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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER: 333-76331
JUPITERMEDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1542480
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 662-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
The aggregate market value of voting common stock held by non-affiliates of the
registrant as of June 30, 2004, based upon the last sale price of such common
stock on that date as reported by the Nasdaq National Market was $281,397,000.
The number of shares of the outstanding registrant's Common Stock as of March
14, 2005, was 33,844,810.
INFORMATION REQUIRED BY PART III OF THIS FORM 10-K, TO THE EXTENT NOT SET FORTH
HEREIN, IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY
STATEMENT FOR ITS 2005 ANNUAL MEETING OF STOCKHOLDERS, WHICH WILL BE FILED
PURSUANT TO REGULATION 14A UNDER THE SECURITIES EXCHANGE ACT OF 1934 WITHIN 120
DAYS AFTER THE END OF THE FISCAL YEAR TO WHICH THIS FORM 10-K RELATES.
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JUPITERMEDIA CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I ................................................................ 3
Item 1. Business ...................................................... 3
Item 2. Properties .................................................... 12
Item 3. Legal Proceedings .............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
PART II ................................................................ 15
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .............. 15
Item 6. Selected Consolidated Financial Data ........................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risks ..... 32
Item 8. Financial Statements and Supplementary Data .................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ....................................... 63
Item 9A. Controls and Procedures ........................................ 63
Item 9B. Other Information............................................... 63
PART III ................................................................ 63
Item 10. Directors, Executive Officers of the Registrant ................ 63
Item 11. Executive Compensation ......................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and Management . 64
Item 13. Certain Relationships and Related Transactions ................. 64
Item 14. Principal Accountant Fees and Services ......................... 64
PART IV ................................................................ 65
Item 15. Exhibits and Financial Statement Schedules ..................... 65
Signatures ................................................................ 67
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this Form 10-K which are not historical facts are
"forward-looking statements" that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. The potential risks and uncertainties address a variety of subjects
including, for example, the competitive environment in which Jupitermedia
competes; the unpredictability of Jupitermedia's future revenues, expenses, cash
flows and stock price; Jupitermedia's ability to integrate acquired businesses,
products and personnel into its existing businesses; Jupitermedia's dependence
on a limited number of advertisers; and Jupitermedia's ability to protect its
intellectual property. For a more detailed discussion of such risks and
uncertainties, refer to Jupitermedia's reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934. The
forward-looking statements included herein are made as of the date of this Form
10-K, and Jupitermedia assumes no obligation to update the forward-looking
statements after the date hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Jupitermedia is a leading global provider of original online information,
images, research and events for information technology ("IT"), business and
creative professionals. We develop and disseminate vertically focused, original
content and provide access to one of the largest online image libraries, 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 media
networks, our online images networks, our proprietary research business, and our
trade shows and conferences.
We operate four interrelated and complementary businesses through some of
the most well known brands targeted at IT, business and creative professionals:
o JupiterWeb, our online media business, operates five distinct online
networks: internet.com and EarthWeb.com for IT and business
professionals, DevX.com for software and Web developers, ClickZ.com
for interactive marketers and Graphics.com for creative professionals;
o 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 such as Comstock Images,
Thinkstock Images, Thinkstock Footage, Photos.com, HemeraImages.com,
Ablestock.com, Clipart.com and Animations.com;
o JupiterResearch, our market research and consulting business, is a
leading international market research and advisory business
specializing in business and technology market research; and
o JupiterEvents, our offline conference and trade show business, is a
leading producer of 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, subscribe
to our research and utilize our images products. Similarly, many attendees at
our conferences also use our online networks and subscribe to our research, and
many of our research clients use our online networks and attend our events.
OUR STRATEGY
Our objective is to strengthen our position as a leading provider of
original online information, images, research and events for IT, business and
creative professionals. We intend to achieve this objective by continuing to
execute on the following strategies:
LEVERAGE OUR INTERRELATED AND COMPLEMENTARY BUSINESS SEGMENTS. We operate
in four 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 online networks, our image and research offerings and
attendees to our events.
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.
CREATE AND MONETIZE NEW OFFERINGS AND SERVICES. We expect to strengthen
our existing offerings of products and services by continuing to improve our
original content, images, research and events available for our users, clients
and customers. We expect to continue to identify emerging technologies and
topics of interest and then create original content, images, research and events
for those topics through internal development and strategic acquisitions. We
expect to continue to develop additional revenue sources
3
through the launch of new content areas, images, research coverage topics and
events.
GROW THROUGH TARGETED ACQUISITIONS. We have made a number of acquisitions
since our inception and we expect to continue to aggressively pursue strategic
acquisition opportunities to strengthen our offerings and services. We may also
acquire IT and Internet related media properties, images and graphics related
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 media and image
properties that are complementary to our business. Our acquisitions of ArtToday,
DevX.com, Comstock, Thinkstock, Hemera and Dynamic Graphics Group are
complementary to our other online properties and have expanded and diversified
our revenue sources.
SEGMENTS
We operate in four business segments under the following brands:
SEGMENT BRAND DESCRIPTION
------- ----- -----------
o Online media o JupiterWeb o JupiterWeb consists of our
internet.com,
EarthWeb.com,DevX.com,
ClickZ.com and Graphics.com
networks of over 150 Web sites
and over 150 e-mail newsletters
that, as of January 2005,
generated over 300 million page
views monthly.
o Online images o JupiterImages o JupiterImages is one of the
leading images companies in the
world with over 7.0 million
images online serving creative
professionals.
o Research o JupiterResearch o JupiterResearch provides
business and technology market
insight, data and objective
analysis for both end-user and
vendor companies.
o Events o JupiterEvents o JupiterEvents is a leading
producer of conferences and
trade shows focused on IT and
business-specific topics.
Segment financial data for the years ended December 31, 2002 through 2004
appears in Note 8 to the Consolidated Financial Statements.
ONLINE MEDIA
The following is a brief description of each of our Online media networks:
o 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.
o 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.
o DevX.com is a provider of original technical information and services
that enables corporate application development teams to efficiently
address development challenges and projects.
o ClickZ.com publishes news, original information, analysis and opinion
for interactive marketing professionals.
o 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, online discussion forums and moderated e-mail
discussion lists. 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 40%, 42% and 33% of consolidated revenues for the years ended
December 31, 2002, 2003 and 2004, respectively.
4
We also generate online 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 AND OFFERINGS. We enter into a number of e-commerce
agreements, which generally provide for a fixed advertising fee and either a
bounty for new customer accounts or revenue sharing ranging from 10% to 50% of
the sales made by the e-commerce vendor as a result of links from our networks.
E-commerce agreements typically are a minimum of three months in duration.
PAID SUBSCRIPTION SERVICES. We offer paid subscription services to our
customers for our e-mail newsletters and services SearchEngineWatch.com,
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.
WEBINARS. We offer JupiterWebinars, which are objective, educational
online forums that provide focused research findings and analysis from our
JupiterResearch business and from other notable analysts, journalists and
industry experts. JupiterWebinars are free to qualified professionals. We
generate revenue from advertiser sponsorships.
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. We
provide access to limited versions of our editorial content to others at no
charge in order to promote our brands and generate traffic.
ONLINE IMAGES
Our JupiterImages network of graphics related Web sites, includes Comstock
Images, Thinkstock Images, Thinkstock Footage, Photos.com, HemeraImages.com,
Ablestock.com, Clipart.com and Animations.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.
The JupiterImages network of Web sites has a library of over 7.0 million
images online and, as of January 2005, generated over 110 million page views per
month. We generate our Online images revenue from paid 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. Paid subscriptions are primarily sold online
through our networks and through third party relationships. We also derive
revenue from granting rights to use images that are downloaded or delivered on
CD-ROMs. We have agreements with a number of distributors of digital images and
video 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.
RESEARCH
JupiterResearch covers a variety of sectors and industries to provide
clients with original and proprietary information to understand how the Internet
and new technologies impact marketing and commerce. JupiterResearch provides
objective insight and analysis, backed by proprietary data in the form of
forecasts, consumer surveys and executive surveys.
JupiterResearch analysts bring to clients domain expertise, a crucial
element to put into context both
5
specific data and changing events. We believe that our expertise with business
and technology enables us to offer our clients the best available research on
how the Internet and new technologies impact marketing and commerce.
JupiterResearch consists of two main product lines: syndicated research
and custom research and consulting.
SYNDICATED RESEARCH. Syndicated research delivers data and original and
proprietary analysis through both written research reports and analyst inquiry.
Reports include forecasts and survey data to understand consumers' behaviors and
preferences, as well as how executives are investing in particular technologies
and platforms. Analyst inquiry allows companies to look into a given subject
one-on-one, to test ideas and to add objective insight for specific industries
and online circumstances. Syndicated research is typically sold on a
subscription basis, either as a package of all research and reports covering our
primary business areas or on a selective, area-by-area or market-by market
basis. Our research coverage areas include the following 24 primary business
areas and 10 vertical markets:
PRIMARY BUSINESS AREAS--UNITED STATES
PERSONAL TECHNOLOGIES & ACCESS MARKETING & MEDIA
o Broadband o Content & Programming
o Digital Television o Digital Rights Management
o Home Theater o Marketing & Branding
o Personal Computer and Console Games o Online Advertising
o Personal Technology o Online Behavior & Demographics
o Wi-Fi Mobility o Online Search
o Wireless
WEB TECHNOLOGIES & OPERATIONS
o Customer Relationship Management
o Marketing Operations
o Payments & Transactions
o Site Technologies & Operations
PRIMARY BUSINESS AREAS--EUROPE
o Commerce o Marketing & Advertising
o Content & Programming o Platforms & Access
o Country Focus o Wireless
o Market Forecasts
VERTICAL INDUSTRY RESEARCH
o Automotive o Health
o Banking & Lending o Microsoft Monitor
o Brokerage & Wealth Management o Music
o Consumer Packaged Goods o Retail
o Entertainment & Media o Travel
CUSTOM RESEARCH AND CONSULTING. Our Custom Research and Consulting
services address our clients' project-specific research needs. Strategic
consulting projects utilize a variety of research methodologies to provide
proprietary recommendations; allow clients to test specific hypotheses regarding
how new technologies, competitive forces and alternative go-to-market strategies
affect their market position; and expand on JupiterResearch's knowledge and
data, often focusing on markets or issues not directly covered in existing
products. Types of custom research projects include market opportunity
assessments, leading practice analyses, business evaluations, new business model
assessments, multi-client studies and site benchmarking.
6
EVENTS
JupiterEvents produces offline conferences and trade shows focused on IT
and business-specific topics that are aligned with our online media properties.
JupiterEvents include an extensive conference program that provides a forum for
the exchange and dissemination of information relevant to the particular event's
focus.
In addition, most events have "keynote" sessions with speakers who are
known for their industry knowledge and expertise.
We are able to efficiently promote these events through our online media
networks. We generate revenues from attendee registrations, exhibition space
from exhibitors who pay a fixed price per square foot of booth space and
advertiser and vendor sponsorships.
Events scheduled for 2005, some of which are produced in multiple cities
in both the United States and around the world each year, include:
o Digital Rights Management Strategies
o IT Service Management Forum
o Search Engine Strategies
o WiFi/VoWiFi Planet
VENTURE FUND INVESTMENTS
We are 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. We were
the portfolio manager of, and an investor in, 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 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. 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. Both Fund II and Fund III were dissolved in December of
2004 and final distributions were made following such dissolutions. We invested
$700,000 in Fund I, all of which is now fully invested. The remaining $4.3
million of capital raised and funded in Fund I were sourced from third party
investors. We no longer have any outstanding capital commitments related to Fund
I. The aggregate carrying value of our investment in Fund I was $171,000 as of
December 31, 2004.
Through I-Venture Management LLC, we earn management fees for the
day-to-day operation and general management of our venture funds. In addition,
through I-Venture Management LLC, we are entitled to up to 20% of the realized
gains on investments made by these funds, after an 8% per annum preferred return
to investors. Due to the liquidation and dissolution of Fund II and Fund III and
the small size of Fund I, these fees will be negligible in 2005 and in the
future.
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 10, 2004, Mr. Meckler
beneficially owned approximately 38.7% 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.
7
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 website address is http://www.jupitermedia.com. We make available free
of charge, through a link on our website 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 advertising, image
and research clients, subscribers to our paid subscription products, and
exhibitors, sponsors and attendees for our events.
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 at trade shows and promotional
links from Web sites that attract demographically similar audiences. We use
public relations, user groups, trade shows, including both JupiterEvents and
third-party industry events, 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 barter a portion of the unsold advertising impressions generated by our
networks, exhibition and sponsorship positions at our events as well as attendee
passes to our events in exchange for advertising and promotion in media
properties owned by third parties.
We sell most of our Online media, Research and Events products through
separate direct sales forces. Our U.S. sales forces operate from our New York,
San Francisco and Darien offices, and we also maintain local representatives in
various locations throughout the United States. 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 sold primarily on our Web
sites.
GEOGRAPHIC FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, a
year-over-year comparison of the percentage of our revenues by geographic
region:
2002 2003 2004
---- ---- ----
United States of America 95% 95% 95%
International 5 5 5
---- ---- ----
100% 100% 100%
==== ==== ====
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 research reports 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.
8
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving. As a result, we cannot assure the future viability or value
of our proprietary rights. We might not have taken adequate steps to prevent the
misappropriation or infringement of our intellectual property. Any such
infringement or misappropriation, should it occur, might harm our business,
results of operations and financial condition. In addition, we may have to file
lawsuits in the future to perfect or enforce our intellectual property rights,
to protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. These lawsuits could result in substantial costs
and divert our resources and the attention of our management. As a result, our
business, results of operations, financial condition and cash flows would
suffer.
Our business activities may infringe upon the proprietary rights of
others, and other parties might assert infringement claims against us. From time
to time, we have been, and expect to continue to be, subject to claims in the
ordinary course of our business including claims of alleged infringement of the
trademarks, service marks content, images and other intellectual property rights
of third parties. If similar claims are made against us in the future, those
claims and any resultant litigation might subject us to liability for damages,
result in invalidation of our proprietary rights and, even if not meritorious,
could be time consuming and expensive to defend and could result in the
diversion of our resources and the attention of our management. As a result, our
business, results of operations, financial condition and cash flows would
suffer.
We generally obtain 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 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 or 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 brands,
proprietary rights or reputation, which would harm our business, prospects,
financial condition, results of operations and cash flows.
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 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 comparable domain names in all the countries in which we conduct
business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is 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.
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.
The results of our Research business vary with the amount of custom
research projects performed during each period.
The results of our Events business vary with the topics, frequency and
timing of the events we produce.
Expenditures by our customers tend to vary in cycles that reflect overall
economic conditions as well as budgeting and buying patterns.
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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 12% of our Online
media revenues in 2004. No customer accounted for more than 10% of our
consolidated revenues during any of the periods presented.
2002 2003 2004
---- ---- ----
Online media 31% 48% 54%
Online images -- -- --
Research 34 36 22
Events 13 15 13
All segments combined 27 35 25
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, 2003 and 2004 (in thousands):
DECEMBER 31,
------------------------
2003 2004
-------- --------
Online media $ 5,546 $ 4,671
Online images 2,322 4,490
Research 4,430 6,372
Events 937 2,160
-------- --------
$ 13,235 $ 17,693
======== ========
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. Our Online images backlog
consists of subscriptions to our JupiterImages products. Our Research backlog
consists of subscriptions to our research products. Our Events backlog consists
of prepayments of attendee registration fees and contracts for exhibition space
and sponsorships.
Substantially all of our backlog as of December 31, 2004 will be
recognized as revenue in 2005.
COMPETITION
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.
10
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.
RESEARCH
Competitive factors in the market for research products and services
include the quality, relevance and timeliness of our research and analysis,
customer service and price. Our principal competitors are Forrester Research,
Inc., Gartner Inc. and IDC, a subsidiary of International Data Group. Numerous
other companies, however, compete with us both domestically and internationally
in providing research and analysis related to a specific industry or geographic
area. In addition, we face increased direct and indirect competition from IT
research firms, business consulting firms, electronic and print publishing
companies and equity analysts employed by financial services companies.
EVENTS
Our events compete for exhibitors and attendees with other technology
related trade shows, including personal computer and computer network related
shows, such as International Data Group and MediaLive International, Inc.
Competitive factors in this industry include the availability of desirable
venues and dates, the ability to provide topics that meet the needs of our
customers, the ability to attract qualified attendees and the ability to provide
high-quality show services, exhibitions space, marketing and sponsorship
opportunities. Some of our competitors are affiliated with major publishers of
technology related books and magazines.
Many of our current and potential competitors in our various segments 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.
EMPLOYEES
The following is a summary of our employees by segment as of December 31,
2003 and 2004:
DECEMBER 31, DECEMBER 31,
2003 2004
-------- --------
Online media 147 129
Online images 17 84
Research 64 69
Events 25 20
Other 26 37
-------- --------
279 339
======== ========
11
ITEM 2. PROPERTIES
The following table sets forth a list of our current office leases:
TERMINATION
LOCATIONS SQUARE FEET DATE USE
- --------------------------------------------- ----------------------------
OCCUPIED
Darien, CT 18,000 February 2007 Administrative, Online media
editorial, IT operations,
Events sales and operations
personnel
New York, NY 16,000 July 2007 Online media sales and
editorial, Research analysts
and sales personnel
Mountainside, NJ 15,000 June 2005 Online images operations and
marketing
Gatineau, Quebec 9,500 July 2009 Online images operations and
marketing
McLean, Virginia 6,000 May 2005 Online images operations and
marketing
San Francisco, CA 5,700 August 2006 Online media sales and
Research sales personnel
Essex, England 5,000 December 2009 Online images operations and
marketing
Tucson, AZ 5,000 November 2005 Online images operations and
marketing
Charlotte, NC 3,000 November 2007 Online images operations and
marketing
Toronto, Ontario 2,500 July 2005 Online images operations and
marketing
Dee Why, Australia 2,500 January 2007 Online images operations
Boston, MA 2,000 July 2006 Online media editorial, IT
operations and Research sales
personnel
Stramberg, Germany 1,900 December 2007 Online images operations
London, England 1,800 June 2005 Online images operations
Westboro, MA 1,500 January 2007 Events operations personnel
Berlin, Germany 1,000 December 2005 Online media sales personnel
Steinsel, Luxembourg 1,000 May 2007 Online images operations and
marketing
Paris, France 1,000 March 2005 Research sales personnel
London, England 1,000 May 2005 Research sales personnel
Hamburg, Germany 700 December 2005 Research sales personnel
SUBLET
Darien, CT 4,500 April 2005 This location is currently
sublet to an unaffiliated
third party.
Tucson, AZ 3,000 November 2005 This location is currently
sublet to an unaffiliated
third party through the lease
termination date.
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.
12
ITEM 3. LEGAL PROCEEDINGS
A complaint was filed in Delaware Chancery Court (the "Chancery Court") on
June 16, 1999 by a former shareholder of Mecklermedia Corporation
("Mecklermedia") alleging that Messrs. Alan M. Meckler and Christopher S.
Cardell, each an executive officer and director of Jupitermedia, as well as the
other former directors of Mecklermedia, breached their fiduciary duties of care,
candor, and loyalty in connection with the approval of both the sale of
Mecklermedia to Penton Media ("Penton") in November 1998 and the related sale of
80.1% of the Internet business of Mecklermedia to Mr. Meckler (the "Delaware
Action"). Jupitermedia was also named as a defendant. The action was brought as
a class action purportedly on behalf of a class of all shareholders of
Mecklermedia (other than any defendant) whose shares were acquired by Penton
("Shareholders"), and seeks damages from all defendants and the imposition of a
constructive trust on the benefits obtained by any defendant. On or about
November 7, 2000, defendants were served with an amended complaint, which named
three additional plaintiffs.
Following discovery, on or about October 9, 2001, plaintiffs filed a
Second Amended Class Action Complaint ("SAC"). The SAC adds allegations
concerning defendants' alleged failure to disclose certain facts concerning Mr.
Meckler's role in the transactions, his role in negotiations with a third party,
and the valuation of the assets at issue. Defendants filed a motion to dismiss
the SAC on April 1, 2002. On November 6, 2002, the Chancery Court issued an
opinion denying defendants motion to dismiss the SAC. On December 13, 2002, all
of the defendants, including the Company, served an answer to the SAC generally
denying the allegations therein, denying that the directors of Mecklermedia
breached any fiduciary duties, and asserting certain affirmative defenses.
The parties to the Delaware Action and the parties to a related class
action brought against Penton in the United States District Court for the
Southern District of New York (the "Penton Action") settled both actions for
$7.5 million. The carrier who provided director and officer liability insurance
to the directors of Jupitermedia paid $2.875 million toward the settlement and
Penton's insurance carrier paid the remaining portion of the settlement. The
settlement agreement was approved by both the New York court and the Chancery
Court and the Penton Action and the Delaware Action have been dismissed.
On February 28, 2003, Jupitermedia filed a lawsuit in the United States
District Court for the District of Colorado alleging that the defendants were
knowingly and willfully using the name "WISPCON" to advertise, promote and
conduct a variety of Internet/ information technology trade shows, where such
name is deliberately and confusingly similar to the plaintiffs' pre-existing use
in connection with their own Internet/ information technology trade shows of the
trademarked, service marked, and branded name "ISPCON." Jupitermedia owns 49.9%
of the ISPCON joint venture, pursuant to which it provides marketing, sales and
other event support for the ISPCON trade shows. The plaintiffs sought injunctive
relief and damages under a variety of legal theories, including trademark
infringement, unfair competition, trademark dilution, deceptive trade practices,
interference with contract, and unjust enrichment. Defendants filed a motion to
dismiss for lack of personal jurisdiction, which the court granted by Order
dated September 7, 2004. By that same Order, the court dismissed the action
without prejudice, each party to bear its own costs. The parties entered into a
settlement agreement in October 2004 that resolved and disposed of all claims in
the case.
On May 12, 2004, Jupitermedia filed a lawsuit against eMarketer, Inc.
("eMarketer") in United States District Court for the Southern District of New
York, alleging that eMarketer violated Jupitermedia's copyright, trademark and
related rights. Jupitermedia is seeking an injunction, damages and legal costs.
On June 30, 2004, eMarketer filed an answer and counterclaim seeking a
declaratory judgment that the conduct of which Jupitermedia complains is not
violative of Jupitermedia's rights and is not seeking damages. Jupitermedia
replied to the counterclaim on July 30, 2004, and discovery has commenced.
On August 3, 2004, Mario Cisneros and Michael Voight filed a class action
lawsuit 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.
13
Jupitermedia intends to vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
PART II
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.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 2003
----------------------------
First Quarter ........................ $ 3.05 $ 2.37
Second Quarter ....................... $ 4.88 $ 2.63
Third Quarter ........................ $ 4.70 $ 3.55
Fourth Quarter ....................... $ 6.10 $ 4.35
YEAR ENDED DECEMBER 31, 2004
----------------------------
First Quarter ........................ $ 12.11 $ 4.60
Second Quarter ....................... $ 14.65 $ 7.67
Third Quarter ........................ $ 18.13 $ 10.08
Fourth Quarter ....................... $ 24.44 $ 15.58
YEAR ENDING DECEMBER 31, 2005
-----------------------------
First Quarter (through March 14, 2005) $ 23.76 $ 12.68
As of March 14, 2005, 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
NUMBER OF SECURITIES
WEIGHTED- REMAINING AVAILABLE
NUMBER OF SECURITIES TO BE AVERAGE EXERCISE FOR FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS OPTIONS, WARRANTS [EXCLUDING SECURITIES
PLAN AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (a)]
CATEGORY (a) (b) (c)
-------- ----------------------------- -------------------- --------------------------------
Equity compensation plans
approved by security
holders 5,636,020 $7.71 1,597,359
Equity compensation plans not
approved by security
holders -- -- --
--------- --------- ---------
Total 5,636,020 $7.71 1,597,359
========= ========= =========
15
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."
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 52,083 $ 43,965 $ 40,697 $ 46,991 $ 71,888
Cost of revenues 22,991 22,101 16,757 21,511 26,077
--------- --------- --------- --------- ---------
Gross profit 29,092 21,864 23,940 25,480 45,811
--------- --------- --------- --------- ---------
Operating expenses:
Advertising, promotion and selling 18,254 18,471 14,116 14,369 16,232
General and administrative 10,172 11,956 6,787 7,003 10,687
Depreciation 2,099 2,730 2,235 1,422 804
Amortization (1) 24,854 33,785 807 1,371 2,166
Impairment of intangibles (2) -- 54,184 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 55,379 121,126 23,945 24,165 29,889
--------- --------- --------- --------- ---------
Operating income (loss) (26,287) (99,262) (5) 1,315 15,922
Income (loss) on investments and other, net (216) (1,946) (205) 121 190
Interest income 4,814 1,376 383 190 163
Interest expense -- -- -- (26) (130)
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority interests and equity
loss from international and venture fund investments (21,689) (99,832) 173 1,600 16,145
Provision for income taxes 205 2 -- -- 288
Minority interests 399 83 (40) 26 (89)
Equity loss from international and venture fund investments, net (1,482) (2,435) (644) (244) (31)
--------- --------- --------- --------- ---------
Net income (loss) $ (22,977) $(102,186) $ (511) $ 1,382 $ 15,737
========= ========= ========= ========= =========
Basic net income (loss) per share $ (0.92) $ (4.03) $ (0.02) $ 0.05 $ 0.54
========= ========= ========= ========= =========
Basic weighted average number of common shares 25,014 25,333 25,318 25,574 29,381
========= ========= ========= ========= =========
Diluted net income (loss) per share $ (0.92) $ (4.03) $ (0.02) $ 0.05 $ 0.49
========= ========= ========= ========= =========
Diluted weighted average number of common shares 25,014 25,333 25,318 26,917 31,801
========= ========= ========= ========= =========
(1) Amortization expense decreased from 2001 to 2002 due primarily to our
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets." On January 1, 2002, SFAS No. 142 became
effective and as a result, we ceased amortizing goodwill.
(2) 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 are determined based upon estimated
future cash flows. During 2001, we determined that certain intangible assets
associated with various acquired Online media properties were impaired. As a
result of this determination, we recorded a non-cash charge of $54.2 million for
the year ended December 31, 2001 related to the impairment of acquired goodwill
and trademarks.
AS OF DECEMBER 31,
----------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents $ 59,979 $ 25,100 $ 25,451 $ 9,567 $ 30,179
Working capital 52,314 22,926 21,312 5,646 26,525
Total assets 162,172 45,787 48,385 56,038 116,297
Total equity 137,483 35,338 34,854 38,359 92,159
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading global provider of original online information, images,
research and events resources for information technology ("IT"), business and
creative professionals. Our operations are classified into four principal
segments: Online media, Online images, Research and Events.
ONLINE MEDIA. Online media includes JupiterWeb, which consists of our
internet.com, EarthWeb.com, DevX.com, ClickZ.com and Graphics.com networks of
over 150 Web sites and over 150 e-mail newsletters that generated, as of January
2005, over 300 million page views monthly.
We generate our Online media revenues from:
o advertising and custom publishing on our Web sites, e-mail
newsletters, online discussion forums and moderated e-mail
discussion lists;
o e-commerce agreements, which generally include a fixed advertising
fee and either a bounty for new customer accounts or revenue
sharing;
o paid subscription services for our paid e-mail newsletters and
services;
o renting our permission based opt-in e-mail list names;
o advertiser sponsorships for our Webinars; and
o 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.
ONLINE IMAGES. Online images include our JupiterImages network, which is
one of the largest paid subscription-based graphics resources on the Web.
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.
We have agreements with a number of distributors of digital images and
videos 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.
The principal costs of our Online images business relate to production and
marketing personnel, technology infrastructure, royalties for images that we
license, lead generation fees for sales referrals and credit card processing
fees.
RESEARCH. Research includes our JupiterResearch business, which provides
clients with original and proprietary information to better understand how the
Internet and new technologies impact marketing and commerce.
We generate our Research revenues primarily from the sale of our
syndicated research products. These products deliver data and analysis via
written research reports and analyst inquiry. Our syndicated research is
typically sold on an annual subscription basis. We also generate revenue through
the sale of our custom
17
research product, which delivers specific research based on the needs of our
customers. The results of our Research business vary with the amount of custom
research projects performed during each period.
The principal costs of our Research business relate to analyst and sales
personnel and costs to acquire third party research data.
EVENTS. Events include our JupiterEvents business that produces offline
events focused on IT and business-specific topics that are of interest to our
users.
We generate our Events 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. The results of our Events business
vary with the topics, frequency and timing of the events we produce.
The principal costs of our Events business relate to operations and sales
personnel, venue and speaker costs and advertising expenses to attract attendees
to our events.
RECENT 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 preliminarily valued at $22.2 million when issued.
Jupitermedia financed the cash portion of the purchase price with cash on hand
and a $20.0 million term loan under a credit facility with JPMorgan Chase Bank,
N.A. ("JPMorgan") obtained in connection with the transaction.
On March 7, 2005, in connection with our acquisition of Dynamic Graphics
Group, Jupitermedia entered into a Credit Agreement (the "Credit Agreement")
with JPMorgan which provides for a $20 million senior term loan, of which $20.0
million was outstanding as of March 14, 2005. The $20.0 million term loan is
scheduled to mature on March 7, 2008 and may be prepaid without penalty.
Jupitermedia may elect that the loan bear interest at a rate per annum equal to
either (i) an adjusted LIBOR-based rate, plus 1.75% (or, if debt to our EBITDA
is less than .50 to 1.00, 1.50%) or (ii) the prime rate, as announced by
JPMorgan. The Credit Agreement requires us to pay principal in quarterly
installments of $1,666,667, commencing on June 30, 2005 and ending on March 31,
2008. The Credit Agreement contains customary covenants including, among others,
restrictions on our ability to pay dividends, incur additional indebtedness
(other than subordinated indebtedness) or liens on our assets, make investments
in excess of $2 million in the aggregate or make acquisitions in excess of $25
million in any four consecutive fiscal quarters or in excess of $5 million for
any single transaction. The Credit Agreement also requires us to meet certain
financial tests, including, a net income test, a net loss test, a minimum net
worth test and a minimum cash balance test. The Credit Agreement contains
customary events of default, including among other things, non payment of
principal, interest, fees or other amounts when due, inaccuracy of
representations and warranties, violation of covenants, a material adverse
change, a change of control or the occurrence of a bankruptcy or certain
ERISA-related events. Upon an event of default, all amounts owing under the
Credit Agreement will immediately become due and payable and will bear interest
at a default rate equal to the then applicable rate of interest plus 2%.
Borrowings under the Credit Agreement are guaranteed by Jupitermedia's material
subsidiaries and are collateralized by substantially all of our assets.
During 2004, we made three significant acquisitions. On April 1, 2004,
Jupitermedia acquired substantially all of the assets and certain liabilities of
Comstock, Inc. ("Comstock Images") for approximately $20.85 million in cash (the
"Comstock Acquisition"). Comstock Images has been integrated into the
JupiterImages business. The Comstock Acquisition was financed with cash on hand
and through $13 million of borrowings under credit facilities from HSBC Bank USA
("HSBC").
On April 1, 2004, Jupitermedia obtained secured revolving credit
facilities from HSBC that provided for aggregate borrowings of up to $12
million. On April 8, 2004, Jupitermedia obtained an additional secured revolving
credit facility from HSBC that provided for additional borrowings of up to $11
million. Following the completion of Jupitermedia's follow-on public offering of
common stock on May 28, 2004 (see Note 11 to Consolidated Financial Statements),
$13 million in outstanding borrowings under the credit facilities with HSBC were
repaid. As of December 31, 2004, there were no outstanding borrowings under the
credit facilities with HSBC. These facilities were terminated in 2005 in
connection with entering into the Credit Agreement with JPMorgan.
18
The total purchase price of the Comstock Acquisition has been allocated to
the assets and liabilities based on estimates of their respective fair values.
The aggregate purchase price was allocated as $12.0 million to goodwill, $7.4
million to intangible assets, $1.4 million to assets other than goodwill and
intangible assets and $28,000 to assumed liabilities. The intangible assets
subject to amortization are being amortized on a straight-line basis over
periods ranging from three to fifteen years.
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"). Based on preliminary estimates, the aggregate
purchase price was allocated as $1.6 million to goodwill, $2.5 million to
intangible assets and $478,000 to assets other than goodwill and intangible
assets and $5,000 to assumed liabilities. The purchase accounting for the
Thinkstock Acquisition will be finalized at a later date not to exceed one year
from the Thinkstock Acquisition date.
On November 12, 2004, Jupitermedia acquired all of the stock of Hemera
Technologies Inc. and its subsidiaries ("Hemera") for approximately $7.3 million
in cash (the "Hemera Acquisition"). Based on preliminary estimates, the
aggregate purchase price was allocated as $3.6 million to goodwill, $2.5 million
to intangible assets and $2.1 million to assets other than goodwill and
intangible and $840,000 to assumed liabilities. The purchase accounting for the
Hemera Acquisition will be finalized at a later date not to exceed one year from
the Hemera Acquisition date.
In 2004, we also made various smaller acquisitions to complement our
current product and service offerings.
During 2003, we made two significant acquisitions. On June 30, 2003, we
acquired all of the stock of ArtToday, Inc. ("ArtToday") from International
Microcomputer Software, Inc. ("IMSI") for $13.0 million in cash, 250,000 shares
of Jupitermedia common stock valued at $997,500 when issued and an earn-out for
up to an additional $4.0 million in cash consideration over the two years
following closing. Earn-out payments are based on net revenue targets achieved
by ArtToday for the period from July 1, 2003 to December 31, 2003; for the
period from January 1, 2004 to June 30, 2004; and for the period from July 1,
2004 to June 30, 2005. Based upon the results of ArtToday for the period from
July 1, 2003 to December 31, 2003, IMSI was paid $1.0 million in February 2004,
representing the maximum amount that could have been earned for this earn-out
period. Based upon the results of ArtToday for the period from January 1, 2004
to June 30, 2004, IMSI was paid $1.0 million in August 2004, representing the
maximum amount that could have been earned for this earn-out period. With the
acquisition of ArtToday we formed our Online images business, and there are no
financial results for this business prior to June 30, 2003. In 2004, we renamed
our Online images business that was formerly known as ArtToday to JupiterImages.
In addition, we acquired the assets of DevX.com, Inc., or DevX.com, on
July 11, 2003 for $2.25 million in cash, 200,000 shares of our common stock
valued at $776,000 when issued and the assumption of $1.5 million in liabilities
including accounts payable, accrued liabilities and obligations to fulfill
contractual commitments. DevX.com is an online network that provides information
and resources for software and Web developers.
In 2003, we also made various smaller acquisitions to complement our
current product and service offerings.
During 2002, we made one significant acquisition. On July 31, 2002, we
acquired certain assets and assumed certain liabilities of the JupiterResearch
business from Jupiter Media Metrix, Inc. ("JMXI") for $250,000 and the
assumption of certain liabilities including obligations to fulfill contractual
obligations.
In 2005, 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.
19
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):
YEAR ENDED DECEMBER 31, 2002 VS. 2003 2003 VS. 2004
------------------------------ ------------------- -------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 27,169 $ 24,991 $ 30,019 $ (2,178) (8)% $ 5,028 20%
Online images -- 4,018 22,571 4,018 -- 18,553 462
Research 5,139 9,101 9,323 3,962 77 222 2
Events 7,271 8,279 9,929 1,008 14 1,650 20
Other 1,118 602 46 (516) (46) (556) (92)
-------- -------- -------- -------- -------- -------- --------
$ 40,697 $ 46,991 $ 71,888 $ 6,294 15% $ 24,897 53%
======== ======== ======== ======== ======== ======== ========
ONLINE MEDIA. During 2001, we began to experience a reduction in
advertising revenues due to the general downturn in the U.S. economy,
particularly related to technology spending. This decrease continued through
2002 and the first quarter of 2003. Beginning with the second quarter of 2003
and throughout the remainder of 2003 and into 2004, we experienced increases in
revenues as conditions in the U.S. economy improved and advertisers,
particularly technology companies, began to increase their advertising spending.
We acquired the assets of DevX.com, Inc. on July 11, 2003 and this
acquisition contributed $2.0 million and $4.2 million to revenues in 2003 and
2004, respectively.
The following table sets forth, for the periods indicated, a
year-over-year comparison of our Online media revenues, including barter.
YEAR ENDED DECEMBER 31, 2002 VS. 2003 2003 VS. 2004
------------------------------ ------------------- -------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 23,948 $ 23,970 $ 29,898 $ 22 -% $ 5,928 25%
Barter 3,221 1,021 121 (2,200) (68) (900) (88)
-------- -------- -------- -------- -------- -------- --------
Total Online media $ 27,169 $ 24,991 $ 30,019 $ (2,178) (8)% $ 5,028 20%
======== ======== ======== ======== ======== ======== ========
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):
NUMBER OF AVERAGE REVENUE
ADVERTISERS PER ADVERTISER
----------- --------------
2002 668 $41
2003 515 49
2004 440 68
In addition, overall revenues from our Online media segment decreased in
2003 as compared to 2002 largely as a result of a decrease in barter revenue due
primarily from the termination of a services agreement with Penton Media, Inc.
in 2003. The decrease in barter revenues from 2002 to 2003 and from 2003 to 2004
was due to a decrease in the number of barter transactions into which we
entered.
ONLINE IMAGES. We acquired ArtToday on June 30, 2003, and therefore there
are no financial results for the Online images segment prior to this date. The
$4.0 million of revenues in 2003 represents the revenues of ArtToday from July 1
through December 31, 2003. We acquired the assets of Comstock Images on April 1,
2004, the assets of Thinkstock on July 28, 2004 and the stock of Hemera on
November 12, 2004, and therefore there are no financial results for these
businesses prior to these respective dates. The acquisition of the assets of
Comstock contributed $9.8 million to revenues during the year ended December 31,
2004, the acquisition of the assets of Thinkstock contributed $1.1 million to
revenues for the year ended December 31, 2004 and the acquisition of Hemera
contributed $542,000 to revenues in 2004.
20
The following table sets forth, for the years ended December 31,
2003 and 2004, the components of our Online images revenues (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004
-------- --------
Subscriptions $ 3,903 $ 10,857
Single images -- 4,347
Distributors, licensing and other 115 4,324
CD-ROMs -- 3,043
-------- --------
Total Online images $ 4,018 $ 22,571
======== ========
The following table sets forth, as of the last day in the periods
indicated, a quarter-by-quarter comparison of our Online images revenues and
subscription bookings for our subscription image products (dollars in
thousands):
REVENUES SUBSCRIPTION BOOKINGS
-------- ---------------------
September 30, 2003 $1,788 $2,119
December 31, 2003 2,115 2,530
March 31, 2004 2,392 3,017
June 30, 2004 2,592 2,948
September 30, 2004 2,744 3,388
December 31, 2004 3,129 3,986
The acquisition of Hemera added $190,000 in revenues and $250,000 in
subscription bookings during the quarter ended December 31, 2004 that are
included in the table above.
Revenues and subscription bookings have increased due primarily to an
increase in the number of subscribers and an increase in average selling price
of the mix of products purchased by our customers. The decrease in subscription
bookings during the quarter ended June 30, 2004 was due primarily to
seasonality. We expect our subscription bookings to continue to increase in the
future.
RESEARCH. We acquired our JupiterResearch business on July 31, 2002. The
results of operations for JupiterResearch in 2002 represent the period from July
31, 2002 through December 31, 2002. Revenues increased in 2003 due to our
ownership of JupiterResearch for a full year in comparison to this five-month
period in 2002. Had we owned the JupiterResearch business for the full year
ended December 31, 2002, we believe our revenues and costs for this business
would have been higher than the amounts presented for the five months ended
December 31, 2002. In addition, we believe there would have been a loss from
operations for this business during the year ended December 31, 2002. Following
our acquisition, we began to see an increase in the renewal rates for our
syndicated research contracts as renewing customers were informed of our
acquisition and our plans to support and further develop the JupiterResearch
business. We experienced continued increases in renewal rates in 2003 and 2004
as conditions in the U.S. economy improved, as we launched several new research
coverage areas and as companies once again began investing in market research.
We also saw an increase in the amount of custom research projects completed for
our customers.
The following table sets forth, for the periods indicated, a
quarter-by-quarter comparison of the JupiterResearch syndicated renewal rates
for 2003 and 2004:
PERCENTAGE PERCENTAGE OF
OF CONTRACT NUMBER OF
VALUE RENEWED CONTRACTS RENEWED
----------------- -----------------
FISCAL QUARTER ENDED 2003 2004 2003 2004
- -------------------- ---- ---- ---- ----
March 31 49% 103% 51% 77%
June 30 67 88 69 71
September 30 67 93 72 70
December 31 98 96 86 82
The amounts above reflect renewal activity to date. The ultimate results
regarding renewals for the quarter ended December 31, 2004 will not be known
until a future date due to the timing of the renewal of certain contracts. We
expect the percentage of contract value renewed and the percentage of the number
of contracts renewed to be greater than the results presented above for the
quarter ended December 31, 2004.
21
The following table sets forth, as of the last day in the periods
indicated, a quarter-by-quarter comparison of the JupiterResearch active
contracts since our acquisition of the JupiterResearch business in 2002 (dollars
in thousands):
NUMBER OF ACTIVE CONTRACTS TOTAL ACTIVE CONTRACT VALUE
-------------------------------- --------------------------------
FISCAL QUARTER ENDED 2002 2003 2004 2002 2003 2004
- -------------------- ---- ---- ---- ---- ---- ----
March 31 N/A 217 240 $ -- $ 8,646 $ 8,236
June 30 N/A 221 243 -- 8,119 8,407
September 30 300 222 259 13,336 7,668 8,691
December 31 291 241 277 12,862 8,082 8,948
Active contract value is defined as the total value of all active
syndicated research contracts without taking into account the amount of revenue
recognized to date or the amount of revenue available to be recognized in the
future. The decrease in the number of contracts and the total active contract
value from 2002 to 2003 is related to the general downturn in the U.S. economy
that began in 2000. During 2003, we saw an increase in the number of customers
and, during the fourth quarter of 2003 and throughout 2004, we experienced an
increase in total value of our active contracts.
EVENTS. The results of our Events business vary with the topics, frequency
and timing of the events that we produce. We have made investments in events
focused on specific vertical content areas that align with our other properties
and, depending upon their success, we may or may not produce the events in the
future. The following table sets forth, for the periods indicated, a
year-over-year comparison of the number of events we produced and a listing of
the amount of our revenues relating to sponsor and exhibitor, paid attendance
and barter revenues during the periods shown (dollars in thousands):
2002 2003 2004
-------- -------- --------
Number of events produced 39 26 19
-------- -------- --------
Sponsor and exhibitor revenue $ 2,800 $ 3,978 $ 4,443
Attendee revenue 3,421 4,043 5,206
Barter 1,050 258 280
-------- -------- --------
Total Events revenue $ 7,271 $ 8,279 $ 9,929
======== ======== ========
The increase in year-over-year revenues is due primarily to the growth of
our Search Engine Strategies and IT Service Management Forum events.
Barter revenues vary from 2002 to 2004 in correlation to the number of
barter transactions into which we entered.
OTHER. Other revenues represent management fees from our management of the
internet.com venture funds. The year-over-year reduction in revenues from 2002
to 2004 was due to the decrease in the value of the investments within the
venture funds. Due to the liquidation and dissolution of internet.com Venture
Fund II LLC and internet.com Venture Partners III LLC and the small size of
internet.com Venture Fund I LLC, these revenues will be negligible in 2005 and
in the future.
22
COST OF REVENUES AND GROSS PROFIT
The following table sets forth, for the periods indicated, a
year-over-year comparison of our cost of revenues and gross profit by segment
(dollars in thousands):
COST OF REVENUES
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 11,084 $ 10,329 $ 11,366 $ (755) (7)% $ 1,037 10%
Online images -- 1,300 4,551 1,300 -- 3,251 250
Research 2,430 5,162 5,195 2,732 112 33 1
Events 3,243 4,720 4,965 1,477 46 245 5
-------- -------- -------- -------- -------- -------- --------
$ 16,757 $ 21,511 $ 26,077 $ 4,754 28% $ 4,566 21%
======== ======== ======== ======== ======== ======== ========
GROSS PROFIT
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 16,085 $ 14,662 $ 18,653 $ (1,423) (9)% $ 3,991 27%
Online images -- 2,718 18,020 2,718 -- 15,302 563
Research 2,709 3,939 4,128 1,230 45 189 5
Events 4,028 3,559 4,964 (469) (12) 1,405 39
Other 1,118 602 46 (516) (46) (556) (92)
-------- -------- -------- -------- -------- -------- --------
$ 23,940 $ 25,480 $ 45,811 $ 1,540 6% $ 20,331 80%
======== ======== ======== ======== ======== ======== ========
GROSS PROFIT %
YEAR ENDED DECEMBER 31
----------------------------------
2002 2003 2004
------ ------ ------
Online media 59% 59% 62%
Online images -- 68 80
Research 53 43 44
Events 55 43 50
Other 100 100 100
------ ------ ------
59% 54% 64%
====== ====== ======
ONLINE MEDIA. Cost of revenues primarily consists of payroll for editorial
personnel, freelance costs, communications infrastructure and Web site hosting.
The year-over-year reduction in cost of revenues from 2002 to 2003 was due
primarily to reduced costs associated with editorial and freelance personnel. In
addition, as we were able to obtain economies of scale with certain of our
acquisitions, we were able to reduce costs related to communication
infrastructure and Web site hosting. The year-over-year increase in cost of
revenues from 2003 to 2004 was due primarily to increased costs resulting from
the full year impact of the acquisition of the assets of DevX.com, Inc. The
acquisition of DevX.com added an additional $850,000 and $1.6 million to cost of
revenues in 2003 and 2004, respectively. In addition, there were increased
freelance costs of $126,000, increased Web site hosting costs of $77,000 and an
increase of $58,000 related to costs associated with our Webinar business.
The increase in gross profit for the year ended December 31, 2004 from the
same period in 2003 was due primarily to the increase in revenues from 2003 to
2004 as well as additional gross profit generated from the acquisition of the
assets for DevX.com.
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.
ONLINE IMAGES. Cost of revenues primarily consists of payroll costs for
production personnel, communications infrastructure, Web site hosting, storage
for our image library and royalties. The acquisition of the assets of Comstock
added $1.7 million to cost of revenues in 2004 and these costs consisted
primarily of payroll related costs. The acquisition of the assets of Thinkstock
added $135,000 to
23
cost of revenues in 2004 and the acquisition of Hemera added $159,000 to cost of
revenues in 2004. The remaining year-over-year increase in costs for revenues
from 2003 to 2004 was due to increased costs resulting from the full year impact
of the acquisition of ArtToday.
We license a portion of our image library from third parties and pay them
a portion of the revenues we receive from our customers as royalties. Royalty
expense was $492,000 and $1.3 million for the years ended December 31, 2003 and
2004, respectively. This increase is due to the full year impact of the
acquisition of ArtToday and the increase in our revenues. We expect the amount
we will pay in future royalties to decrease due to our increased ownership of
images licensed to our customers.
The year-over-year increase in gross profit and gross profit percentage
from 2003 to 2004 is directly attributable to the increased revenues for the
respective periods.
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 royalty expenses 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.
RESEARCH. Cost of revenues primarily consists of payroll costs related to
research analysts and costs to acquire third party research data. Cost of
revenues increased in 2003 due to our ownership of JupiterResearch for a full
year in 2003 in comparison to a five-month period in 2002.
The year-over-year increase in gross profit and gross profit percentage
from 2003 to 2004 is directly attributable to the increased revenues for the
respective periods.
We intend to make investments in new research coverage areas where
appropriate and this may result in increased costs related to hiring personnel
and acquiring data to produce our research.
EVENTS. Cost of revenues primarily consists of payroll costs related to
operations employees and event production costs such as venue and speaker costs.
Costs of revenues have increased year-over-year from 2002 to 2004 due primarily
to the growth in the size of certain of our events and the launch of first-time
events.
Gross profit percentage may vary with the topics, frequency and timing of
the events we produce in addition to the impact of launching first-time events.
The decrease in gross profit and gross profit percentage from 2002 to 2003 is
due primarily to the costs incurred in 2003 in connection with the launch of our
Computer Digital Expo event. The increase in gross profit and gross profit
percentage from 2003 to 2004 is due primarily to the growth of the Search Engine
Strategies and IT Service Management Forum events in 2004.
We intend to continue to make investments to launch new events that align
with our other properties. In addition, depending upon the success of certain
events, we may increase the frequency of the number of times we run an event
relating to a specific topic.
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):
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 8,983 $ 6,278 $ 6,737 $ (2,705) (30)% $ 459 7%
Online images -- 508 3,228 508 -- 2,720 535
Research 1,345 2,884 3,045 1,539 114 161 6
Events 3,788 4,699 3,222 911 24 (1,477) (31)
-------- -------- -------- -------- -------- -------- --------
$ 14,116 $ 14,369 $ 16,232 $ 253 2% $ 1,863 13%
======== ======== ======== ======== ======== ======== ========
ONLINE MEDIA. Advertising, promotion and selling expenses primarily
consists of payroll costs for sales and marketing personnel and costs related to
marketing activities including barter. The reduction in advertising, promotion
and selling expenses from 2002 to 2003 was due primarily to a reduction in
payroll costs for sales personnel. In addition, costs associated with barter
decreased from 2002 to 2004. Barter
24
expense was $2.0 million, $110,000 and $31,000 for the years ended December 31,
2002, 2003 and 2004, respectively. The decrease in barter expense in 2003 was
due primarily to the termination of a services agreement with Penton Media, Inc.
in 2003. Barter expenses vary in correlation to the number of barter
transactions into which we enter.
The increase in advertising, promotion and selling expenses from 2003 to
2004 relates primarily to increased costs resulting from the full year impact of
the acquisition of the assets of DevX.com. The acquisition of the assets of
DevX.com, Inc. added an additional $550,000 and $899,000 to advertising,
promotion and selling expenses in 2003 and 2004, respectively. The remaining
increase relates primarily to increased employee related costs totaling $110,000
for the year ended December 31, 2004.
ONLINE IMAGES. Advertising, promotion and selling expenses primarily
consists of payroll for marketing personnel, commissions to third parties for
referrals, credit card transaction fees and advertising. The acquisitions of the
assets of Comstock and Thinkstock added $1.7 million and $111,000, respectively,
to advertising, promotion and selling expenses during the year ended December
31, 2004. In addition, the acquisition of Hemera added $109,000 to advertising,
promotion and selling expenses during 2004. The expenses from these acquisitions
included $1.1 million for advertising and marketing promotions and $625,000 in
payroll costs for the year ended December 31, 2004. The remaining year-over-year
increase in advertising, promotion and selling expense from 2003 to 2004 was due
primarily to increased costs resulting from the full year impact of the
acquisition of ArtToday.
RESEARCH. Advertising, promotion and selling expenses primarily consists
of payroll for sales and marketing personnel. Advertising, promotion and selling
expenses increased in 2003 due to our ownership of JupiterResearch for a full
year in 2003 in comparison to a five-month period in 2002.
EVENTS. Advertising, promotion and selling expenses primarily consists of
sales and marketing personnel and advertising expense. Advertising, promotion
and selling expenses increased from 2002 to 2003 due to increased payroll
related costs for sales and marketing personnel and due to an increase in
advertising for our events. Expenses decreased from 2003 to 2004 due to a
reduction of employee related costs of $791,000. In addition, advertising costs
for our events decreased $753,000 from 2003 to 2004 due to a decrease in the
number of events we produced during the year. Barter expense was $1.0 million,
$259,000 and $273,000 for the years ended December 31, 2002, 2003 and 2004,
respectively. Barter expenses vary from 2002 to 2004 in correlation to the
number of barter transactions into which we entered.
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):
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Online media $ 217 $ 772 $ 611 $ 555 256% $ (161) (21)%
Online images -- 284 1,298 284 -- 1,014 357
Research 569 1,066 570 497 87 (496) (47)
Events 302 184 153 (118) (39) (31) (17)
Other 5,699 4,697 8,055 $ (1,002) (18) 3,358 71
-------- -------- -------- -------- -------- -------- --------
$ 6,787 $ 7,003 $ 10,687 $ 216 3% $ 3,684 53%
======== ======== ======== ======== ======== ======== ========
ONLINE MEDIA. General and administrative expenses primarily consist of
office related costs and provisions for losses on accounts receivable. The
increase in general and administrative expenses from 2002 to 2003 was due
primarily to increased provisions for losses on accounts receivable. During
2001, we experienced a higher rate of losses from the collection of our accounts
receivable due to many customers being unable to pay their balances as result of
the general economic downturn in the U.S. Our experience with our receivables
improved significantly in 2002 as we recorded a reduction from our allowance for
doubtful accounts of $270,000 in 2002. We recorded a provision for losses on
accounts receivable of $89,000 in 2003, which resulted in a net change of
$359,000 versus 2002.
The acquisition of DevX added an additional $228,000 and $90,000 to
general and administrative expenses in 2003 and 2004, respectively. The decrease
from 2003 to 2004 relating to DevX.com was due primarily to a reduced payroll
and office related costs of $139,000.
25
The decrease in general and administrative expenses from 2003 to 2004 was
due primarily to a reduction from our allowance for doubtful accounts of
$182,000 in 2003, which resulted in a net change of $271,000 for the year ended
December 31, 2004. This decrease was due to improved collections of our
receivables. We do not expect this decrease to be a trend that will continue in
the future. These decreases were partially offset by lower expenses of $293,000
for the year ended December 31, 2003 due to recording of sublease income to
offset rental expense for office space that had been previously vacated.
ONLINE IMAGES. General and administrative expenses primarily consists of
payroll for administrative personnel, office related costs and professional
fees. The acquisition of the assets of Comstock, Thinkstock and the stock of
Hemera added $664,000, $140,000 and $102,000, respectively, to general and
administrative expenses during 2004. The cost from these acquisitions included
$407,000 for office related costs, $160,000 for provisions for losses on
accounts receivable, $158,000 for payroll related costs and $112,000 in
professional fees in 2004. The remaining year-over-year increase in general and
administrative expense from 2003 to 2004 was due to increased costs resulting
from the full year impact of the acquisition of ArtToday.
RESEARCH. General and administrative expenses primarily consists of
payroll for administrative personnel, office related costs and professional
fees. General and administrative expenses increased in 2003 due to our ownership
of JupiterResearch for a full year in 2003 in comparison to a five-month period
in 2002. The year-over-year decrease in general and administrative expense from
2003 to 2004 was due to a reduction in provisions for losses on accounts
receivable of $226,000. This decrease was due to an improvement in our
collections. We do not expect this decrease to be a trend that will continue in
the future. In addition, general and administrative expenses decreased during
the year ended December 31, 2004 due to decreased office related costs of
$107,000, a decrease in administrative payroll related costs of $73,000 and a
decrease in professional fees relating to third party payroll provider services
of $51,000.
EVENTS. General and administrative expenses primarily consists of payroll
for administrative personnel, office related costs and professional fees. The
year-over-year decrease in general and administrative expenses from 2002 to 2004
relates primarily to a reduction in payroll costs for administrative personnel
and a reduction in office related costs.
OTHER. General and administrative expenses primarily consist of payroll
costs for administrative personnel, office related costs and professional fees.
The decrease in general and administrative expenses from 2002 to 2003 was due
primarily to reduced office related costs for vacated premises that were
recorded as an expense in 2002 and a reduction in legal fees due to the
resolution of certain legal matters in 2003. The increase in general and
administrative expenses from 2003 to 2004 relates to an increase in professional
fees for consulting services of $803,000, legal expenses of $958,000, payroll
and other employee related costs of $545,000, and professional fees for audit
and tax related services of $539,000. The increase in legal expenses is due to
increased costs relating to certain legal proceedings. The increase in
professional fees was caused primarily by increased audit and tax related
services due to the increase in the size of our business. We incurred $1.2
million of audit and consulting fees due to the requirements of complying with
the Sarbanes-Oxley Act of 2002. We expect the level of our audit and tax
services to remain constant and consulting related services to decrease in the
foreseeable future.
DEPRECIATION AND AMORTIZATION
The following table sets forth, for the periods indicated, a
year-over-year comparison of our depreciation and amortization expenses (in
thousands):
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Depreciation $ 2,235 $ 1,422 $ 804 $ (813) (36)% $ (618) (43)%
Amortization 807 1,371 2,166 564 70 795 58
Depreciation expense decreased from 2002 to 2004 due primarily to an
increase in assets having already been fully depreciated.
Amortization expense increased from 2002 to 2004 due primarily to the
amortization of intangible assets acquired from ArtToday and DevX.com, Inc. in
2003 and the amortization of intangible assets related to the acquisitions of
Comstock, Thinkstock and Hemera in 2004 and the full year impact of the ArtToday
and DevX.com Inc. acquisitions.
26
The acquisitions of the assets of Comstock and Thinkstock and the
acquisition of Hemera added $608,000, $154,000 and $56,000, respectively, to
depreciation and amortization expense in 2004. The acquisitions of ArtToday and
the assets of DevX.com, Inc. added an additional $433,000 and $86,000,
respectively, to depreciation and amortization expense in 2003. The acquisition
of the JupiterResearch business added an additional $23,000 to depreciation and
amortization expense in 2002.
Our depreciation and amortization expenses may vary in 2005 based upon a
change in our capital expenditure levels, changes in any purchase accounting
adjustments relating to the acquisitions of Hemera and the assets of Comstock
and Thinkstock or any acquisitions that may be completed during 2005.
INCOME (LOSS) ON INVESTMENTS AND OTHER, NET
The following table sets forth, for the periods indicated, a
year-over-year comparison of our income (loss) on investments and other, net
(dollars in thousands):
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Income (loss) on
investments
and other,
net $ (205) $ 121 $ 190 $ 326 N/M $ 69 57%
We determined that the declines in value from Jupitermedia's accounting
basis for certain of our investments in internet.com venture fund portfolio
companies were other than temporary. During the years ended December 31, 2002,
2003, and 2004, Jupitermedia recognized losses of $407,000, $21,000, and
$16,000, respectively, related to investment impairment, net of a gain on the
sales of assets and foreign exchange transactions of $241,000 for the year ended
December 31, 2002. During 2003 and 2004, Jupitermedia recognized income of
$101,000 and $48,000, respectively, relating to foreign exchange transactions.
Foreign currency translation income or loss relates to translation adjustments
for our international operations. In addition, Jupitermedia recorded other
income of $130,000 relating to litigation settlements in 2004.
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 (in
thousands):
YEAR ENDED DECEMBER 31 2002 VS. 2003 2003 VS. 2004
---------------------------------- --------------------- ---------------------
2002 2003 2004 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Interest income $ 383 $ 190 $ 163 $ (193) (50)% $ (27) (14)%
Interest expense -- (26) (130) (26) -- (104) (400)
The year-over-year decrease in interest income from 2002 to 2004 was due
to the overall decrease in interest rates received on our cash accounts and
lower average cash balances resulting from cash used to finance multiple
acquisitions including our acquisitions of JupiterResearch in July 2002,
ArtToday and DevX.com in 2003, and Comstock, Thinkstock and Hemera in 2004.
Interest expense relates to long-term financing arrangements assumed as
part of the acquisition of ArtToday as well as financing related to our
acquisition of Comstock.
PROVISION FOR INCOME TAXES
Jupitermedia recorded provisions for federal, state and foreign income
taxes of $48,000, $226,000 and $14,000, respectively, for the year ended
December 31, 2004 based upon estimated tax rates and did not record a provision
for income taxes for the years ended December 31, 2002 and 2003, as Jupitermedia
did not have taxable income.
As of December 31, 2004, we had $34.5 million of net operating losses for
federal income tax purposes, which begin to expire in 2018. We also had $34.1
million of net operating losses for state income tax purposes, which begin
expiring in 2006.
27
MINORITY INTERESTS
Minority interests represent the minority stockholders' proportionate
share of profits or losses of our majority-owned Japanese subsidiary,
Japan.internet.com KK, which is our online media business focused on Japan.
EQUITY LOSS FROM INTERNATIONAL AND VENTURE FUND INVESTMENTS, NET
Equity loss represents our net equity interests in the investments in
internet.com venture funds and joint ventures. The year-over-year decrease from
2002 to 2004 in the amount of our equity losses from venture fund investments
and other was due primarily to a reduction in the write-downs of portfolio
investments by the internet.com venture funds. As a result of the dissolution of
internet.com Venture Fund II LLC and internet.com Venture Partners III LLC
during 2004, the remaining carrying value of our venture fund investments is
limited to the carrying value of our investment in internet.com Venture Fund I
LLC, which was $171,000 as of December 31, 2004.
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):
2002 VS. 2003 2003 VS. 2004
FOR THE YEAR ENDED ---------------------- ----------------------
DECEMBER 31: 2002 2003 2004 $ % $ %
- --------------------------- -------- -------- -------- -------- -------- -------- --------
Operating cash flows $ 2,066 $ 1,393 $ 19,811 $ (673) (33)% $ 18,418 1,322%
Investing cash flows $ (1,617) $(17,683) $(36,729) $(16,066) 994% $(19,046) 108%
Financing cash flows $ (98) $ 378 $ 37,537 $ 476 N/M $ 37,159 9,830%
Capital expenditures $ (166) $ (227) $ (601) $ (61) 37% $ (374) 165%
Acquisitions of businesses $ (1,979) $(17,562) $(36,487) $(15,583) 7,874% $(18,925) 52%
AS OF DECEMBER 31:
Cash and cash equivalents $ 25,451 $ 9,567 $ 30,179 $(15,884) (62)% $ 20,612 215%
Accounts receivable, net $ 7,521 $ 10,281 $ 15,385 $ 2,760 37% $ 5,104 50%
Working capital $ 21,312 $ 5,646 $ 26,525 $(15,666) (74)% $ 20,879 370%
Since inception, we have funded operations primarily with cash proceeds
from our initial and follow-on public offerings of our common stock in June
1999, February 2000, and May 2004. 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 decreased in
2003 primarily due to our acquisitions of ArtToday and of the assets of
DevX.com, Inc., which resulted in cash payments of $13.0 million and $2.25
million, respectively.
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
and bookings for paid attendance, sponsorships and exhibition space fees for
certain events to be held in the future. Cash provided by operating activities
in 2003 decreased primarily due to changes in accounts receivable and prepaid
expenses and other, offset by increased net income and deferred revenues. In
2003, accounts receivable increased due to the increase in sales during the
year. Deferred revenues increased primarily due to the acquisition of ArtToday.
Prepaid expenses and other increased due to new prepaid database licensing and
maintenance agreements and an increase in prepaid royalties resulting from our
acquisition of ArtToday. During 2002, cash provided by operating activities was
primarily due to decreased levels of net losses, net non-cash expenses of $2.6
million and an increase in accrued expenses. Accrued expenses increased
primarily due to payroll related costs.
We made four acquisitions in 2002, seven in 2003 and four in 2004. 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 2004
increased from net cash used in 2003 primarily due to the acquisitions of the
assets of Comstock and Thinkstock and the acquisition of Hemera. Net cash used
in investing activities in 2003 increased from cash used in 2002 primarily due
to the acquisitions of ArtToday and DevX.com. As part of the acquisition of
ArtToday, we are required to make earn-out payments totaling up to a maximum of
$4.0 million in cash consideration based on net revenue targets achieved by
ArtToday for the period from July 1, 2003 to December 31, 2003; for the period
from January 1, 2004 to June 30, 2004; and for the period from July 1, 2004 to
June 30, 2005. Based upon the results of ArtToday, Inc. for the period from
28
July 1, 2003 to December 31, 2003, IMSI was paid $1.0 million in February 2004
which represents the maximum amount that could have been earned for this
earn-out period. Based on the results of ArtToday for the period from January 1,
2004 to June 30, 2004, IMSI was paid $1.0 million in August 2004, which
represented the maximum amount that could have been earned for this earn-out
period.
Cash provided from financing activities relates primarily to proceeds from
our follow-on public offering of common stock in May 2004 and proceeds received
from the exercise of employee stock options. During 2004, more stock options
were exercised in comparison to both 2002 and 2003. The use of cash for
financing activities in 2002 relates to our purchase of shares of common stock
for $106,000 in connection with our stock repurchase program, which was
terminated in May 2004.
In October 2001, we announced that our Board of Directors had authorized
the expenditure of up to $1.0 million to repurchase our outstanding common
stock. In September 2002, we repurchased 65,000 shares of Jupitermedia common
stock at $1.60 per share as part of this stock repurchase program. Other than in
this instance, we did not repurchase any of our shares of common stock under our
stock repurchase program. Our stock repurchase program was terminated prior to
our follow-on public offering in May 2004.
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 preliminarily valued at $22.2 million when issued.
Jupitermedia financed the cash portion of the purchase price with cash on hand
and a $20.0 million term loan under a credit facility with JPMorgan Chase Bank,
N.A. ("JPMorgan") obtained in connection with the transaction.
On March 7, 2005, in connection with our acquisition of Dynamic Graphics
Group, Jupitermedia entered into a Credit Agreement (the "Credit Agreement")
with JPMorgan which provides for a $20 million senior term loan, of which $20.0
million was outstanding as of March 14, 2005. The $20.0 million term loan is
scheduled to mature on March 7, 2008 and may be prepaid without penalty.
Jupitermedia may elect that the loan bear interest at a rate per annum equal to
either (i) an adjusted LIBOR-based rate, plus 1.75% (or, if debt to our EBITDA
is less than .50 to 1.00, 1.50%) or (ii) the prime rate, as announced by
JPMorgan. The Credit Agreement requires us to pay principal in quarterly
installments of $1,666,667, commencing on June 30, 2005 and ending on March 31,
2008. The Credit Agreement contains customary covenants including, among others,
restrictions on our ability to pay dividends, incur additional indebtedness
(other than subordinated indebtedness) or liens on our assets, make investments
in excess of $2 million in the aggregate or make acquisitions in excess of $25
million in any four consecutive fiscal quarters or in excess of $5 million for
any single transaction. The Credit Agreement also requires us to meet certain
financial tests, including, a net income test, a net loss test, a minimum net
worth test and a minimum cash balance test. The Credit Agreement contains
customary events of default, including among other things, non payment of
principal, interest, fees or other amounts when due, inaccuracy of
representations and warranties, violation of covenants, a material adverse
change, a change of control or the occurrence of a bankruptcy or certain
ERISA-related events. Upon an event of default, all amounts owing under the
Credit Agreement will immediately become due and payable and will bear interest
at a default rate equal to the then applicable rate of interest plus 2%.
Borrowings under the Credit Agreement are guaranteed by Jupitermedia's material
subsidiaries and are collateralized by substantially all of our assets.
On April 1, 2004, we acquired substantially all of the assets of Comstock
Images for approximately $20.85 million in cash and the assumption of $28,000 of
liabilities. We financed the acquisition with cash on hand and $13.0 million in
borrowings under our revolving credit facilities with HSBC Bank USA ("HSBC").
On April 1, 2004, Jupitermedia obtained secured revolving credit
facilities from HSBC that provided for aggregate borrowings of up to $12.0
million. On April 8, 2004, Jupitermedia obtained an additional secured revolving
credit facility from HSBC, that provided for additional borrowings of up to
$11.0 million.
On May 28, 2004, Jupitermedia completed a follow-on public offering of
common stock that generated net proceeds of $30.6 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. A portion of the proceeds from this offering was used to repay all
amounts outstanding under the credit facilities with HSBC. As of December 31,
2004, there were no outstanding borrowings under the credit facilities with
HSBC. These facilities were terminated in 2005 in connection with entering into
the Credit Agreement with JPMorgan.
29
We expect to continue our investing activities, which includes the
potential to strategically acquire companies, content and images that are
complementary to our business. Although we are currently considering potential
strategic acquisitions, we have no binding commitments or agreements with
respect to any such acquisitions. We expect to finance future acquisition
through a combination of long-term and short-term financing including debt,
equity and cash and internally generated cash flow. We may obtain long-term
financing through the issuance of equity securities and the incurrence of
long-term secured or unsecured debt. We may obtain short-term financing through
the use of a revolving credit facility, which may be terminated or replaced with
long-term financing as appropriate.
Our existing cash and investment balances may decline during 2005 in the
event of a downturn in the general economy, particularly related to technology
advertising, 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, 2004 (in thousands):
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- -------- -------- -------- --------
Operating lease obligations $ 3,324 $ 1,485 $ 1,639 $ 200 $ --
Purchase obligation - acquisition earn-out 2,000 2,000 -- -- --
Other liabilities 351 126 225 -- --
-------- -------- -------- -------- --------
Total $ 5,675 $ 3,611 $ 1,864 $ -- $ --
======== ======== ======== ======== ========
Other liabilities represent payments due under contractual obligations
assumed in the acquisition of ArtToday related to purchases of domain names.
Jupitermedia has employment agreements with both its President and Chief
Operating Officer and its Executive Vice President and Chief Financial Officer.
The former provides twelve months of severance to be paid upon termination and
the latter provides six months of severance to be paid upon termination due to a
change of ownership and are not reflected in the above table.
RELATED PARTY TRANSACTIONS
Jupitermedia, Internet World Media, Inc. and Penton Media, Inc. entered
into a services agreement in November 1998, whereby Jupitermedia agreed to
provide certain services to Internet World Media, Inc. and Penton Media, Inc. in
return for services to be provided to Jupitermedia by Internet World Media, Inc.
and Penton Media, Inc. This services agreement terminated in 2003.
I-Venture Management LLC, a wholly-owned subsidiary of Jupitermedia,
serves as the managing member of internet.com Venture Fund I LLC and served as
the managing member of 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.
Alan M. Meckler, our Chairman and CEO, and his wife guaranteed up to $5.0
million of our obligations under our $8 million and $4 million revolving credit
facilities with HSBC. Each of them had also guaranteed our obligations under our
$11 million revolving credit facility with HSBC. Each of these guarantees were
secured by Mr. and Mrs. Meckler's personal assets. Our HSBC credit facilities
and the related guarantees by Mr. Meckler and his wife were terminated in
connection with our recent acquisition of Dynamic Graphics Group as more fully
described in ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" under "Liquidity and Capital Resources".
30
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised) ("SFAS 123R"), "Share-Based Payment." SFAS 123R
established standards for the accounting for transactions in which an entity
exchanges it equity instruments for goods or services. It also addressed
transactions in which a entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS 123R
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award.
SFAS 123R applies to all awards granted after the required effective date
and to awards modified, repurchased or cancelled after that date. Compensation
cost will be recognized on or after the required effective date for the portion
of outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under Statement
No. 123 for either recognition or pro forma disclosures. The Statement is
effective for the first interim or annual period that begins after June 15,
2005. We expect that the impact of expensing existing stock options, as well as
the impact of any anticipated stock option grants and restricted stock awards
will be to reduce net income by approximately $0.08 per diluted share in 2005.
The impact of SFAS 123R will not have any impact on Jupitermedia's cash flows or
liquidity.
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 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.
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
video 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.
RESEARCH
We typically sell our research products on an annual subscription basis
and revenues are deferred and then recognized over the term of the related
contract as services are provided. Revenues related to our custom research and
consulting products are recognized over the period the service is provided.
31
EVENTS
Our JupiterEvents business generates revenue from attendee registrations,
exhibition space and from advertiser and vendor sponsorships. Revenue for our
events is recognized in the period in which the event is held. Deferred revenues
relate to the portion of collected conference registration fees as well as
exhibition space, advertiser and vendor sponsorships that have been contracted
prior to the commencement of the event.
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:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; o significant
negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o 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 $63.8 million as of
December 31, 2004. 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.
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 are 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. We were
the portfolio manager of, and an investor in, 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 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
32
following year-end 2003. 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. Both Fund II and Fund III were
dissolved in December of 2004 and final distributions were made following such
dissolutions. We invested $700,000 in Fund I, all of which is now fully
invested. The remaining $4.3 million of capital raised and funded in Fund I were
sourced from third party investors. We no longer have any outstanding capital
commitments related to Fund I. The aggregate carrying value of our investment in
Fund I was $171,000 as of December 31, 2004.
Our transactions are generally conducted, and as of December 31, 2004, 94%
of our cash is held in accounts that are denominated, in United States dollars.
Accordingly, we are not exposed to significant foreign currency risk.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
JUPITERMEDIA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Responsibilities Report 35
Report of Independent Registered Public Accounting Firm on Consolidated
Financial Statements 36
Consolidated Balance Sheets as of December 31, 2003 and 2004 37
Consolidated Statements of Operations for the Years Ended December 31,
2002, 2003 and 2004 38
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2002, 2003 and 2004 39
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2003 and 2004 40
Notes to Consolidated Financial Statements 41
34
MANAGEMENT'S RESPONSIBILITIES REPORT
The Company's consolidated financial statements were prepared by
management, who is responsible for their integrity and objectivity. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and, as such, include amounts based on management's best estimates and
judgments.
Management is further responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of final
statements for external purposes in accordance with GAAP. The Company follows
and continuously monitors its policies and procedures for internal control over
financial reporting to ensure that this objective is met.
The consolidated financial statements were audited by Deloitte & Touche
LLP, an independent registered public accounting firm. Their audit was conducted
in accordance with the standards of the Public Company Accounting Oversight
Board (United States) and their report is shown on the following page.
The Audit Committee of the Board of Directors, which is composed solely of
independent directors, meets regularly with the independent registered public
accounting firm and management to discuss specific accounting, financial
reporting and internal control matters. The independent registered public
accounting firm has full and free access to the Audit Committee. Each year the
Audit Committee selects, subject to ratification by stockholders, the firm which
is to perform audit and other related work for the Company.
/s/ Alan M. Meckler
- -------------------------------
Alan M. Meckler
Chairman and Chief Executive Officer
Jupitermedia Corporation
/s/ Christopher J. Baudouin
- -------------------------------
Christopher J. Baudouin
Senior Vice President and Chief Financial Officer
Jupitermedia Corporation
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS
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,
2003 and 2004, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the financial statement
schedule listed at Item 15(a)(2) of the Company's 2004 Annual Report on Form
10-K. 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 as of December 31,
2003 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, 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, present fairly
in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 15, 2005
36
JUPITERMEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, DECEMBER 31,
2003 2004
---------- ----------
Current assets:
Cash and cash equivalents $ 9,567 $ 30,179
Accounts receivable, net of allowances of $948 and $966, respectively 10,281 15,385
Unbilled accounts receivable 1,012 1,530
Prepaid expenses and other 2,124 2,713
---------- ----------
Total current assets 22,984 49,807
Property and equipment, net 1,488 2,339
Intangible assets, net 8,130 20,939
Goodwill 21,760 42,015
Investments and other assets 1,676 1,197
---------- ----------
Total assets $ 56,038 $ 116,297
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,494 $ 2,277
Accrued payroll and related expenses 2,482 1,785
Accrued expenses and other 4,151 5,037
Deferred revenues 9,211 14,183
---------- ----------
Total current liabilities 17,338 23,282
Long term liabilities 341 225
Deferred revenues -- 510
Deferred income tax liability -- 121
---------- ----------
Total liabilities 17,679 24,138
---------- ----------
Commitments and contingencies (see notes) Stockholders' equity:
Preferred stock, $.01 par value, 4,000,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $.01 par value, 75,000,000 shares authorized, 25,984,130
and 32,378,361 shares issued at December 31, 2003 and 2004,
respectively 260 324
Additional paid-in capital 177,629 215,648
Accumulated deficit (139,427) (123,690)
Treasury stock, 65,000 shares, at cost (106) (106)
Accumulated other comprehensive income (loss) 3 (17)
---------- ----------
Total stockholders' equity 38,359 92,159
---------- ----------
Total liabilities and stockholders' equity $ 56,038 $ 116,297
========== ==========
See notes to consolidated financial statements.
37
JUPITERMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004
---------- ---------- ----------
Revenues $ 40,697 $ 46,991 $ 71,888
Cost of revenues 16,757 21,511 26,077
---------- ---------- ----------
Gross profit 23,940 25,480 45,811
---------- ---------- ----------
Operating expenses:
Advertising, promotion and selling 14,116 14,369 16,232
General and administrative 6,787 7,003 10,687
Depreciation 2,235 1,422 804
Amortization 807 1,371 2,166
---------- ---------- ----------
Total operating expenses 23,945 24,165 29,889
---------- ---------- ----------
Operating income (loss) (5) 1,315 15,922
Income (loss) on investments and other, net (205) 121 190
Interest expense -- (26) (130)
Interest income 383 190 163
---------- ---------- ----------
Income before income taxes, minority interests and equity loss from
international and venture fund investments and other, net 173 1,600 16,145
Provision for income taxes -- -- 288
Minority interests (40) 26 (89)
Equity loss from international and venture fund investments and
other, net (644) (244) (31)
---------- ---------- ----------
Net income (loss) $ (511) $ 1,382 $ 15,737
========== ========== ==========
Earnings (loss) per share:
Basic $ (0.02) $ 0.05 $ 0.54
========== ========== ==========
Diluted $ (0.02) $ 0.05 $ 0.49
========== ========== ==========
Shares used in computing earnings (loss) per share:
Basic 25,318 25,574 29,381
========== ========== ==========
Diluted 25,318 26,917 31,801
========== ========== ==========
See notes to consolidated financial statements.
38
JUPITERMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL TOTAL
---------------------- PAID-IN ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCK INCOME (LOSS) EQUITY INCOME (LOSS)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
January 1, 2002 25,333,077 $ 253 $ 175,418 $ (140,298) $ -- $ (35) $ 35,338 $ (102,200)
Exercise of stock options 8,940 -- 8 -- -- -- 8 --
Capital contributions -- -- 61 -- -- -- 61 --
Purchase of treasury stock -- -- -- -- (106) -- (106) --
Foreign currency
translation adjustment -- -- -- -- -- 64 64 64
Net loss -- -- -- (511) -- -- (511) (511)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 2002 25,342,017 253 175,487 (140,809) (106) 29 34,854 (447)
Exercise of stock options 192,113 3 375 -- -- -- 378 --
Issuance of stock for
acquisition 450,000 4 1,767 -- -- -- 1,771 --
Foreign currency
translation adjustment -- -- -- -- -- (26) (26) (26)
Net income -- -- -- 1,382 -- -- 1,382 1,382
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 2003 25,984,130 260 177,629 (139,427) (106) 3 38,359 1,356
Exercise of stock options 1,843,734 18 7,182 -- -- -- 7,200
Public offering 4,500,497 45 30,297 -- -- -- 30,342 --
Issuance of stock for
acquisition 50,000 1 540 -- -- -- 541 --
Foreign currency
translation adjustment -- -- -- -- -- (20) (20) (20)
Net income -- -- -- 15,737 -- -- 15,737 15,737
Balance at
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
December 31, 2004 32,378,361 $ 324 $ 215,648 $ (123,690) $ (106) $ (17) $ 92,159 $ 15,717
========== ========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
39
JUPITERMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (511) $ 1,382 $ 15,737
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,042 2,793 2,970
Barter transactions, net (1,176) (912) --
Provision (benefit) for losses on accounts receivable (162) 205 (134)
Income (loss) on investments and other, net 205 (121) (190)
Minority interests 40 (26) 89
Equity loss from venture fund investments, and other, net 644 244 31
Changes in current assets and liabilities (net of businesses acquired):
Accounts receivable, net 212 (1,845) (2,909)
Unbilled accounts receivable 275 106 (518)
Prepaid expenses and other 368 (1,075) 161
Accounts payable and accrued expenses 580 (719) (358)
Deferred revenues (1,451) 1,361 4,932
---------- ---------- ----------
Net cash provided by operating activities 2,066 1,393 19,811
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (166) (227) (601)
Acquisitions of businesses and other, net of cash acquired (1,979) (17,562) (36,487)
Proceeds from sale of assets and other 310 106 211
Distribution from internet.com venture funds 227 -- 148
---------- ---------- ----------
Net cash used in investing activities (1,617) (17,683) (36,729)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- -- 30,337
Borrowings under credit facilities -- -- 13,000
Repayment of borrowings under credit facilities -- -- (13,000)
Purchase of treasury stock (106) -- --
Proceeds from exercise of stock options 8 378 7,200
---------- ---------- ----------
Net cash provided by (used in) financing activities (98) 378 37,537
---------- ---------- ----------
Effect of exchange rates on cash -- 28 (7)
---------- ---------- ----------
Net change in cash and cash equivalents 351 (15,884) 20,612
Cash and cash equivalents, beginning of year 25,100 25,451 9,567
---------- ---------- ----------
Cash and cash equivalents, end of year $ 25,451 $ 9,567 $ 30,179
========== ========== ==========
Supplemental disclosures of cash flow:
Cash paid for interest $ -- $ 26 $ 131
========== ========== ==========
Cash paid for income taxes $ -- $ -- $ --
========== ========== ==========
Non-cash investing activities:
Common stock issued for acquisitions $ -- $ 1,771 $ 541
========== ========== ==========
See notes to consolidated financial statements.
40
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
1. THE COMPANY
Jupitermedia Corporation ("Jupitermedia") is a global provider of original
information, images, research and events resources for information technology
("IT"), business and creative professionals. JupiterWeb, the online media
division of Jupitermedia, operates five distinct online networks: internet.com
and EarthWeb.com for IT and business professionals; DevX.com for developers;
ClickZ.com for interactive marketers; and Graphics.com for creative
professionals. JupiterImages is a paid Web resource serving creative
professionals with brands like Comstock Images, Thinkstock Images, Thinkstock
Footage, Photos.com, HemeraImages.com, Ablestock.com, Clipart.com and
Animations.com. Jupitermedia also includes JupiterResearch, an international
research advisory organization specializing in business and technology market
research in 24 business areas and 10 vertical markets. In addition,
JupiterEvents produces offline conferences and trade shows focused on IT and
business-specific topics.
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 four
reportable segments: Online media, Online images, Research and Events.
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 include advertising on our Web sites, bounties for new customers
or revenue sharing for sales made by the e-commerce vendors as a result of
links from our networks, or in some cases combinations of advertising,
bounties and revenue sharing. We recognize the advertising component of
these agreements ratably in the period the advertising is displayed,
provided that no significant company obligations remain and collection of
the remaining receivable is probable. Generally, bounties and revenue
sharing agreements require a monthly minimum fee from Jupitermedia's
customers. Revenues from these agreements are recognized in the period in
which they are earned.
PAID SUBSCRIPTION REVENUES. Paid subscription services relate to
customer subscriptions to our paid e-mail newsletters and services,
SearchEngineWatch.com, 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.
41
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
WEBINAR REVENUES. JupiterWebinars are objective, educational online
forums that provide focused research findings and analysis from
JupiterResearch, as well as other highly respected analysts, journalists
and industry experts. JupiterWebinars are free to qualified professionals.
We generate revenue from advertiser sponsorships. Revenue is recognized in
the period in which the Webinar occurs.
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.
BARTER REVENUES. We barter a portion of the unsold advertising
impressions generated by our networks for advertising and promotion in
media properties owned by other third parties. In addition, we have
bartered portions of unsold advertising impressions for equity interests
in certain of our venture funds' portfolio companies. We recognize revenue
and expense from barter transactions at their estimated fair values in
accordance with the guidelines set under Emerging Issues Task Force No.
99-17 "Accounting for Advertising Barter Transactions." Revenues related
to barter transactions were $3.2 million, $1.0 million and $121,000 for
the years ended December 31, 2002, 2003 and 2004, respectively.
ONLINE IMAGES
JupiterImages provides creative professionals with online access to
photos, clipart, animations, Web graphics, footage clips, fonts and Flash
movies. Paid subscription sites include Comstock1700k.com, Photos.com,
Ablestock.com, Clipart.com and Animations.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 video 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.
RESEARCH
Jupitermedia typically sells research products on an annual
subscription basis and revenues are deferred and then recognized over the
term of the related contract as services are provided.
Revenues related to custom research and consulting products are
recognized over the period the service is provided.
Revenues from A la Carte products are recorded at the time of sale.
42
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
EVENTS
JupiterEvents generate revenue from attendee registrations,
exhibition space and from advertiser and vendor sponsorships. Revenues for
events are recognized in the period in which the event is held.
Deferred revenues relate to the portion of collected conference
registration fees as well as exhibition space and advertiser and vendor
sponsorships that have been contracted prior to the commencement of
events. Revenues related to barter transactions were $1.1 million,
$258,000 and $280,000 for the years ended December 31, 2002, 2003 and
2004, respectively.
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, 2002, 2003 or 2004.
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, 2003 and 2004, Jupitermedia had no investments
with maturities greater than three months.
UNBILLED ACCOUNTS RECEIVABLE. Research contracts are noncancelable
contracts and are recorded at the commencement of the contract as an asset to
unbilled accounts receivable with a corresponding liability to deferred revenue.
Unbilled accounts receivable are reclassified to accounts receivable as
contracts are billed.
FINANCIAL INSTRUMENTS. The recorded amounts of financial instruments such
as cash and cash equivalents, accounts receivable and accounts payable
approximate their fair values due to their short maturities.
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 revenue and expenses at the monthly 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.
43
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
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. With the adoption
of SFAS No. 142 in the first quarter of 2002, we discontinued amortizing the
remaining balances of goodwill and domain names.
The provisions of SFAS No. 142 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. If the fair value exceeds the carrying value,
goodwill is not impaired and no further testing is performed. The second step is
performed if the carrying value exceeds the fair value. The implied fair value
of the reporting unit's goodwill must be determined and compared to the carrying
value of the goodwill. If the carrying value of a reporting unit's goodwill
exceeds its implied fair value, an impairment loss equal to the difference will
be recorded.
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.
INVESTMENTS IN INTERNET.COM VENTURE FUNDS. Although Jupitermedia has less
than a 20% interest in the internet.com venture funds, the investments are
accounted for on the equity method of accounting as Jupitermedia has significant
influence as the managing member of the funds. These investments are reviewed
whenever events or changes in circumstances indicate that the carrying amount of
these investments may not be recoverable.
ADVERTISING AND PROMOTION EXPENSE. Jupitermedia expenses advertising and
promotion costs as incurred. Advertising and promotion expense was $4.7 million,
$3.2 million and $3.8 million for the years ended December 31, 2002, 2003 and
2004, respectively. Included in these amounts are expenses related to barter
transactions of $3.1 million, $371,000 and $304,000 for the years ended December
31, 2002, 2003 and 2004, 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. Valuation allowances have
been established to reduce deferred tax assets to the amounts expected to be
realized.
STOCK BASED COMPENSATION. Jupitermedia grants to certain employees stock
options with an exercise price equal to the fair value of the shares at the date
of grant. Jupitermedia accounts for stock option grants in accordance with
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees," and accordingly, recognizes no compensation expense for such grants.
44
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
As permitted under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", Jupitermedia has not changed its method of accounting for
stock-based compensation; however, SFAS No. 123, as amended by SFAS No. 148,
requires footnote disclosures relating to the effect of using a fair value based
method of accounting for stock-based compensation cost.
The following table reflects pro forma net income (loss) and income (loss)
per share had Jupitermedia elected to adopt the fair value approach of SFAS No.
123 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
------- ------- -------
Net income (loss) $ (511) $ 1,382 $15,737
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards (8,131) (5,011) (3,090)
------- ------- -------
Pro forma net income (loss) $(8,642) $(3,629) $12,647
======= ======= =======
Basic earnings (loss) per share
As reported $ (0.02) $ 0.05 $ 0.54
======= ======= =======
Pro forma $ (0.34) $ (0.14) $ 0.43
======= ======= =======
Diluted earnings (loss) per share
As reported $ (0.02) $ 0.05 $ 0.49
======= ======= =======
Pro forma $ (0.34) $ (0.14) $ 0.40
======= ======= =======
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
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:
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2003 2004
------ ------ ------
Risk-free interest rate 3.06% 2.03% 3.05%
Expected Life (in years) 3 3 3
Dividend yield 0% 0% 0%
Expected volatility 132% 121% 71%
RECENT ACCOUNTING PRONOUNCEMENTS. In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement No. 123 (revised) ("SFAS
123R"), "Share-Based Payment." SFAS 123R established standards for the
accounting for transactions in which an entity exchanges it equity instruments
for goods or services. It also addressed transactions in which a entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123R requires a public entity to measure the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions). That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award.
SFAS 123R applies to all awards granted after the required effective date
and to awards modified, repurchased or cancelled after that date. Compensation
cost will be recognized on or after the required effective date for the portion
of outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under Statement
No. 123 for either recognition or pro forma disclosures. The Statement is
effective for the first interim or annual period that begins after June 15,
2005. We expect that the impact of expensing existing stock options, as well as
the
45
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
impact of any anticipated stock option grants and restricted stock awards will
be to reduce net income by approximately $0.08 per diluted share in 2005. The
impact of SFAS 123R will not have any impact on Jupitermedia's cash flows or
liquidity.
3. COMPUTATION OF EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Dilutive earnings (loss)
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares 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 (loss) per share for the years
ended December 31, 2002, 2003 and 2004 are as follows (in thousands, except per
share amounts):
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
------- ------- -------
BASIC EARNINGS PER SHARE:
Income available to common
Stockholders (numerator) $ (511) $ 1,382 $15,737
Weighted average common shares
Outstanding (denominator) 25,318 25,574 29,381
------- ------- -------
Basic earnings (loss) per share $ (0.02) $ 0.05 $ 0.54
======= ======= =======
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
------- ------- -------
DILUTED EARNINGS PER SHARE:
Income available to common
stockholders (numerator) $ (511) $ 1,382 $15,737
Weighted average common shares
outstanding 25,318 25,574 29,381
Effect of dilutive stock options -- 1,343 2,420
------- ------- -------
Total weighted average common shares and
dilutive securities (denominator) 25,318 26,917 31,801
------- ------- -------
Diluted earnings (loss) per share $ (0.02) $ 0.05 $ 0.49
======= ======= =======
The following table summarizes the number of outstanding stock options
excluded for the calculation of diluted earnings per share for the periods
presented because of the result would have been anti-dulitive:
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004
------- ------- -------
Number of anti-dilutive stock options 5,645,589 2,364,947 1,110,066
Weighted average exercise price $6.33 $11.36 $14.80
46
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2003 2004
------- -------
Computer equipment and software $ 8,699 $ 9,494
Furniture, fixtures and equipment 1,194 1,719
Leasehold improvements 269 382
------- -------
10,162 11,595
Less: Accumulated depreciation (8,674) (9,256)
------- -------
Property and equipment, net $ 1,488 $ 2,339
======= =======
5. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill include the preliminary allocations of the
purchase prices relating to the acquisitions of the assets of Thinkstock Images
and Thinkstock Footage businesses, which took place on July 28, 2004, as well as
the acquisition of the stock of Hemera Technologies Inc., which took place on
November 12, 2004. Jupitermedia is in the process of obtaining third party
valuations of certain intangible assets, thus the allocation of the purchase
prices relating to these acquisitions 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):
DECEMBER 31, 2003
-------------------------------------------
ACCUMULATED NET
COST AMORTIZATION CARRYING VALUE
------ ------------ --------------
Image library $3,198 $ (102) $3,096
Customer lists 1,296 (86) 1,210
Web site development costs 2,321 (1,282) 1,039
Trademarks 2,381 (1,493) 888
Non-compete agreements 334 (53) 281
Other 188 (188) --
------ ------- ------
Total $9,718 $(3,204) $6,514
====== ======= ======
DECEMBER 31, 2003
-------------------------------------------
ACCUMULATED NET
COST AMORTIZATION CARRYING VALUE
------ ------------ --------------
Image library $15,864 $ (930) $14,934
Customer lists 1,668 (352) 1,316
Web site development costs 2,710 (1,649) 1,061
Trademarks 2,635 (2,057) 578
Non-compete agreements 434 (193) 241
Other 188 (188) --
------- ------- -------
Total $23,499 $(5,369) $18,130
======= ======= =======
47
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
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 lists 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. 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):
YEAR ENDING DECEMBER 31:
2005 $2,486
2006 2,112
2007 1,827
2008 1,630
2009 1,532
Thereafter 8,543
-------
$18,130
=======
UNAMORTIZED INTANGIBLE ASSETS
DECEMBER 31,
-----------------
2003 2004
------ ------
Domain names $1,616 $2,809
------ ------
Total $1,616 $2,809
====== ======
GOODWILL
The changes in the carrying amount of goodwill for each of the two years
in the period ended December 31, 2004, are as follows (in thousands):
ONLINE ONLINE
MEDIA IMAGES RESEARCH EVENTS TOTAL
----- ------ -------- ------ -----
Balance as of January 1, 2003 $5,254 $ -- $ 3,074 $49 $ 8,377
Goodwill acquired during year 2,395 11,475 -- -- 13,870
Purchase accounting adjustments (45) -- (442) -- (487)
------ ------- ------- --- -------
Balance as of December 31, 2003 7,604 11,475 2,632 49 21,760
Goodwill acquired during year 1,302 18,980 -- -- 20,282
Purchase accounting adjustments (336) 309 -- -- (27)
------ ------- ------- --- -------
Balance as of December 31, 2004 $8,570 $30,764 $ 2,632 $49 $42,015
====== ======= ======= === =======
Purchase accounting adjustments in 2004 pertain primarily to adjustments
made to the fair value of certain assets purchased in conjunction with the
acquisitions of ArtToday, Inc. and the assets of DevX.com, Inc.
48
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
6. INVESTMENTS AND OTHER ASSETS
Investments and other assets consisted of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2003 2004
------ ------
Investments in internet.com venture fund
portfolio companies $ 270 $ 600
Security deposits 408 320
Investments in internet.com venture funds 710 171
Long-term prepaid expenses 76 63
Other 34 43
Officer loan 178 --
------ ------
Investments and other assets $1,676 $1,197
====== ======
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.
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. Jupitermedia no
longer has any outstanding capital commitments related to the Funds.
As of December 31, 2002 and 2003, Jupitermedia had a 14%, 12% and 14%
investment in each of Fund I, Fund II and Fund III, respectively. As of December
31, 2004, Jupitermedia had a 14% investment in Fund I. Acting as the managing
member of the Funds, Jupitermedia has significant influence over the operations
of the Funds, and accordingly, Jupitermedia accounts for these investments on
the equity basis of accounting, subject to review for impairment.
Jupitermedia is entitled to approximately a 2% management fee for the
day-to-day management of the Funds, which amounted to $1.1 million, $602,000 and
$46,000 for the years ended December 31, 2002, 2003 and 2004, 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, 2002, 2003 and 2004, Jupitermedia recognized losses of $407,000, $21,000 and
$16,000 respectively, related to investment impairment. These amounts are a
component of Income (loss) on investments and other in the Consolidated
Statements of Operations.
49
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
7. DEFERRED REVENUES
The components of deferred revenues by segment are as follows (in
thousands):
DECEMBER 31, DECEMBER 31,
2003 2004
------- -------
Research $ 4,431 $ 5,477
Online images 2,322 4,407
Events 987 2,341
Online media 1,471 1,958
------- -------
$ 9,211 $14,183
======= =======
8. SEGMENT INFORMATION
Jupitermedia has four reportable segments: Online media, Online images,
Research and Events. Online media consists of the internet.com, EarthWeb.com,
DevX.com, ClickZ.com and Graphics.com Networks. Due to the acquisition of
ArtToday on June 30, 2003, Jupitermedia added an additional reportable segment
titled Online images. In 2004, we renamed our Online images business that was
formerly known as ArtToday to JupiterImages. Research represents the
JupiterResearch division. Events represents the JupiterEvents division.
Jupitermedia evaluates segment performance based on income or loss from
operations. Other includes corporate overhead, depreciation, amortization and
venture fund 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, 2002, 2003
and 2004 is as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2003 2004
-------- -------- --------
Revenues:
Online media $ 27,169 $ 24,991 $ 30,019
Online images -- 4,018 22,571
Research 5,139 9,101 9,323
Events 7,271 8,279 9,929
Other 1,118 602 46
-------- -------- --------
$ 40,697 $ 46,991 $ 71,888
-------- -------- --------
Cost of revenues and operating expenses:
Online media $ 20,289 $ 17,379 $ 18,714
Online images -- 2,092 9,077
Research 4,344 9,112 8,810
Events 7,333 9,603 8,340
Other 8,736 7,490 11,025
-------- -------- --------
$ 40,702 $ 45,676 $ 55,966
-------- -------- --------
Operating income (loss):
Online media $ 6,880 $ 7,612 $ 11,305
Online images -- 1,926 13,494
Research 795 (11) 513
Events (62) (1,324) 1,589
Other (7,618) (6,888) (10,979)
-------- -------- --------
$ (5) $ 1,315 $ 15,922
======== ======== ========
50
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
Revenues from advertising on Jupitermedia's Web sites were 40%, 42% and
33% of consolidated revenues for the years ended December 31, 2002, 2003 and
2004, respectively.
Approximately 95% of Jupitermedia's revenues for each of the three years
in the period ended December 31, 2004 were derived from its domestic operations.
9. ACQUISITIONS
On June 20, 2002, Jupitermedia agreed to acquire (the "Research
Acquisition") certain assets and to assume certain liabilities of the Jupiter
Research and Jupiter Events businesses from Jupiter Media Metrix, Inc. ("JMXI"),
pursuant to an Asset Purchase Agreement, dated as of June 20, 2002, by and
between Jupitermedia, JMXI and Jupiter Communications, Inc. The Research
Acquisition closed on July 31, 2002.
The consideration paid in the Research Acquisition consisted of cash in
the amount of $250,000 plus the assumption of certain liabilities of JMXI
including obligations to fulfill contractual commitments. The final aggregate
purchase price was allocated as $2.6 million to goodwill, $3.9 million to assets
other than goodwill and $6.3 million to assumed liabilities.
On June 30, 2003 (the "Closing Date"), Jupitermedia acquired (the
"ArtToday Acquisition") all of the stock of ArtToday, an Arizona corporation,
pursuant to a stock purchase agreement, dated as of June 24, 2003, by and
between Jupitermedia and International Microcomputer Software, Inc. ("IMSI").
The consideration paid in the ArtToday Acquisition as of December 31, 2003
consisted of cash in the amount of $13.0 million, 250,000 shares of
Jupitermedia's common stock valued at $997,500 when issued. The purchase price
was subject to adjustment after the Closing Date based on the adjusted net
assets of ArtToday as of the Closing Date. As a result of this adjustment, IMSI
paid $136,000 to Jupitermedia in the third quarter of 2003. Furthermore, cash
earn-out payments totalling $4.0 million may be made based on net revenue
targets achieved by ArtToday for the period from July 1, 2003 to December 31,
2003; for the period from January 1, 2004 to June 30, 2004; and for the period
from July 1, 2004 to June 30, 2005. Based upon the results of ArtToday for the
period from July 1, 2003 to December 31, 2003, IMSI was paid $1.0 million in
February 2004, representing the maximum amount that could be earned for this
earn-out period. Based upon the results of ArtToday for the period from January
1, 2004 to June 30, 2004, IMSI was paid $1.0 million in August 2004,
representing the maximum amount that could be earned for this earn-out period.
The goodwill associated with the ArtToday Acquisition is not deductible for tax
purposes.
The total purchase price has been allocated to the assets and liabilities
based on estimates of their respective fair values.
51
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
The following table summarizes the final purchase price allocation of the
ArtToday Acquisition (in thousands):
Cash and cash equivalents $ 109
Accounts receivable, net 43
Prepaid expenses and other 254
Property, plant and equipment 520
Domain names 1,427
Customer lists 584
Image library 2,500
Non-compete agreements 283
Web site development costs 495
Goodwill 10,785
-------
Total assets acquired 17,000
-------
Accounts payable (109)
Accrued payroll and related expenses (60)
Accrued expenses (486)
Deferred revenue (1,616)
Long-term liabilities (731)
-------
Total liabilities assumed (3,002)
-------
Net assets acquired $13,998
=======
The intangible assets subject to amortization are being amortized on a
straight-line basis over periods ranging from three to fifteen years.
On July 11, 2003, Jupitermedia acquired the assets (the "DevX
Acquisition") of DevX.com from DevX.com, Inc., a Delaware corporation (n/k/a XD
Remainder Corp.) ("DevX"), pursuant to an asset purchase agreement, dated July
11, 2003, between DevX and Jupitermedia.
The consideration price paid in the DevX Acquisition as of December 31,
2003 consisted of cash in the amount of $2.25 million and 200,000 shares of
Jupitermedia's common stock valued at $776,000 when issued plus the assumption
of certain liabilities including accounts payable and obligations to fulfill
contractual commitments.
The total purchase price has been allocated to the assets and liabilities
based on estimates of their respective fair values.
52
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
The following table summarizes the final purchase price allocation of the
DevX Acquisition (in thousands):
Accounts receivable, net $ 934
Prepaid expenses and other 50
Property, plant and equipment 100
Goodwill 2,049
Customer lists 1,004
Web site development costs 378
Domain names 50
Non-compete agreements 11
-------
Total assets acquired 4,576
-------
Accounts payable (540)
Accrued payroll and related expenses (289)
Accrued expenses (176)
Deferred revenue (545)
-------
Total liabilities assumed (1,550)
-------
Net assets acquired $ 3,026
=======
The intangible assets subject to amortization are being amortized on a
straight-line basis over periods ranging from three to seven years. The goodwill
associated with the DevX Acquisition is deductible for tax purposes.
On August 27, 2003, Jupitermedia filed a registration statement on Form
S-3 with the Securities and Exchange Commission (the "SEC") to permit the resale
from time to time of the shares of common stock issued to IMSI and DevX in
connection with the ArtToday Acquisition and the DevX Acquisition, respectively.
On September 10, 2003, the SEC declared such registration statement effective.
On April 1, 2004, Jupitermedia acquired substantially all of the assets
and certain liabilities of Comstock, Inc. ("Comstock") for approximately $20.85
million in cash (the "Comstock Acquisition"). The Comstock Acquisition is
expected to expand Jupitermedia's online images business.
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
Comstock Acquisition (in thousands):
Accounts receivable, net $ 912
Property, plant and equipment 489
Domain names 800
Image library 6,400
Web site development costs 230
Goodwill 12,040
Investments and other assets 7
-------
Total assets acquired 20,878
-------
Accrued payroll and related expenses (28)
-------
Net assets acquired $20,850
=======
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 the Comstock Acquisition is deductible for tax
purposes.
53
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
On July 28, 2004, Jupitermedia acquired the assets of the Thinkstock
Images and Thinkstock Footage businesses from Thinkstock, LLC 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"). The Thinkstock Acquisition is expected to expand
Jupitermedia's online images business.
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 preliminary purchase price allocation
of the Thinkstock Acquisition (in thousands):
Accounts receivable, net $ 392
Property, plant and equipment 86
Goodwill 1,607
Image library 2,100
Non-compete agreements 100
Web site development costs 60
Domain names 200
-------
Total assets acquired 4,545
-------
Accrued payroll and related expenses (5)
-------
Net assets acquired $ 4,540
=======
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 the
Thinkstock Acquisition is subject to refinement. The goodwill associated with
the Thinkstock Acquisition is deductible for tax purposes.
On November 12, 2004, JupiterImages Corporation, a wholly-owned subsidiary
of the Registrant, acquired all of the shares (the "Hemera Acquisition)" of
Hemera Technologies Inc., a Canada corporation ("Hemera"), pursuant to a Share
Purchase Agreement, dated November 12, 2004, between Hemera and JupiterImages
Corporation. The Hemera Acquisition is expected to expand Jupitermedia's online
images business.
The consideration paid in the Hemera Acquisition consisted of
approximately $7.3 million in cash.
The total purchase price has been allocated to the assets and liabilities
based on estimates of their respective fair values.
54
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
The following table summarizes the preliminary purchase price allocation
of the Hemera Acquisition (in thousands):
Cash and cash equivalents $ 283
Accounts receivable, net 732
Prepaid expenses and other 533
Property, plant and equipment 525
Domain names 150
Image library 2,252
Web site development costs 100
Goodwill 3,592
-------
Total assets acquired 8,167
-------
Accrued payroll and related expenses (42)
Accrued expenses (280)
Deferred revenue (518)
-------
Total liabilities assumed (840)
-------
Net assets acquired $ 7,327
=======
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 the
Hemera Acquisition is subject to refinement. The goodwill associated with the
Hemera Acquisition is not deductible for tax purposes.
The following table summarizes Jupitermedia's additional acquisitions
during the years ended December 31, 2002, 2003 and 2004 (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
---- ---- ----
Number of acquisitions 3 5 3
=== ==== ======
Total aggregate purchase price $87 $337 $1,300
=== ==== ======
The unaudited pro forma information below presents results of operations
as if the Comstock Acquisition, Thinkstock Acquisition and Hemera Acquisition
had occurred as of January 1, 2003. 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):
YEAR ENDED DECEMBER 31,
-----------------------
2003 2004
------- -------
Revenues $63,331 $80,547
======= =======
Net income (loss) $ (430) $18,491
======= =======
Basic earnings (loss) per share $ (0.02) $ 0.63
======= =======
Diluted earnings (loss) per share $ (0.02) $ 0.58
======= =======
55
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
10. CREDIT FACILITIES
In connection with the Comstock Acquisition on April 1, 2004 (see Note 9),
Jupitermedia obtained secured revolving credit facilities from HSBC Bank USA
("HSBC"), which provided for aggregate borrowings of up to $12 million. These
credit facilities consisted of an $8 million revolving credit facility,
borrowings under which are capped at the lesser of $8 million and 80% of
Jupitermedia's eligible accounts receivable, and a $4 million revolving credit
facility. Jupitermedia paid a commitment fee of 0.5% per annum on the daily
average unused amount of available borrowings under the $8 million credit
facility. Both the $8 million credit facility and the $4 million credit facility
are collateralized by all of Jupitermedia's assets. At Jupitermedia's option,
borrowings under these credit facilities bear interest either at a rate equal to
HSBC's prime rate or at a rate equal to LIBOR plus 2.0%.
On April 8, 2004, Jupitermedia obtained an additional secured revolving
credit facility from HSBC, which provided for additional borrowings of up to $11
million. Borrowings under this $11 million credit facility bore interest at a
rate equal to LIBOR plus 1.35% and were collateralized by all of Jupitermedia's
assets.
All of Jupitermedia's credit facilities contain customary covenants
including, among others, restrictions on Jupitermedia's ability to pay
dividends, incur additional indebtedness or liens on Jupitermedia's assets, make
investments in excess of $1 million or make acquisitions in excess of $25
million in the aggregate or in excess of $5 million for any single transaction.
Jupitermedia's credit facilities also require Jupitermedia to meet certain
financial tests, including a stockholders' equity test, a quarterly net income
test, an interest coverage ratio test and a fixed charge coverage ratio test.
Following the completion of Jupitermedia's follow-on public offering of
common stock on May 28, 2004 (see Note 11), $13 million in outstanding
borrowings under Jupitermedia's credit facilities was repaid. As of December 31,
2004, there were no outstanding borrowings under the credit facilities with HSBC
and these facilities were terminated in 2005 in connection with Jupitermedia's
acquisition of Dynamic Graphics Group and the related $20.0 million financing
from JPMorgan (see Note 18).
11. 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.
In October 2001, Jupitermedia announced that its Board of Directors had
authorized the expenditure of up to $1.0 million to repurchase the Company's
outstanding common stock. Any purchases under Jupitermedia's stock repurchase
program may be made, from time-to-time, in the open market, through block trades
or otherwise, at the discretion of Company management. Depending on market
conditions and other factors, these purchases may be commenced or suspended at
any time or from time-to-time without prior notice. In September 2002,
Jupitermedia repurchased 65,000 shares of Jupitermedia common stock at $1.60 per
share as part of its stock repurchase program. Other than in this instance, the
Company has not repurchased any shares of common stock under the stock
repurchase program. Our stock repurchase program was terminated prior to our
follow-on public offering in May 2004.
On May 28, 2004, Jupitermedia completed a follow-on public offering of
common stock that generated net proceeds of $30.6 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.
56
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
12. INCOME TAXES
Jupitermedia's income tax provision for each of the years presented is
determined in accordance with SFAS No. 109.
The components of income tax provision as shown in the Consolidated
Statements of Operations are as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
2002 2003 2004
---- ---- ----
Current tax provision
Federal $ - $ - $ -
State and local - - 219
Foreign - - 14
---- ---- ----
Total current tax provision - - 233
---- ---- ----
Deferred tax provision
Federal - - 48
State and local - - 7
Foreign - - -
---- ---- ----
Total deferred tax provision - - 55
---- ---- ----
Income tax provision $ - $ - $288
==== ==== ====
A summary of Jupitermedia's deferred tax assets and liabilities as of
December 31, 2003 and 2004 is as follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------
2003 2004
------- -------
Deferred income tax assets:
Net operating losses $12,888 $13,982
Amortization and impairment of intangible assets 27,727 25,854
Capital loss carry forward 906 1,003
Reserves recorded for financial reporting purposes 558 909
Depreciation of property and equipment 645 391
------- -------
Total deferred income tax assets 42,724 42,139
Less: valuation allowance (42,724) (42,139)
------- -------
Net deferred income tax assets -- --
------- -------
Deferred income tax liabilities:
Amortization of domain names -- (121)
------- -------
Net deferred income tax liabilities $ -- $ (121)
======= =======
Jupitermedia has not generated taxable income since its inception and
therefore recorded a valuation allowance as of December 31, 2003 and 2004, which
fully offsets its deferred income tax assets. At this time, there is no
assurance that Jupitermedia will generate sufficient taxable income in the
future to be able to realize any or all of the deferred tax assets.
The decrease in the valuation allowance from 2003 to 2004 was due to the
amortization of intangibles for income tax purposes offset by an increase in our
net operating losses. The increase in our net operating losses in 2004 was
primarily due to tax benefits relating to the exercise of employee stock
options. However, no tax benefits were recorded to additional paid-in capital
because their realization was not more likely than not to occur and,
consequently, a valuation allowance was recorded against the entire benefit.
As of December 31, 2004 Jupitermedia had $34.5 million of net operating
losses for federal income tax purposes, which begin to expire in 2018.
Jupitermedia also had $34.1 million of net operating losses for state income tax
purposes, which begin expiring in 2006.
57
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
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):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
----- ----- ------
Income tax expense based on federal statutory rate $(203) $ 484 $5,508
State and local tax expense, net of U.S. federal
income tax (26) 77 1,035
Change in valuation allowance 200 (596) (6,389)
Non-deductible expenses 29 35 54
Foreign rate differential -- -- 80
----- ----- ------
$ -- $ -- $ 288
===== ===== ======
13. 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 utility costs for these premises.
Rent expense, net of sublease income, for leased facilities was $1.7 million,
$1.0 million and $1.4 million for the years ended December 31, 2002, 2003 and
2004, respectively.
Future annual minimum lease payments under all operating leases are as
follows (in thousands):
YEARS ENDING DECEMBER 31, OPERATING LEASES
------------------------- ----------------
2005 $1,485
2006 1,140
2007 499
2008 127
2009 73
------
Total minimum payments $3,324
======
The total minimum rentals to be received in the future under noncancelable
subleases as of December 31, 2004 are $100,000.
Jupitermedia has entered into employment agreements with two of its
officers. These agreements provide twelve months and six months of severance,
respectively, to be paid upon termination and termination due to a change of
ownership of Jupitermedia, respectively.
A complaint was filed in Delaware Chancery Court (the "Chancery Court") on
June 16, 1999 by a former shareholder of Mecklermedia Corporation
("Mecklermedia") alleging that Messrs. Alan M. Meckler and Christopher S.
Cardell, each an executive officer and director of Jupitermedia, as well as the
other former directors of Mecklermedia, breached their fiduciary duties of care,
candor, and loyalty in connection with the approval of both the sale of
Mecklermedia to Penton Media ("Penton") in November 1998 and the related sale of
80.1% of the Internet business of Mecklermedia to Mr. Meckler (the "Delaware
Action"). Jupitermedia was also named as a defendant. The action was brought as
a class action purportedly on behalf of a class of all shareholders of
Mecklermedia (other than any defendant) whose shares were acquired by Penton
("Shareholders"), and seeks damages from all defendants and the imposition of a
constructive trust on the benefits obtained by any defendant. On or about
November 7, 2000, defendants were served with an amended complaint, which named
three additional plaintiffs.
58
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
Following discovery, on or about October 9, 2001, plaintiffs filed a
Second Amended Class Action Complaint ("SAC"). The SAC adds allegations
concerning defendants' alleged failure to disclose certain facts concerning Mr.
Meckler's role in the transactions, his role in negotiations with a third party,
and the valuation of the assets at issue. Defendants filed a motion to dismiss
the SAC on April 1, 2002. On November 6, 2002, the Chancery Court issued an
opinion denying defendants' motion to dismiss the SAC. On December 13, 2002, all
of the defendants, including the Company, served an answer to the SAC generally
denying the allegations therein, denying that the directors of Mecklermedia
breached any fiduciary duties, and asserting certain affirmative defenses.
The parties to the Delaware Action and the parties to a related class
action brought against Penton in the United States District Court for the
Southern District of New York (the "Penton Action") settled both actions for
$7.5 million. The carrier who provided director and officer liability insurance
to the directors of Jupitermedia paid $2.875 million toward the settlement and
Penton's insurance carrier paid the remaining portion of the settlement. The
settlement agreement was approved by both the New York court and the Chancery
Court and the Penton Action and the Delaware Action have been dismissed.
On February 28, 2003, Jupitermedia filed a lawsuit in the United States
District Court for the District of Colorado alleging that the defendants were
knowingly and willfully using the name "WISPCON" to advertise, promote and
conduct a variety of Internet/ information technology trade shows, where such
name is deliberately and confusingly similar to the plaintiffs' pre-existing use
in connection with their own Internet/ information technology trade shows of the
trademarked, service marked, and branded name "ISPCON." Jupitermedia owns 49.9%
of the ISPCON joint venture, pursuant to which it provides marketing, sales and
other event support for the ISPCON trade shows. The plaintiffs sought injunctive
relief and damages under a variety of legal theories, including trademark
infringement, unfair competition, trademark dilution, deceptive trade practices,
interference with contract, and unjust enrichment. Defendants filed a motion to
dismiss for lack of personal jurisdiction, which the court granted by Order
dated September 7, 2004. By that same Order, the court dismissed the action
without prejudice, each party to bear its own costs. The parties entered into a
settlement agreement in October 2004 that resolved and disposed of all claims in
the case.
On May 12, 2004, Jupitermedia filed a lawsuit against eMarketer, Inc.
("eMarketer") in United States District Court for the Southern District of New
York, alleging that eMarketer violated Jupitermedia's copyright, trademark and
related rights. Jupitermedia is seeking an injunction, damages and legal costs.
On June 30, 2004, eMarketer filed an answer and counterclaim seeking a
declaratory judgment that the conduct of which Jupitermedia complains is not
violative of Jupitermedia's rights and is not seeking damages. Jupitermedia
replied to the counterclaim on July 30, 2004, and discovery has commenced.
On August 3, 2004, Mario Cisneros and Michael Voight filed a class action
lawsuit 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 it's 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.
Jupitermedia is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial statements of Jupitermedia.
59
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
14. 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. The plan allows eligible employees to contribute up to 15%
of their compensation to the plan. At the discretion of the board of directors,
Jupitermedia may also make contributions each year for the benefit of all
eligible employees under the plan. There were no discretionary contributions for
the years ended December 31, 2002, 2003, and 2004.
15. 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 up to an aggregate of
10,000,000 shares of common stock. 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 and vests equally
on each of the first three anniversaries of their respective grant dates. The
plan will terminate on April 15, 2009. As of December 31, 2004, there were
1,597,359 options remaining available for future issuance under this plan.
A summary of the status of Jupitermedia's stock option plan as of December
31, 2002, 2003 and 2004 and changes during the years ending December 31, 2002,
2003 and 2004 are presented below:
DECEMBER 31, 2002 DECEMBER 31, 2003 DECEMBER 31, 2004
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 4,337,136 $8.85 5,645,589 $6.33 7,249,633 $5.50
Granted 2,179,183 2.21 2,456,352 3.36 1,488,750 12.55
Exercised (8,940) 0.97 (191,515) 1.97 (2,519,471) 3.45
Forfeited (861,790) 4.23 (660,793) 5.67 (582,892) 11.29
--------- --------- ---------
Outstanding at end of year 5,645,589 $6.33 7,249,633 $5.50 5,636,020 $7.71
========= ========= =========
Options exercisable at end of year 2,208,480 $10.39 3,495,394 $8.24 2,687,982 $7.58
========= ========= =========
Weighted average fair value of options
granted during the year $1.68 $2.43 $5.30
60
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
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:
YEAR ENDED DECEMBER 31,
--------------------------
2002 2003 2004
---- ---- ----
Risk-free interest rate 3.06% 2.03% 3.05%
Expected life (in years) 3 3 3
Dividend yield 0% 0% 0%
Expected volatility 132% 121% 71%
The following table summarizes information about stock options outstanding
at December 31, 2004:
OUTSTANDING EXERCISABLE
----------------------------------------------------------- ------------------------------------
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
RANGE OF OPTIONS AT REMAINING YEARS OF EXERCISE OPTIONS AT EXERCISE
EXERCISE PRICES DECEMBER 31, 2004 CONTRACTUAL LIFE PRICE DECEMBER 31, 2004 PRICE
----------------- ---------------- ----- ----------------- -----
$0.97-$1.24 195,376 4.98 $ 0.97 195,376 $ 0.97
1.82-2.17 181,697 7.00 2.05 121,837 2.05
2.28-3.24 2,124,193 6.12 3.00 843,717 2.75
3.29-4.73 235,391 8.59 4.15 81,797 4.14
5.11-10.30 474,022 7.52 6.47 463,189 6.41
12.03-16.28 2,342,941 6.23 12.92 926,166 13.60
18.75-22.50 56,850 7.56 19.52 30,350 19.86
30.91-37.09 9,300 5.30 34.46 9,300 34.46
40.69-58.69 16,250 5.13 48.43 16,250 48.43
--------- ---- ------ --------- ------
5,636,020 6.39 $ 7.71 2,687,982 $ 7.58
========= ==== ====== ========= ======
16. RELATED PARTY TRANSACTIONS
Jupitermedia, Internet World Media, Inc. and Penton Media, Inc. entered
into a services agreement in November 1998, whereby Jupitermedia agreed to
provide certain services to Internet World Media, Inc. and Penton Media, Inc. in
return for services to be provided to Jupitermedia by Internet World Media, Inc.
and Penton Media, Inc. The value of the services provided was $504,000 for the
year ended December 31, 2002. These amounts are included in both Revenues and
Advertising promotion and selling expenses in the Consolidated Statements of
Operations. This services agreement terminated in 2003.
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.
Alan M. Meckler, the Chairman and CEO of Jupitermedia, and his wife
guaranteed up to $5.0 million of Jupitermedia's obligations under its $8 million
and $4 million revolving credit facilities with HSBC. Each of them also
guaranteed Jupitermedia's obligations under its $11 million revolving credit
facility with HSBC. Each of these guarantees were secured by Mr. and Mrs.
Meckler's personal assets. The HSBC credit facilities and the related guarantees
by Mr. Meckler and his wife were terminated in connection with Jupitermedia's
acquisition of Dynamic Graphics Group (See Note 10).
61
JUPITERMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
17. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTERS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- -----
Revenues $ 8,245 $ 10,220 $ 13,328 $ 15,198 $ 46,991
Gross profit $ 3,573 $ 5,712 $ 7,206 $ 8,989 $ 25,480
Net income (loss) $ (1,330) $ (111) $ 653 $ 2,170 $ 1,382
Basic earnings (loss) per share (a) $ (0.05) $ (0.00) $ 0.03 $ 0.08 $ 0.05
Diluted earnings (loss) per share $ (0.05) $ (0.00) $ 0.02 $ 0.08 $ 0.05
2004 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- -----
Revenues $ 14,353 $ 17,846 $ 18,774 $ 20,915 $ 71,888
Gross profit $ 8,333 $ 11,299 $ 12,296 $ 13,883 $ 45,811
Net income $ 1,637 $ 3,509 $ 5,059 $ 5,532 $ 15,737
Basic earnings per share (a) $ 0.06 $ 0.13 $ 0.16 $ 0.17 $ 0.54
Diluted earnings per share (b) $ 0.06 $ 0.11 $ 0.15 $ 0.16 $ 0.49
(a) Earnings (loss) per share is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly basic earnings (loss) per share
amounts exceeds the total for the year in 2003 and 2004.
(b) Earnings per share is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly diluted earnings per share
amounts exceeds the total for the year in 2004.
18. SUBSEQUENT EVENTS
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 preliminarily valued at $22.2 million when issued.
Jupitermedia financed the cash portion of the purchase price with cash on hand
and a $20.0 million term loan under a credit facility with JPMorgan Chase Bank,
N.A. ("JPMorgan") obtained in connection with the transaction.
On March 7, 2005, in connection with its acquisition of Dynamic Graphics
Group, Jupitermedia entered into a Credit Agreement (the "Credit Agreement")
with JPMorgan, which provides for a $20 million senior term loan, of which $20.0
million was outstanding as of March 14, 2005. The $20.0 million term loan is
scheduled to mature on March 7, 2008 and may be prepaid without penalty.
Jupitermedia may elect that the loan bear interest at a rate per annum equal to
either (i) an adjusted LIBOR-based rate, plus 1.75% (or, if debt to our EBITDA
is less than .50 to 1.00, 1.50%) or (ii) the prime rate, as announced by
JPMorgan. The Credit Agreement requires Jupitermedia to pay principal in
quarterly installments of $1,666,667, commencing on June 30, 2005 and ending on
March 31, 2008. The Credit Agreement contains customary covenants including,
among others, restrictions on Jupitermedia's ability to pay dividends, incur
additional indebtedness (other than subordinated indebtedness) or liens on its
assets, make investments in excess of $2 million in the aggregate or make
acquisitions in excess of $25 million in any four consecutive fiscal quarters or
in excess of $5 million for any single transaction. The Credit Agreement also
requires Jupitermedia to meet certain financial tests, including, a net income
test, a net loss test, a minimum net worth test and a minimum cash balance test.
The Credit Agreement contains customary events of default, including among other
things, non payment of principal, interest, fees or other amounts when due,
inaccuracy of representations and warranties, violation of covenants, a material
adverse change, a change of control or the occurrence of a bankruptcy or a
certain ERISA-related events. Upon an event of default, all amounts owing under
the Credit Agreement will immediately become due and payable and will bear
interest at a default rate equal to the then applicable rate of interest plus
2%. Borrowings under the Credit Agreement are guaranteed by Jupitermedia's
material subsidiaries and are collateralized by substantially all of its assets.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Alan M. Meckler, the
Company's Chairman and Chief Executive Officer, and Christopher J. Baudouin, the
Company's Executive Vice-President and Chief Financial Officer, have evaluated
the effectiveness of the Company's disclosure controls and procedures as of
December 31, 2004. Based on such evaluation, each of Mr. Meckler and Mr.
Baudouin concluded that the Company's disclosure controls and procedures were
effective to ensure that the material information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
DESIGN AND EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING. Under
Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in
this Annual Report on Form 10-K (i) a report from our management regarding the
Company's internal controls over financial reporting, which report is required
to include, among other things, an assessment and statement as to the
effectiveness of our internal controls over financial reporting as of December
31, 2004 and (ii) an attestation report of our independent registered public
accounting firm on management's assessment of such internal controls.
On November 30, 2004, the SEC issued an exemptive order (SEC Release No.
50754) which provides a 45-day extension for the filing of the management report
and the related attestation report by eligible companies. We have elected to
rely on this 45-day extension, and therefore, this Annual Report on Form 10-K
does not include such reports. We intend to include such reports in an amendment
to this Annual Report on Form 10-K in accordance with the SEC's exemptive order.
During 2004, we spent considerable time and internal and external
resources analyzing, documenting and testing our system of internal controls
over financing reporting and have substantially completed our internal
evaluation.
There can be no assurance, however, that one or more material weaknesses
in our internal controls over financial reporting will not be identified during
the 45-day extension period, that management will be able to assert that our
internal controls over financial reporting are effective as of December 31, 2004
or that our independent registered public accounting firm will be able to attest
that management's report is fairly stated or express an unqualified opinion on
the effectiveness of our internal controls. If such weaknesses are identified or
if our independent registered public accounting firm does not render an
unqualified attestation, it could result in a loss of investor confidence in our
financial reports, adversely affect our stock price and/or subject us to
sanctions or investigation by regulatory authorities.
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, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
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 2005. 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.
63
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 2005.
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 2005.
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 2005.
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 2005.
64
PART IV
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 34 of this report.
(2) Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts
(3) Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Merger Agreement, dated June 24, 1999, between internet.com LLC and
the Registrant (1)
3.1 Registrant's Amended and Restated Certificate of Incorporation, as
amended (2)
3.2 Registrant's Amended and Restated Bylaws (3)
4.1 Form of Specimen Stock Certificate for the Registrant's Common Stock
(1)
10.1 Form of Indemnification Agreement entered into between the
Registrant and each of its directors and executive officers (1)
10.2+ Registrant's 1999 Stock Incentive Plan (Amended and Restated as of
February 27, 2003) (2)
10.3+ Employment Agreement between the Registrant and Christopher S.
Cardell, dated as of November 24, 1998 (1)
10.4+ Employment Agreement between the Registrant and Christopher J.
Baudouin, dated as of November 24, 1998 (1)
10.5 Asset Purchase Agreement, by and among Jupitermedia Corporation,
Jupiter Media Metrix, Inc. and Jupiter Communications Inc., dated as
of June 20, 2002. (4)
10.6 Stock Purchase Agreement, by and between ArtToday, Inc. and
Jupitermedia Corporation, dated as of June 24, 2003 (5)
10.7 Asset Purchase Agreement, by and between DevX.com, Inc. and
Jupitermedia Corporation, dated as of July 11, 2003 (6)
10.8 Asset Purchase Agreement, dated as of April 1, 2004, by and among
Jupitermedia Corporation, Comstock, Inc. and, with regard to certain
provisions, Henry Scanlon, Matthias Bowman, Judy Curiale, Michael
Stuckey and Edward Gronske (7)
10.9 Asset Purchase Agreement, dated July 28, 2004, between Thinkstock,
LLC and ArtToday, Inc., a wholly owned subsidiary of Jupitermedia
Corporation (8)
10.10 Share Purchase Agreement, dated November 12, 2004, between Hemera
Technologies Inc. and JupiterImages Corporation, a wholly-owned
subsidiary of Jupitermedia Corporation (9)
10.11 Equity Purchase Agreement, dated as of February 12, 2005, by and
among Jupitermedia Corporation, JupiterImages Corporation, Creatas,
L.L.C., Moffly-Creatas Investors, LLC, Creatas Management Investors
LLC, MCG Capital Corporation and the members of certain sellers
identified on the signature pages thereto (10)
10.12 Credit Agreement, dated March 7, 2005, among Jupitermedia
Corporation, as borrower, JPMorgan Chase Bank, N.A., as
Administrative Agent and as Lender, and such other financial
institutions as may from time to time become party thereto as
lenders (10)
10.13 Guaranty Agreement, dated March 7, 2005, among JupiterImages
Corporation, MCG Finance Corporation IH, Creatas, L.L.C., Dynamic
Graphics, Inc. and PictureQuest Acquisition Company, L.L.C., as
guarantors in favor of JPMorgan Chase Bank, N.A., as Administrative
Agent (10)
10.14 Security Agreement, dated March 7, 2005, among Jupitermedia
Corporation, as borrower, JupiterImages Corporation, MCG Finance
Corporation IH, Creatas, L.L.C., Dynamic Graphics, Inc.,
PictureQuest Acquisition Company, L.L.C. and JPMorgan Chase Bank,
N.A., as Administrative Agent (10)
10.15 Pledge Agreement, dated March 7, 2005, among Jupitermedia
Corporation, as borrower, JupiterImages Corporation, MCG Finance
Corporation IH, Creatas, L.L.C., Dynamic Graphics, Inc.,
PictureQuest Acquisition Company, L.L.C. and JPMorgan Chase Bank,
N.A., as Administrative Agent (10)
10.16 Registration Rights Agreement, dated as of March 7, 2005, by and
among Jupitermedia Corporation, Moffly-Creatas Investors, LLC,
Creatas Management Investors LLC, MCG Capital Corporation, David
Moffly and Stoneybrook Creatas Investors (10)
11.1 Statement Regarding Computation of Per Share Earnings (Loss)
(included in notes to financial statements)
21.1 Subsidiaries of the Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
65
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(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
+ Compensatory plans and arrangements for executives and others
66
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 16, 2005
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.
/s/ Alan M. Meckler Chairman of the Board, Chief March 16, 2005
- --------------------------- Executive Officer and Director
Alan M. Meckler (Principal Executive Officer)
/s/ Christopher S. Cardell President, Chief Operating March 16, 2005
- --------------------------- Officer and Director
Christopher S. Cardell
/s/ Christopher J. Baudouin Executive Vice President and March 16, 2005
- --------------------------- Chief Financial Officer
Christopher J. Baudouin (Principal Financial and
Accounting Officer)
/s/ Gilbert F. Bach Director March 16, 2005
- ---------------------------
Gilbert F. Bach
/s/ Michael J. Davies Director March 16, 2005
- ---------------------------
Michael J. Davies
/s/ John R. Patrick Director March 16, 2005
- ---------------------------
John R. Patrick
/s/ William A. Shutzer Director March 16, 2005
- ---------------------------
William A. Shutzer
67
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
JUPITERMEDIA CORPORATION
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2002 2003 2004
------ ------ ------
Balance, beginning of year $1,810 $1,056 $ 948
Provision (benefit) charged to (deducted from)
statement of operations (162) 205 (134)
Additions to (deductions from) accounts
receivable to which they apply (592) (313) 152
------ ------ ------
Balance, end of year $1,056 $ 948 $ 966
====== ====== ======
68