million on the sale of the ClickZ.com Network of Web sites during the third quarter of 2005 (See note 10).
(b) Includes gain of $15.8 million on the sale of the discontinued Events operations (See note 10) and a reversal of the valuation allowance relating to Jupitermedia’s deferred tax assets (See note 13) during the third quarter of 2005.
(c) Basic earnings per share is computed independently for each of the periods presented. Accordingly, the sum of the quarterly basic earnings per share amounts does not equal the total for the year in 2005 and 2006.
(d) Diluted earnings per share is computed independently for each of the periods presented. Accordingly, the sum of the quarterly diluted earnings per share amounts does not equal the total for the year in 2005 and 2006.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Operating Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2006. Based on that evaluation, the Chief Executive Officer and Chief Operating Officer concluded that as of December 31, 2006, these disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting. See Management’s Report on Internal Control Over Financial Reporting on page 40 of this Annual Report on Form 10-K.
Changes in Internal Controls. No change in our internal controls over financial reporting occurred during the fourth quarter of our fiscal year ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this Item is incorporated herein by reference to Jupitermedia’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2007. Jupitermedia has adopted a Code of Ethics for its Chief Executive Officer and Chief Financial Officer, the text of which it has posted on its Web site www.jupitermedia.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated herein by reference to Jupitermedia’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2007.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item is incorporated herein by reference to Jupitermedia’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2007.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item is incorporated herein by reference to Jupitermedia’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2007.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item is incorporated herein by reference to Jupitermedia’s Proxy Statement for its Annual Meeting of Stockholders to be held in 2007.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO EXHIBITS
(a) Documents filed as part of this report.
(1) Financial Statements: See Jupitermedia Corporation-Index to Consolidated Financial Statements at Item 8 on page 38 of this report.
(2) Financial Statement Schedule: Schedule II-Valuation and Qualifying Accounts
(3) Index to Exhibits
(1) Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-76331) filed on April 15, 1999
(2) Incorporated herein by reference to the Registrant’s Form 10-K filed on March 5, 2004
(3) Incorporated herein by reference to the Registrant’s Form S-3/A filed on April 12, 2004
(4) Incorporated herein by reference to the Registrant’s Form 10-Q filed on August 14, 2002
(5) Incorporated herein by reference to the Registrant’s Form 8-K filed on July 1, 2003
(6) Incorporated herein by reference to the Registrant’s Form 8-K filed on July 16, 2003
(7) Incorporated herein by reference to the Registrant’s Form 8-K filed on April 2, 2004
(8) Incorporated herein by reference to the Registrant’s Form 8-K filed on August 2, 2004
(9) Incorporated herein by reference to the Registrant’s Form 8-K filed on November 18, 2004
(10) Incorporated herein by reference to the Registrant’s Form 8-K filed on March 9, 2005
(11) Incorporated herein by reference to the Registrant’s Form 8-K filed on July 1, 2005.
(12) Incorporated herein by reference to the Registrant’s Form 8-K filed on July 20, 2005.
(13) Incorporated herein by reference to the Registrant’s Form 8-K filed on August 2, 2005.
(14) Incorporated herein by reference to the Registrant’s Form 8-K filed on October 12, 2005.
(15) Incorporated herein by reference to the Registrant’s Form 8-K filed on October 19, 2005.
(16) Incorporated herein by reference to the Registrant’s Form 8-K filed on December 28, 2005.
(17) Incorporated herein by reference to the Registrant’s Form 8-K filed on March 31, 2006.
(18) Incorporated herein by reference to the Registrant’s Form 8-K filed on November 13, 2006.
(19) Incorporated herein by reference to the Registrant’s Form 10-Q/A filed on February 8, 2007.
 Compensatory plans and arrangements for executives and others
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 26, 2007
Jupitermedia Corporation
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.
Schedule II-Valuation and Qualifying Accounts
Jupitermedia Corporation
(in thousands)