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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to___________
Commission File Number: 000-49906
MaxWorldwide, Inc.
(Exact name of registrant as specified in its charter)
Delaware 46-0487484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 West 23rd Street, Fourth Floor
New York, New York 10010
(Address of principal executive offices) (Zip Code)
(212) 302-2424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)
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 the 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 |
The aggregate market value of the registrant's voting common stock held
by non-affiliates of the registrant was approximately $15,481,896(computed using
the last sale price of $0.94 per share of common stock on June 28, 2002 based on
the last reported sale price on the NASDAQ National Market on that date, and on
the assumption that directors and officers and more than 10% shareholders are
affiliates). There were 24,503,282 shares of the registrant's common stock, par
value $.001 per share, outstanding on March 31, 2003.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. | | Yes |X| No
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in Part III of
this report:
Definitive Proxy Statement intended to be filed with the Securities and Exchange
Commission (the "Commission").
MAXWORLDWIDE, INC.
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business .................................................................................................... 1
Item 2. Properties .................................................................................................. 15
Item 3. Legal Proceedings ........................................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....................................... 18
Item 6. Selected Financial Data ..................................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk................................................... 33
Item 8. Financial Statements and Supplemental Data................................................................... 35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......................... 67
Part III
Item 10. Directors and Executive Officers of the Registrant........................................................... 67
Item 11. Executive Compensation ...................................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 67
Item 13. Certain Relationships and Related Transactions............................................................... 67
Part IV
Item 14. Controls and Procedures...................................................................................... 67
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................. 68
Signatures 72
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT MAXWORLDWIDE, INC.
AND OUR INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS. AS A RESULT OF CERTAIN FACTORS, AS MORE
FULLY DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. MAXWORLDWIDE
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR
ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN
THE FUTURE. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DESCRIBED IN "RISK FACTORS" OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE IN THIS REPORT.
PART I
MaxWorldwide, Inc.'s consolidated financial statements for the years ended
December 31, 2001 and 2000, as filed with the Commission on May 16, 2002, have
been restated. Accordingly, all financial data in this Report reflect the
effects of this restatement. See Note 3 to MaxWorldwide, Inc.'s Consolidated
Financial Statements for a description of the restatements.
ITEM 1. BUSINESS
Company Overview
MaxWorldwide, Inc. (sometimes referred to herein as "MaxWorldwide" or the
"Company") is a leading independent company in online advertising sales and
representation. We are an Internet-based provider of marketing solutions for
marketers and Web publishers. These solutions principally rely on our sale of
Internet advertisements for websites that we represent, from which we generate
revenue by receiving commissions. We provide fully outsourced ad sales, e-mail
marketing and sweepstakes promotions and provide our clients with strategic full
service solutions that focus on maximizing results and returns. Our online
advertising sales and representation services are provided under the name
MaxOnline. In addition, we formerly operated a traditional direct marketing
business called MaxDirect that we sold in February 2003.
We commenced operations in January 1997 as a sole proprietorship. In May 1997,
we became a California limited liability company and changed our name to John
Bohan and Associates, LLC. At that time, we did business as AdNet Strategies. In
January 1998, we incorporated in California, elected S-corporation status and
changed our name to AdNet Strategies, Inc. In December 1998, we became a
California C-corporation and operated under the name Latitude 90, Inc. In
September 1999, we reincorporated in Delaware as L90, Inc. In February 2000, we
sold 7.5 million shares of common stock in an initial public offering and raised
$102.6 million. In July of 2002, we acquired the North American media business
of DoubleClick Inc. In connection with this acquisition, we reorganized the
company into a holding company structure, and we now operate under the name
MaxWorldwide, Inc.
On March 12, 2003, we entered into an agreement with Focus Interactive, Inc
("Focus") and certain of its affiliates to sell substantially all of our assets
related to our MaxOnline division (the "MaxOnline Sale"). A copy of the
Agreement and Plan of Merger, dated March 12, 2003, was filed with the
Commission as Exhibit 2.1 to our Form 8-K filed with the Commission on March 14,
2003. Pursuant to the merger agreement, we will receive $3.0 million in cash
upon the closing of the transaction and $2.0 million in cash, plus interest,
upon the first anniversary of the closing or, at the election of Focus, six
months thereafter. We could also receive up to an additional $1.0 million in
cash if the MaxOnline business that Focus is acquiring exceeds certain
performance levels in calendar year 2003. In addition, Focus would pay us 70% of
the accounts receivable transferred to Focus under the merger agreement and
collected by them during the eight month period beginning 120 days following the
effective date of the merger (net of certain expenses and accounts payable
associated with such accounts receivable). Focus also agreed to reimburse us,
within one year after the effective date of the merger, the amount of any
positive working capital in the MaxOnline business it acquires as a result of
the merger. The MaxOnline Sale is subject to approval by holders of a majority
of our outstanding shares of common stock and other customary conditions,
including without limitation, our receipt of an opinion from our financial
advisor that the MaxOnline Sale is fair, from a financial point of view, to the
holders of our common stock. Assuming all the conditions are satisfied or are
otherwise waived by us and/or Focus, we expect the MaxOnline Sale to close on or
about June 30, 2003. If the MaxOnline Sale is consummated, substantially all of
our operating assets, but excluding our cash, our name, MaxWorldwide and certain
limited intellectual property, will be sold to Focus. Accordingly, we would no
longer continue to operate our business in the manner historically operated and
as described below. If the MaxOnline sale is consummated, we currently intend to
adopt a plan of liquidation and dissolution pursuant to which we would liquidate
and dissolve the Company. Accordingly, we do not plan to operate any businesses
following the sale of MaxOnline.
MaxOnline Business Overview
Since our inception over six years ago, we have been a leading provider of
innovative marketing solutions that go beyond simple banners to produce better
customer conversion rates, resulting in higher prices for Web site publishers
and more value for marketers.
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We focus on the relationships between the customer and marketers and between the
customer and Web publishers.
An Internet based world is emerging in which the accessibility and accuracy of
information is creating more intelligent customers and a significantly more
competitive business environment. In this new digital world, marketers and
customers increasingly are interacting over an "always connected" network that
extends across the Internet through Web sites and e-mail, across television and
the wireless frontier (via cell phones, pagers, personal digital assistants
(PDAs) and other wireless devices). It is our belief that the reliance upon
traditional distribution channels will lessen as companies begin to interact on
a one-to-one basis with their customers, creating significant demand for
technologies and services that drive value, attract customers, build lasting
relationships with these customers and, ultimately, convert these relationships
into revenue.
Our marketing partnerships begin with brand building and initial customer
acquisitions and continue to evolve as we utilize our expertise to work with our
clients to determine the best possible inventory and methods to increase
traffic, stimulate transactions and develop one-to-one relationships. Our
Internet reach, inventory segmentation and marketing expertise provide both
marketers and Web publishers with effective, differentiated and simple solutions
to work together to grow their businesses and embrace the new economy.
Value to Advertisers -- Build Brands, Acquire New Customers, Increase Traffic,
Stimulate Transactions And Grow Relationships
From strategic development and design, to execution, tracking and analysis, we
are the complete source for value-generating marketing programs on the Internet.
Our marketing solutions were developed to help businesses build brands, acquire
customers, drive traffic, increase sales and promote customer retention. We
create advertising programs that include sponsorships, opt-in e-mail,
newsletters, content integration, microsites and sweepstakes. In addition, we
provide marketers an experienced e-mail list management and brokerage group, a
strategic marketing and creative services group and a network of high profile
web site publishers. In 2002, we worked with over 700 marketers worldwide and
have representation and sales agreements with over 1,100 Web publishing
partners. Through our network of flagship publishers and our non-exclusive
partnerships with leading Web sites, we reach 56.3% of the total online audience
(according to a December 31, 2002 Comscore Media Metrix report).
Value to Web Publishers -- A Fully Outsourced Marketing Sales Solution That
Allows Web Publishers To Focus On Their Core Competency
We offer Web publishers the ability to add value to their customer
relationships, thereby increasing the value of their inventory to marketers.
Through our superior sales representation, we are able to generate greater
revenue on the Internet for these Web publishers. MaxOnline delivers Internet
users relevant offers and promotions through targeted campaigns, enhancing
users' experiences and providing them with incentives to return to a Web site.
Outsourcing a Web publisher's sales efforts to MaxOnline helps streamline the
publisher's internal sales and marketing costs while broadening a site's reach
and impact to its customers. Our fully outsourced marketing sales solutions are
designed to generate greater revenue for Web publishers by increasing the value
of their inventory to marketers and by selling this inventory through an
experienced sales force. As a result, Web publishers are free to focus on the
core competency of their businesses.
The MaxOnline Difference
While a number of companies compete in the digital marketing space, we believe
MaxOnline stands out for a number of reasons.
Brands. MaxOnline has exclusive and non-exclusive advertising representation
relationships with Web sites, including top-tier, premium Web sites across key
vertical markets that offer marketers the opportunity to target consumers. The
brand or flagship sites offer marketers the ability to communicate their
marketing messages on recognized top brand Web sites. All of the sites typically
offer sponsorships, content integration and customized marketing opportunities
that align with a specific advertiser's online objectives.
Reach and Media. Through our non-exclusive relationships and flagship sites, we
are able to reach over 56% of the Web users in the United States (according to a
December 31, 2002 Comscore Media Metrix report). This reach enables marketers to
target and connect with a number of diverse audiences. In addition, we offer Web
publishers superior site representation, which includes the sale of their
advertising inventory and the provision of ad delivery and related services.
Opt-In E-mail Lists. We provide opt-in e-mail list management services for over
12 million permission based e-mail addresses. In addition, through our e-mail
list brokerage group we have partnered with other permission based list managers
and owners to potentially gain an unlimited reach in the e-mail market.
Marketing. Bringing extensive experience and a rich knowledge base, MaxOnline
professionals offer clients counsel and expertise in developing integrated,
Internet strategies designed to meet branding, customer acquisition and
revenue-generating goals. Our marketing services include the in-house
capabilities of our creative services group called MaxCreative to assist
marketers in designing contextually relevant marketing campaigns that attract
and retain the Internet user. From concept creation and innovative design to
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our back-end implementation, we provide a full service solution for customers'
online marketing needs. MaxCreative is a team of highly talented marketers,
designers and engineers. Our MaxCreative capabilities include: microsites, jump
pages, sweepstakes development, Webmercials, PowerAds, HTML and rich media
enhanced HTML e-mails, animated, audio, video, HTML and rich media banners and
skyscrapers, voice over recording and editing, video capture, interactive games,
copy writing and advanced flash programming.
Innovation. We have developed a suite of digital marketing tools that can be
used to achieve the following goals: build brands, acquire new customers,
increase traffic, stimulate transactions and grow relationships. Ultimately,
this translates into high value relationships among marketers, Web publishers
and their customers.
We believe that MaxOnline stands alone in offering full service sales and
marketing solutions designed to allow marketers and Web publishers to interact
in an environment that maximizes e-mail and Web-based inventory, while driving
one-to-one, business-to-consumer communication that stimulates transactions,
optimizes campaigns in real time and fosters the development of loyal
relationships with customers
Digital Marketing Tools
We provide marketers and Web publishers with a suite of digital marketing tools
designed to enable them to achieve the following goals:
o Build Brands
o Acquire New Customers
o Increase Traffic
o Stimulate Transactions
o Grow Relationships
By using our digital marketing tools to achieve these goals, marketers and Web
publishers are able to build targeted, high-value relationships with Internet
users. They are able to convert Internet visitors into loyal customers by
optimizing the value of each relationship on a customer-by-customer basis. Our
current portfolio of digital marketing tools includes:
Banners. The original brand awareness, traffic and lead generation tool that is
most effective through targeted delivery.
E-newsletters. Product awareness and customer acquisition through targeted
advertising and content within an e-mail newsletter.
Opt-in E-mails. Delivery of an offer to targeted, permission-based e-mail lists
as a method of lead generation and brand building.
Co-Reg. (co-registration). Lead-generation and customer acquisition obtained on
a permission-basis as consumers are registering on a Web site.
Link. Incentive-based viral marketing programs based upon word-of-mouth
referrals.
Sweepstakes. Incentive-based promotions to acquire new customers, drive traffic
and acquire opt-in information on users.
Games. Custom designed games that generate brand or product awareness and work
to acquire valuable user information and new permission based users.
Variety Ads. Customizable pop-up ads that build brand awareness, drive traffic
and generate leads through our over-the-page, under-the-page and
in-between-the-page ad units such as pop-ups and interstitials
Boomerang. Targeting ads to customers based on their recent online behavior.
MicroSites. Brand awareness and customer acquisition through custom-designed
mini-sites targeted at specific audiences.
Sponsorships. Brand awareness and association through sponsorship of a targeted
area or a special event on a Web site.
Content Integration. Strategic placement of relevant content within a Web site
to create brand association and drive qualified user traffic to a designated
advertiser's destination.
Broadband. Rich media advertising that combines the communication power of
television, radio and print with the interactive and direct response components
of the Internet.
Virtual Billboards. Customized virtual billboards that post a brand message or
promotion on top of a Web site's content before
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disappearing.
Overview of Our Former MaxDirect Business
MaxDirect was a division of MaxWorldwide, specializing in marketing services for
the direct marketing community. We acquired the direct marketing business of
Novus List Marketing on May 14, 2001, and formed MaxDirect. In February 2003, we
sold MaxDirect to American List Counsel. Accordingly, we no longer provide the
services previously provided by our MaxDirect division and described below.
While operated by us, MaxDirect was a provider of list marketing services to
leading publishing, catalog, e-commerce and other marketing companies as well as
to non-profit organizations.
While operated by us, MaxDirect offered its clients seven distinct services:
Database Management, List Management, Alternative Media, Database Overlay and
Enhancements, Modeling, Data Hygiene and List Rental Fulfillment.
Database Management. MaxDirect provided comprehensive data warehousing services.
List Management. The goal of List Management was to maximize revenue by renting
a client's database of names, addresses, and/or e-mail addresses to the business
marketplace.
Alternative Media. Alternative Media was a service providing a wide variety of
revenue producing programs for clients including: blow-in programs, package
inserts, co-ops and statement stuffers.
Database Overlay and Enhancements. MaxDirect had partnered with the industry's
leading data providers to append additional data to our managed properties in
order to offer more targeted selectivity on our managed files.
Modeling Services. While operated by us, MaxDirect used proprietary statistical
software that analyzed client data to identify which customer attributes
(variables) provided the most insight into predicting customer behavior.
Data Hygiene Process. While operated by us, MaxDirect provided a full array of
data hygiene services, including address standardization.
List Rental Fulfillment. While operated by us, MaxDirect used our proprietary
established software to maintain all aspects of a customer's database.
Privacy Concerns
We believe that issues relating to the privacy of Internet users and the use of
personal information about these users are extremely important. In the course of
delivering ads to a Web user, we only collect non-personally identifiable
information about the Web user. We do not collect any personally identifiable
information about the Web user unless the Web user voluntarily and knowingly
provides personally identifiable information. In implementing any service or
program designed to gather consumer data, we are always mindful of our
continuing commitment to uphold the privacy principles of the Direct Marketing
Association. We actively monitor privacy laws and regulations and seek to comply
with all applicable privacy requirements.
Employees
As of December 31, 2002, we had 87 full-time employees, including 62 in sales
and marketing, and 25 in accounting, human resources, business operations and
administration. We are not subject to any collective bargaining agreements and
believe that our employee relations are good. If the MaxOnline Sale is
consummated, we expect that substantially all of our sales and marketing, and
several accounting employees will be offered employment by Focus. We anticipate
approximately 12 administrative employees remaining with MaxWorldwide following
the MaxOnline Sale.
Sales and Marketing
We sell our MaxOnline sales and marketing solutions through a sales and
marketing team that consisted of a total of 42 employees as of December 31,
2002. Our MaxOnline ad sales team is comprised of sales managers, account
executives and sales support. MaxOnline is responsible for generating ad sales
revenue, which includes selling our e-mail services. During February 2003 we
sold our MaxDirect division, which resulted in the reduction of 20 sales and
marketing employees from our workforce.
We conduct a variety of marketing programs to generate demand for our products
and services, build market awareness, develop customer leads and establish
business relationships. Our marketing activities include public relations, print
advertisements, online and offline advertisements and direct marketing, Web
advertising seminars, trade shows, special events and ongoing customer
communications programs.
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Seasonality and Cyclicality
Our business is subject to seasonal fluctuations. Marketers generally place
fewer advertisements during the first and third calendar quarters of each year
and direct marketers generally mail substantially more marketing materials in
the third calendar quarter of each year. In addition, expenditures by
advertisers and direct marketers vary in cycles and tend to reflect the overall
economic conditions, as well as budgeting and buying patterns. Furthermore, user
traffic on the Internet tends to decrease during the summer months, which
results in fewer advertisements to sell and deliver. A decline in the general
economy or in the economic prospects of advertisers and direct marketers could
adversely affect our revenue. Our revenue in the past has been and may in the
future be materially affected by a decline in the economic prospects of our
customers or in the economy in general, which could alter our current or
prospective customers' spending priorities or budget cycles or extend our sales
cycle.
Competition
The market for interactive, Internet-based marketing solutions is extremely
competitive. Competition may increase as a result of industry consolidation. We
believe that our ability to compete depends upon many factors both within and
beyond our control, including the following:
- - the timing and market acceptance of new solutions and enhancements to existing
solutions developed either by us or our competitors;
- - the continued and increasing acceptance by marketers of the Internet as an
effective and cost-efficient means of advertising;
- - the ability to adapt to the rapidly changing trends of the Internet;
- - our customer service and support efforts;
- - our sales and marketing efforts;
- - our ability to scale our operation to successfully increase sales;
- - our ability to adapt technology as customer needs change and grow; and
- - the ease of use, performance, price and reliability of solutions developed
either by us or our competitors.
We compete for advertising revenue with large Web publishers and Web portals,
such as AOL, Lycos, MSN and Yahoo. We also compete with traditional advertising
media, including television, radio, cable and print, for a share of marketers'
total advertising budgets. In addition, we compete with a variety of Internet
advertising networks, content aggregation companies and advertising agencies.
Under our agreement with DoubleClick Inc. pursuant to which we purchased its
North American media business, we agreed to extend a covenant with DoubleClick
until July 10, 2003. This covenant provides that we will not engage in the use,
development, licensing, sale or distribution of any technology, product or
service that performs ad-management, serving and tracking for third parties with
the same or substantially similar purpose as our former adMonitor technology.
The covenant does permit us to perform these activities in connection with our
media sales and advertising and design services businesses.
If the MaxOnline sale is consummated, we will be prohibited from competing in
the type of business currently conducted by our MaxOnline division for a period
of one year following the closing.
Intellectual Property Rights
Our success and ability to compete are substantially dependent on our internally
developed technologies and trademarks that we protect through a combination of
patent, copyright, trade secret, unfair competition and trademark law as well as
contractual agreements. We have applied to register trademarks internationally
and in the United States.
We cannot guarantee that any of our current or future trademark applications
will be approved. Even if they are approved, these trademarks may be
successfully challenged by others or invalidated. Furthermore, if our trademark
applications are not approved because third parties own dominant trademarks, our
use of these trademarks may be restricted unless we enter into arrangements with
these third parties. We cannot assure you that we can enter into arrangements
with these third parties on commercially reasonable terms.
We generally enter into confidentiality, inventions or license agreements with
our employees, consultants and corporate partners and generally control access
to and distribution of our technologies, documentation and other proprietary
information. Despite these
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efforts, unauthorized parties may attempt to disclose, obtain or use our
advertising solutions or technologies. Our precautions may not prevent
misappropriation of our advertising solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
rights as fully as laws in the United States.
If the MaxOnline Sale is not consummated, we cannot guarantee that any of our
intellectual property rights will be viable or valuable in the future since the
validity, enforceability and scope of protection of intellectual property rights
in Internet related industries is uncertain and still evolving. If the MaxOnline
Sale is consummated, substantially all of our intellectual property will be sold
to Focus. Whether or not the MaxOnline Sale is consummated, third parties may
assert infringement claims against us. Any claims could subject us to
significant liability for damages and could result in the invalidation of our
intellectual property rights. In addition, any claims could result in
litigation, which would be time-consuming and expensive to defend, and divert
our time and attention. Even if we prevail, this litigation could cause our
business, results of operations and financial condition to suffer. Any claims or
litigation from third parties may also result in limitations on our ability to
use the intellectual property subject to these claims or litigation unless we
enter into arrangements with the third parties responsible for these claims or
litigation, which could be unavailable on commercially reasonable terms. We
believe that factors such as the creative skills of our personnel, new service
offerings, brand recognition and reliable customer service are more essential to
establishing and maintaining our position in the marketplace than the legal
protection of our technologies. We cannot assure you that others will not
develop technologies that are similar or superior to our technologies.
Acquisition
On July 10, 2002, we purchased the North American media business of DoubleClick
Inc. ("DoubleClick"). Pursuant to the Agreement and Plan of Merger, we paid $5.0
million in cash and issued 4.8 million shares of our common stock. In addition,
DoubleClick may also receive up to an additional $6.0 million in cash if, during
the three-year period subsequent to consummation of the transaction, the Company
achieves proforma earnings for two out of three consecutive quarters. Proforma
earnings, as defined in the merger agreement, is earnings before interest,
taxes, depreciation and amortization, excluding any one-time non-recurring
items, restructuring charges (including facility relocation charges),
transaction related costs, including costs incurred in connection with the
acquisition or disposition of a business, whether consummated or not, and any
asset impairment, including impairment of goodwill.
Dispositions
On February 10, 2003, we completed the sale of our MaxDirect traditional direct
marketing business to American List Counsel, Inc. As consideration for the sale,
American List Counsel paid us $2.0 million in cash and assumed certain
liabilities on the closing and agreed to pay, monthly, 92.5% of the acquired
MaxDirect accounts receivable collected by American List Counsel during the
first six months following the closing and 46.25% of the acquired MaxDirect
accounts receivable collected by American List Counsel during the second six
months following the closing, in each case net of any accounts payable
associated with such accounts receivable. In addition, American List Counsel
agreed to pay us $500,000 in cash if revenue generated by the MaxDirect business
during the one year period following the closing is at least $2.5 million and an
additional $1.0 million in cash if revenue generated by the MaxDirect business
during the one year period following the closing is at least $3.5 million.
American List Counsel also agreed to pay us $0.50 for each dollar of revenue
above $3.5 million generated by the MaxDirect business during the one-year
period following the closing.
On March 12, 2003, we entered into an agreement with Focus and certain of its
affiliates to sell substantially all of our assets related to our MaxOnline
division. A copy of the Agreement and Plan of Merger, dated March 12, 2003 was
filed with the Commission as Exhibit 2.1 to our Form 8-K filed with the
Commission on March 14, 2003. Pursuant to the merger agreement, we would receive
$3.0 million in cash upon the closing of the transaction and $2.0 million in
cash, plus interest, upon the first anniversary of the closing or, at the
election of Focus, six months thereafter. We could also receive up to an
additional $1.0 million in cash if the MaxOnline business that Focus is
acquiring exceeds certain performance levels in calendar year 2003. In addition,
Focus would pay us 70% of the accounts receivable transferred to Focus under the
merger agreement and collected by it during the eight month period beginning 120
days following the effective time of the merger (net of certain expenses and
accounts payable associated with such accounts receivable). Focus also agreed to
reimburse us, within one year after the effective time of the merger, the amount
of any positive working capital in the MaxOnline business it acquires as a
result of the merger. The MaxOnline Sale is subject to approval by holders of a
majority of our outstanding shares of common stock and other customary
conditions, including without limitation, our receipt of an opinion from our
financial advisor that the MaxOnline Sale is fair, from a financial point of
view, to the holders of our common stock. Assuming all the conditions are
satisfied or are otherwise waived by us and/or Focus, we expect the MaxOnline
Sale to close on our about June 30, 2003. If the MaxOnline Sale is consummated,
we currently intend to adopt a plan of liquidation and dissolution pursuant to
which we would liquidate the Company and dissolve the corporation. Accordingly
we will not plan to operate any businesses following the sale of MaxOnline. We
will significantly curtail administrative expenses, discharge our outstanding
liabilities and initiate the orderly distribution of our remaining assets to our
shareholders. If the MaxOnline Sale is not consummated, we intend to operate our
business in the ordinary course.
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Recent Developments
SEC Investigation and Nasdaq Delisting. On January 25, 2002, the Commission
issued a formal order of investigation in connection with non-specified
accounting matters, financial reports, public disclosures and trading activity
in our securities. We have an agreement with the Commission to settle the
Commission's investigation of our Company. Pursuant to the settlement, we
consented to the entry by the Commission of an order relating to certain cash
transactions that substantially offset one another when aggregated and appear to
represent barter arrangements that do not meet the criteria for revenue
recognition under GAAP. The Commission's findings in the order, which we will
not admit or deny, include findings that we improperly recorded and reported
revenue from certain barter transactions and misclassified certain research and
development expenses in 2000 and 2001. The order requires us to cease and desist
from further violations of sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Securities Exchange Act and Rules 12b-20, 13a-1 and 13a-13. The order does not
require us to pay any fine or monetary damages. In addition, in January 2002, we
were notified that the Nasdaq National Stock Market Listing Investigations
requested certain documents and other information relating to certain
transactions pursuant to Marketplace Rule 4330(c). Our common stock was delisted
from quotation on the Nasdaq Stock Market on August 20, 2002 for our failure to
timely file our quarterly report on Form 10-Q for the quarter ended June 30,
2002.
Restatements of Financials. On February 1, 2002, our Board of Directors
authorized the Audit Committee of the Board of Directors to commence an
independent internal investigation into the matters being investigated by the
Commission. The Audit Committee and we each engaged special counsel and a
forensic accounting firm to conduct a comprehensive examination of our financial
records. On May 6, 2002, we announced that the Audit Committee had concluded its
internal investigation and determined that certain of our financial results for
the years ended December 31, 2001 and December 31, 2000 would be restated. As a
result, we restated certain of our financial results as reflected in (i) our
annual report on From 10-K for the year ended December 31, 2001, which we filed
with the Commission on May 16, 2002, (ii) our amended quarterly reports on Form
10-Q for the quarters ended March 31, 2002, September 30, 2000, March 31, 2001,
June 30, 2001, and September 30, 2001, which we filed with the Commission on
June 11, 2002.
On June 28, 2002, we dismissed Arthur Andersen, LLP as our independent
accountant. Arthur Andersen's report on our financial statements for the years
ended December 31, 2001 and 2000 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the years ended December 31, 2001 and
2000 and the interim period between December 31, 2001 and June 28, 2002, there
were no disagreements between us and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Arthur
Andersen, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. The dismissal of Arthur Andersen
LLP as our independent accountant was recommended and approved by both the Audit
Committee of the Board of Directors and the full Board of Directors. On July 9,
2002, we appointed PricewaterhouseCoopers LLP as our new independent accountant.
During the course of our preparation of our quarterly report on Form 10-Q for
the quarter ended June 30, 2002, we discovered certain errors in the application
of generally accepted accounting principles in the United States ("GAAP") which
required restatement of our previously issued financial statements. Because the
auditors that previously reported on the 2001 and 2000 consolidated financial
statements have ceased operations, we engaged our current auditors to re-audit
our financial results for the years ended December 31, 2001 and 2000. These
audits have resulted in a restatement of our financial statements for the years
ended December 31, 2000 and 2001 and for the quarter ended March 31, 2002. For a
description of the restatements, see Note 3 to the financial statements.
Management Changes. On February 1, 2002, our Vice President of Finance tendered
her resignation. On February 27, 2002, Steven Kantor joined us as Vice President
of Finance. On March 5, 2002, Mark Roah, a founder of the Company, resigned as a
member of the Board of Directors, citing personal reasons. On March 8, 2002,
John Bohan resigned as President and Chief Executive Officer and as a member of
our Board of Directors. On March 11, 2002, we named Mitchell Cannold as our new
President and Chief Executive Officer. Mr. Cannold now serves on our Board of
Directors. On March 12, 2002, we placed Thomas A. Sebastian, our Chief Financial
Officer, on administrative leave. On March 19, 2002, Thomas A. Sebastian
resigned from his position as Chief Financial Officer. On July 9, 2003, we named
William H. Mitchell as our new Chief Financial Officer, and on September 8, 2002
we named Hyunjin F. Lerner as our Vice President of Finance and Controller to
replace Mr. Kantor. William H. Wise, who currently serves as Chief Operating
Officer, joined us on July 10, 2002 in connection with our acquisition of
DoubleClick's North American media business.
Related Party Transactions. From March 2002 to October 2002, we engaged Los
Altos Group, Inc., a corporation for which Peter Sealey, a long-standing member
of the Board of Directors, serves as its Chief Executive Officer, as a
consultant to advise MaxWorldwide's management. On October 1, 2002, we engaged
William Apfelbaum, Chairman of our Board of Directors, as a consultant to advise
MaxWorldwide's management.
Securities Class Actions. Beginning on March 21, 2002, a number of securities
class action complaints were filed against us and certain of our former officers
and directors in the United States District Court for the Central District of
California. For a further description of the nature and status of these legal
proceedings see, "Item 3 - Legal Proceedings."
Derivative Actions. Beginning on March 22, 2002, we have been named as a nominal
defendant in a number of derivative actions,
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purportedly brought on our behalf, filed in the Superior Court of the State of
California for the County of Los Angeles. For a further description of the
nature and status of these legal proceedings, see "Item 3 - Legal Proceedings."
Homestore.com, Inc. On July 31, 2002, we were named as a defendant in a
securities class action complaint initially filed in the United States District
Court for the Central District of California against Homestore.com, Inc. For a
further description of the nature and status of these legal proceedings, see
"Item 3 - Legal Proceedings."
eUniverse Merger. On January 3, 2002, we announced that we entered into an
Agreement and Plan of Merger with eUniverse, Inc. and L90 Acquisition
Corporation, a wholly-owned direct subsidiary of eUniverse. On March 21, 2002,
in light of the uncertainty as to the expected date of the conclusion of the
Commission's investigation, we and eUniverse, mutually and formally terminated
the merger agreement. Accordingly, the contingent cash distribution that was
anticipated as part of the merger will not occur. As part of the termination,
both companies have executed mutual general releases relating to the merger and
we reimbursed eUniverse for expenses related to the merger equal to $300,000.
Additionally, we purchased $800,000 of advertising through the eUniverse
Network.
Repurchase of Shares. On August 13, 2002, we purchased in a private sale
5,293,639 shares of our common stock owned by John Bohan, our former President
and Chief Executive Officer. Such purchase was made at a discount to the then
current market price of the stock. The aggregate purchase price was
approximately $2.65 million, or $0.50 per share. In addition, we agreed to
purchase an additional 303,333 shares from Mr. Bohan, subject to certain
conditions being satisfied. The purchase price for these additional shares is
also $0.50 per share.
RISK FACTORS
You should consider carefully the following risks before you decide to buy our
common stock. The risks and uncertainties described below are not the only ones
we may face. Additional risks and uncertainties may also impair our business
operations. If any of the following risks actually occur, our business, results
of operations and financial condition would likely suffer. In such case, the
trading price of our common stock could decline, and you may lose all or part of
the money you paid to buy our common stock.
The contemplated sale of our MaxOnline division to Focus would deprive us of our
ability to generate revenue from what has historically been our business model.
The future of MaxWorldwide is uncertain and if the MaxOnline sale is consummated
would result in a liquidation of the company.
On March 12, 2003, we entered into an agreement with Focus to sell our online
advertising sales and representation business, MaxOnline. Upon the closing of
this sale, which is expected to occur on or about June 30, 2003, we will have no
operating business and we will not generate any revenue. If the MaxOnline Sale
closes, we intend to adopt a plan of liquidation and dissolution. If the closing
occurs and we liquidate our remaining assets, we can not assure you that we
would distribute cash or other assets to our stockholders having a value equal
to or greater than the price at which our common stock has traded in the past,
currently trades or the price at which it may trade in the future. Moreover,
liquidation would require that we keep a significant amount of assets in reserve
for a period of time to cover contingent liabilities. Administering a
liquidation could also take a long period of time and result in substantial
administrative costs.
Our revenue, prospects, operating results and stock price are difficult to
forecast and may fluctuate significantly due to the volatility in the internet
advertising industry and our relatively short operating history.
We began our business in January 1997 and have a brief operating history which
has included the acquisition of three businesses and the disposition of our
adMonitor technology. During that time, the Internet advertising industry, the
primary industry in which we have historically operated, has experienced
significant volatility. The stock market has also experienced extreme price and
volume fluctuations during this period, and our stock has been, and may continue
to be, highly volatile. Moreover, we are subject to various lawsuits stemming
from our announcement of the Commission's investigation. In addition, in August
2002, we were delisted from trading on the Nasdaq stock market. Given the
volatility in our industry and our stock price, our relatively short operating
history, and the various lawsuits that followed our announcement of the
Commission's investigation, it is very difficult to forecast future revenue,
operating results or stock performance. This unpredictability will likely result
in significant fluctuations in our quarterly results and stock price. Therefore,
you should not rely on quarter-to-quarter or year to year comparisons of results
of operations or our historical stock price as an indication of our future
performance. You should consider our prospects in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
the Internet industry and in an early stage of development, particularly
companies in rapidly evolving markets such as online advertising.
These risks include:
- our ability to manage our growth effectively;
8
- our ability to anticipate and adapt to the rapid changes and
competitive developments in the internet industry;
- our ability to manage the volatile demands of our clients;
- our ability to scale our operation to successfully increase sales;
- our ability to continue to develop and upgrade our technology;
- our ability to continue to identify, attract, retain and motivate
qualified personnel;
- market acceptance of the Internet as an advertising medium;
- delay, cancellation, expiration or termination of advertising
contracts;
- system outages, disruption of the internet, delays in obtaining new
equipment or problems with upgrades;
- seasonality in the demand for advertising;
- changes in government regulation of the Internet;
- actual or anticipated variations in our revenue, earnings and cash
flow;
- adoption of new accounting standards affecting our industry;
- general economic and market conditions, extraordinary events such as
the war with Iraq, and economic and market conditions specific to the
internet;
- whether we successfully resolve the various lawsuits that followed our
announcement of the Commission's investigation; and
- whether the MaxOnline Sale is consummated.
If we are unsuccessful in addressing these risks, our revenue may not grow in
accordance with our business model and may fall short of expectations of market
analysts and investors, which could negatively affect the price of our stock.
Pending litigation could harm our business.
In March 2002, certain of our current and former stockholders filed multiple
securities class action and derivative lawsuits against us and certain of our
former officers and directors. As described in Note 14 to the Company's
Consolidated Financial Statements, we believe we have reached agreements in
principle to settle these lawsuits. The settlements are still under negotiation,
and will be subject to certain terms and conditions, including court approval.
If these suits are not settled, the litigation exposure and the uncertainty
associated with this substantial unresolved litigation could seriously harm our
business and financial condition. In particular, these lawsuits could harm our
relationships with existing customers and our ability to obtain new customers.
The continued defense of these lawsuits also could result in the diversion of
our management's time and attention away from business operations, which could
harm our business. Negative developments with respect to these lawsuits could
cause our stock price to decline significantly. If we fail to reach final
agreement to settle these lawsuits, we are unable to determine the amount, if
any, that we may be required to pay in connection with the resolution of these
lawsuits by settlement or otherwise, and the size of any such payment could
seriously harm our financial condition.
Litigation resulting from the sale of our MaxOnline business to Focus could harm
our plans of liquidation.
The sale of our MaxOnline business to Focus may result in the termination of
certain third party relationships, including contracts we have with our ad
serving vendor, DoubleClick and certain Web sites. The termination of these
contracts could lead to the initiation of litigation by these parties which
could be time consuming and expensive to defend, and could divert our time and
attention. Such litigation could lead to a delay in the completion of the
transaction or the termination of the transaction.
We have a history of losses and expect to incur substantial losses in the
future.
Since before our initial public offering, we have been unable to generate a
profit during any fiscal year, and we cannot assure you that we will ever return
to profitability. We incurred net losses attributable to common stockholders of
approximately $28.0 million for the year ended December 31, 2002, $47.6 million
for the year ended December 31, 2001 and $26.0 million for the year ended
December 31, 2000. Our accumulated deficit from inception, as of December 31,
2002, was approximately $110.4 million. We expect to
9
continue to incur net losses for the foreseeable future due to ongoing operating
expenses and the continued expenses of defending ourselves in the derivative
actions and the securities class actions if we are not able to settle these
matters (see above, "Pending litigation could harm our business"). We cannot
assure you that we will realize higher revenue. If we do not succeed in
substantially increasing our revenue, our losses may continue indefinitely and
would likely increase.
Our revenue from advertisements and advertising services tend to be cyclical and
depend on the economic prospects of advertisers and the economy in general. A
continued decrease in expenditures by advertisers or a continued downturn in the
economy could cause our revenue to decline significantly in any given period.
We derive, and, if the MaxOnline Sale is not consummated, expect to continue to
derive for the foreseeable future, all of our revenue from the sale and
placement of advertisements on Web sites. Expenditures by advertisers tend to be
cyclical, reflecting overall economic conditions as well as budgeting and buying
patterns. The advertising market has experienced continued softness of demand,
lower prices for advertisements, the reduction or cancellation of advertising
contracts, an increased risk of uncollectible receivables from advertisers and
the reduction of marketing and advertising budgets. As a result, advertising
spending across traditional media, as well as the Internet, has decreased, as
well as our ability to collect revenue from the ads we serve.
Our customers continue to experience business conditions that could adversely
affect our business.
Our customers, particularly those who are Internet-related companies, have
experienced and may continue to experience difficulty raising capital and
supporting their current operations and implementing their business plans and,
therefore, may elect to reduce the resources they devote to advertising. Many
other companies in the Internet industry have ceased operations or filed for
bankruptcy protection. These customers may not be able to discharge their
payment and other obligations to us. The non-payment or late payment of amounts
due to us from our customers could negatively impact our financial condition. If
the current environment for Internet marketing and for Internet-related
companies does not improve, our business, results of operations and financial
condition could be materially harmed. For the year ended December 31, 2002, our
bad debt expense related to uncollected advertising fees and advertising credits
was $2.4 million. This bad debt expense was partially offset by $0.4 million in
reserves made against due to website payables, as a result of certain of our Web
publishers bearing the risk of non-payment of advertising fees from marketers.
Further reductions in advertising spending may occur. We also cannot assure you
that even if economic conditions improve, marketing budgets and advertising
spending will increase from current levels. As a result, our revenue from
advertisements on websites and through email list services may decline
significantly in any given period.
The occurrence of extraordinary events, such as the war with Iraq and the attack
on the World Trade Center and the Pentagon, may substantially decrease the use
of and demand for advertising over the Internet, which may significantly
decrease our revenue.
Following the attack on the World Trade Center and the Pentagon, some
advertisers cancelled their online advertising purchases. The same may occur as
a result of the war with Iraq. Any additional occurrences of terrorist attacks
or other extraordinary events that capture significant attention worldwide may
result in similar reductions in the use of and demand for online advertising and
may significantly decrease our revenue for an indefinite period of time.
Advertisers may be reluctant to devote a portion of their budgets to Internet
advertising and digital marketing solutions.
Companies providing media services on the Internet, including us, must compete
with traditional advertising media, including television, radio, cable and
print, for a share of advertisers' total marketing budgets. Widespread use of
online advertising depends upon businesses accepting a new way of marketing
their products and services. Potential customers may be reluctant to devote a
significant portion of their marketing budget to Internet advertising if they
perceive the Internet to be a limited or ineffective marketing medium. During
the current economic downturn and following the burst of the Internet "bubble,"
we believe that many potential customers have shifted their marketing budgets
away from online advertising. If the MaxOnline Sale is not consummated, since we
expect to derive substantially all of our revenue in the foreseeable future from
online advertising and in particular, the delivery of banner advertisements, any
continued shift in marketing budgets away from Internet advertising spending
could materially harm our business, results of operations or financial
condition. We believe that online banner advertising has dramatically decreased
since the middle of 2001 and has continued to decline throughout 2002, and this
is expected to continue through some or all of 2003, which has had and could
continue to have a material adverse effect on our business. If advertisers
determine that banner advertising is an ineffective or unattractive advertising
medium, we cannot assure you that we will be able to effectively make the
transition to any other form of Internet advertising. Also, there are "filter"
software programs that limit or prevent advertising from being delivered to a
user's computer. The commercial viability of Internet advertising, and our
business, results of operations and financial condition, would be materially and
adversely affected by Web users' widespread adoption of such software.
Government regulation may affect our ability to gather, generate or use
information for profiles and may hinder our ability to conduct business.
10
The legal and regulatory environment governing the Internet and the use of
information about Web users is uncertain and may change. A number of lawsuits
have recently been filed against certain Internet companies related to online
privacy. In addition, the Federal Trade Commission has begun investigations of,
and several Attorney Generals have instituted legal proceedings against, certain
Internet companies related to online privacy. United States legislators and
various state governments in the past have introduced a number of bills aimed at
regulating the collection and use of data from Internet users and additional
similar bills are currently being considered. The European Union has adopted a
directive addressing data privacy that may result in limitations on the
collection and the use of specific personal information regarding Internet
users. In addition, Germany and other European Union member countries have
imposed their own laws protecting data that can become personally identifiable
through subsequent processing. Other countries have enacted, or are considering,
limitations on the use of personal data as well. The effectiveness of our
services could be impaired by any limitation on the collection of data from
Internet users, and consequently, our business and results of operations could
be harmed.
A number of laws and regulations have been, and in the future may be, adopted
covering issues such as pricing, acceptable content, taxation and quality of
products and services on the Internet. This legislation could inhibit the growth
in the use of the Internet and decrease the acceptance of the Internet as a
communications and commercial medium. In addition, due to the global
accessibility of the Internet, it is possible that multiple federal, state or
foreign jurisdictions might inconsistently regulate our activities and our
customers. Any of these developments could limit our ability to do business and
to generate revenue.
From time to time, a small number of Web publishers may account for a
significant percentage of our advertising revenue. As a result, our failure to
develop and sustain long-term relationships with Web publishers, or the
reduction in traffic of a current Web publisher in our network, could limit our
ability to generate revenue.
Our contracts with Web publishers are generally one year in duration and can be
terminated by either party with as little as 30 days notice. We cannot assure
you that any of our Web publishers will continue their relationships with us.
Additionally, we may lose Web publishers as a result of acquisitions or as a
result of the discontinuation of operations of any of our Web publishers. If the
MaxOnline Sale is consummated, we anticipate transferring all of our Web
publishers to Focus in connection with the transaction.
From time to time, a limited number of marketers may account for a significant
percentage of our gross billings and revenue and a loss of one or more of these
marketers could cause our results of operations to suffer.
For the year ended December 31, 2002, revenue from our largest purchaser of
advertising accounted for approximately 13 % of our MaxOnline gross billings and
approximately 12% of revenue. Marketers typically purchase advertising under
short-term purchase order agreements. We cannot assure you that our top
marketers or our other marketers will continue their relationships with us. The
loss of one or more of the marketers that represent a significant portion of our
revenue could cause our results of operations to suffer. If the MaxOnline Sale
is consummated, we will no longer engage in business with marketers. In
addition, many of our contracts with Web publishers require us to bear the risk
of non-payment of advertising fees from marketers. Accordingly, the non-payment
or late payment of amounts due to us from a significant marketer could cause our
financial condition to suffer.
Since our business depends in part on market acceptance of electronic commerce,
if electronic commerce does not grow, or grows slower than we expect, our
ability to generate revenue may suffer.
Our success depends in part on market acceptance of electronic commerce. A
number of factors outside of our control could prevent this acceptance,
including the following:
- the necessary network infrastructure for substantial growth in usage
of the Internet may not develop adequately;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- negative publicity and consumer concern surrounding the security of
transactions could impede the growth of electronic commerce.
If electronic commerce does not grow, or grows slower than we expect, due to any
of the above factors, or any other factor, our ability to generate revenue could
suffer.
Our failure to adequately respond to rapid changes in technology and the
Internet could harm our ability to generate revenue.
The market for online products and services is subject to rapid change and
characterized by evolving industry standards and frequent introductions of new
technological developments. These new standards and technological developments
could make our existing or future products or services obsolete. Keeping pace
with the introduction of new standards and technological developments could
result in significant additional costs or prove to be difficult or impossible
for us. Any failure to keep pace with the introduction of new
11
standards and technological developments on a cost-effective basis could result
in increased costs and harm our ability to generate revenue.
Many competitors have substantial competitive advantages that may make it more
difficult for us to retain our existing marketers and Web publishers and to
attract new marketers and Web publishers.
The markets for online advertising and direct marketing are intensely
competitive. We compete with television, radio, cable and print for a share of
marketers' total advertising budgets. We also compete with large Web publishers
and Web portals, such as AOL, Lycos, MSN and Yahoo, for the online advertising
budgets of marketers. In addition, we compete with various Internet advertising
networks. Many of our current and potential competitors enjoy competitive
advantages over us, including significantly greater financial, technical and
marketing resources. They may also enjoy significantly greater brand recognition
and substantially larger bases of Web site clients and marketers.
As a result, our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in client requirements. Our competitors
may also have a significantly greater ability to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to potential employees, strategic partners, marketers and Web
publishers. Further, our competitors may develop online and offline products and
services that are equal to or superior to our products and services or that
achieve greater market acceptance than our products and services. If we are
unable to compete successfully against existing or potential competitors, our
revenue and margins may decline.
If the MaxOnline Sale is not consummated, our failure to successfully acquire
and integrate new technologies and businesses could cause our results of
operations to suffer.
The Internet is a quickly changing environment, requiring companies to
constantly improve their technology and develop or acquire new technology. If
the MaxOnline Sale is not consummated and we continue in the Internet
advertising business, we cannot assure you that we will be able to identify
other acquisition or investment candidates. Even if we do identify other
candidates, we cannot assure you that we will be able to make any potential
acquisition or investment on commercially acceptable terms. Moreover, we may
have difficulty integrating and/or operating any acquired businesses, products,
services or technologies. These difficulties could disrupt our business,
distract our management and employees and increase our expenses. In addition, we
may incur debt or issue equity securities to fund any future acquisitions. The
issuance of equity securities could be dilutive to existing stockholders.
If we are unable to safeguard the security and privacy of our information, our
results of operations may suffer.
Our technical infrastructure is potentially vulnerable to physical or electronic
computer break-ins, viruses and similar disruptive problems. Weaknesses or
vulnerabilities in the Internet, a user's personal computer or in our services
could compromise the confidential nature of information transmitted over the
Internet. These factors could require us to devote significant financial and
human resources to protect against future breaches and alleviate or mitigate
problems caused by security breaches. Security breaches could result in
financial loss, litigation and other liabilities, any of which could cause our
results of operations to suffer.
Any failure by us to protect our intellectual property could harm our business
and competitive position.
We generally protect our intellectual property through a combination of
trademark, trade secret and copyright laws, confidentiality and inventions
agreements with our employees and third parties, and license agreements with
consultants, vendors and clients. We have filed applications for several
trademarks internationally and in the United States. We cannot assure you that
any of our trademark applications will be approved. Even if these applications
are approved, the trademarks may be successfully challenged by others or
invalidated. In addition, despite our efforts to protect our intellectual
property, unauthorized parties may attempt to copy aspects of our services or to
obtain and use information that we regard as proprietary. We may not have
adequate remedies for any breach of confidentiality agreements, and our trade
secrets may otherwise become known or independently developed by competitors.
We may be liable for content available or posted on the Web sites of our
publishers.
We may be liable to third parties for content in the advertising we serve if the
music, artwork, text or other content involved violates the copyright, trademark
or other intellectual property rights of such third parties or if the content is
defamatory. Any claims or counterclaims could be time-consuming, result in
costly litigation or divert management's attention.
We depend on third-party ad serving, Internet and telecommunications providers,
over whom we have no control, to operate our services. Interruptions in our
services caused by one of these providers or failure in our technology and
computing systems could have an adverse effect on revenue and our relationships
with our clients and securing alternate sources of these services could
significantly increase expenses.
We depend heavily on several third-party providers of ad serving, Internet and
related telecommunication services, including hosting
12
and co-location facilities, in operating our products and services. These
companies may not continue to provide services to us without disruptions in
service, at the current cost or at all. The costs associated with any transition
to a new service provider would be substantial, requiring us to reengineer our
computer systems and telecommunications infrastructure to accommodate a new
service provider. This process would be both expensive and time-consuming. In
addition, failure of our ad serving, Internet and related telecommunications
providers to provide the ad serving, data communications capacity in the time
frame required by us could cause interruptions in the services we provide.
Furthermore, we have periodically experienced minor systems interruptions,
including Internet disruptions, which we believe may occur periodically in the
future. The continuing and uninterrupted performance of our servers and
networking hardware and software infrastructure is critical to our business. Any
system failure that causes interruptions in our ability to service our customers
could reduce customer satisfaction and, if sustained or repeated, could cause
our results of operations to suffer.
The loss of key employees and the reduction in our workforce may impair our
business and results of operations. If we are unable to attract and retain sales
and client service personnel our business and future revenue growth could
suffer.
Our performance and future success is substantially dependent on the continued
service of our officers and other employees, all of who are employed on an
at-will basis. Many of our executive officers have worked together for only a
short period of time. For example, our President and Chief Executive Officer,
our Chief Financial Officer, our Chief Operating Officer and our Chief
Technology Officer have joined us within the past year. The loss of the services
of any of the above executive officers, our President of Sales or any other key
personnel could harm our business.
We have lost a number of our employees over the past year due to certain
acquisitions and dispositions and general economic conditions. In February 2003
as a result of the sale of our MaxDirect division to American List Counsel, we
reduced a portion of our workforce, particularly those employees associated with
the MaxDirect business. In addition, we reduced the combined workforce following
our acquisition of the North American media business of DoubleClick. These
reductions in workforce may negatively impact our ability to conduct business
and serve our customers and vendor partners with the level of service as we have
in the past, which could cause our business to suffer. Further, our workforce
reduction could cause concern among our customers, vendors and other significant
strategic relationships about our ability to meet their ongoing Internet
marketing solutions needs. Our remaining personnel may also seek employment with
larger, more stable companies they perceive to have better prospects. If the
MaxOnline Sale is consummated, we anticipate losing substantially all of our
employees. If the MaxOnline Sale is not consummated, our future success will
depend on our ability to identify, recruit, train, integrate and retain
qualified sales and marketing, managerial and technical personnel. Competition
for these personnel is intense. The inability to attract, integrate and retain
the necessary sales, marketing, technical and administrative personnel could
harm our ability to generate revenue.
Future sales of our common stock may affect the market price of our common
stock.
As of March 31, 2003, we had 24,503,282 shares of common stock outstanding,
excluding approximately 4.6 million shares subject to options outstanding as of
such date under our stock option plan that are exercisable at prices ranging
from $0.45 to $21.06 per share. Additionally, certain holders of our common
stock have registration rights with respect to their shares. We may be required
to file one or more registration statements in compliance with these
registration rights. We cannot predict the effect, if any, that future sales of
common stock or the availability of shares of common stock for future sale will
have on the market price of our common stock prevailing from time to time.
Because of our delisting from Nasdaq, our shares trade only on the "Pink
Sheets," which means that our trading volume is generally much lower that it was
when we were traded on Nasdaq. Sales of substantial amounts of common stock, or
the perception that such sales could occur, may materially and adversely affect
prevailing market prices for our common stock, particularly given our relatively
low trading volume.
We may need additional capital in the future to operate our business and we may
experience difficulty in obtaining this additional capital.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. We may need to raise additional funds in the future
to fund our operations, to enhance or expand the range of products and services
we offer or to respond to competitive pressures or perceived opportunities. We
cannot assure you that additional financing will be available on terms favorable
to us, or at all. If adequate funds are not available or not available when
required or on acceptable terms, the growth of our business and results of
operations may suffer.
We are subject to anti-takeover provisions, which may make it difficult for a
third party to acquire us.
A number of recent acquisitions and consolidations have occurred in our
industry. We are subject to anti-takeover provisions that may make it difficult
for a third party to acquire us, including the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business
13
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested stockholder"
is a person who, together with affiliates and associates, owns, or within three
years prior, did own, 15% or more of the corporation's voting stock. These
provisions will not preclude us from consummating the MaxOnline Sale.
Our common stock was delisted from the Nasdaq Stock Market and as a result,
trading of our common stock has become more difficult.
Our common stock was delisted from the Nasdaq Stock Market on August 20, 2002
because we did not timely file our quarterly report on Form 10-Q for the quarter
ended June 30, 2002 following our discovery of the misclassification of certain
expenses in prior periods as research and development expenses. The result of
this action is a limited public market for our common stock. Trading is now
conducted in the over-the-counter market in the so-called "Pink Sheets."
Consequently, selling our common stock is more difficult because smaller
quantities of shares can be bought and sold, transactions can be delayed and
security analysts and news media's coverage of us may be reduced. These factors
could result in lower prices and larger spreads in the bid and ask prices for
shares of our common stock as well as lower trading volume.
As a result of the delisting of our common stock from the Nasdaq National
Market, our common stock may become subject to the "penny stock" regulations,
including Rule 15g-9 under the Securities Exchange Act of 1934. That rule
imposes additional sales practice requirements on broker-dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
our common stock and affect the ability of holders to sell their shares of our
common stock in the secondary market. In the event that our common stock becomes
subject to the penny stock regulations, the market liquidity for the shares
would be adversely affected.
E-mail marketing may not gain market acceptance, which could have a material
adverse effect on our business.
The degree to which our e-messaging platform is accepted and used in the
marketplace depends on market acceptance of e-mail as a method for targeted
marketing of products and services. Our ability to successfully differentiate
our services from random mass e-mailing products and services, which have
encountered substantial resistance from consumers, also will be important.
Businesses that already have invested substantial resources in traditional or
other methods of marketing may be reluctant to adopt new commercial methods or
strategies, such as e-mail marketing. In addition, individuals with established
patterns of purchasing goods and services based on traditional marketing methods
may be reluctant to alter those patterns. As a result of the factors listed
above, e-mail marketing may not be accepted by the marketplace, which would have
a material adverse effect on our business.
Our revenue could decline if we fail to effectively manage our existing
advertising space and our growth could be impeded if we fail to acquire new
advertising space.
The success of our current business depends in part on our ability to
effectively manage our existing advertising space. The Web sites that list their
unsold advertising space with us are not bound by long-term contracts that would
ensure us a consistent supply of advertising space, which we refer to as
inventory. In addition, Web sites can change the amount of inventory they make
available to us at any time. If a Web site publisher decides not to make
advertising space from its Web sites available to us, we may not be able to
replace this advertising space with advertising space from other Web sites that
have comparable traffic patterns and user demographics quickly enough to fulfill
our advertisers' requests. These events could result in lost revenue. We expect
that our customers' requirements will become more sophisticated as the Web
matures as an advertising medium. If we fail to manage our existing advertising
space effectively in order to meet our customers' changing requirements, our
revenue could decline.
The growth of our current business depends on our ability to expand our
advertising inventory. In order to attract new customers, we must maintain a
consistent supply of attractive advertising space. Our ability to attract new
Web sites and to retain Web sites currently in our network will depend on
various factors, some of which are beyond our control. These factors include our
ability to introduce new and innovative product lines and services, our ability
to efficiently manage our existing advertising inventory, our pricing policies
and the cost-efficiency to Web publishers of outsourcing their advertising
sales. We cannot assure you that the size of our inventory will increase or even
remain constant in the future. Furthermore, if the MaxOnline Sale is
consummated, we will sell to Focus substantially all of our existing advertising
space, relationships with Web publishers and other assets relating to our online
advertising business thereby materially adversely affecting our ability to
attract new customers.
We could lose customers or advertising inventory if we fail to measure clicks on
banner advertisements in a manner that is acceptable to our advertisers and Web
publishers.
In some instances, we earn advertising revenue and make payments to Web
publishers based on the number of clicks on advertisements delivered on our
network. Advertisers' and Web publishers' willingness to use our services and
join our network will depend on the extent to which they perceive our
measurements of clicks to be accurate and reliable. Advertisers and Web
publishers
14
often maintain their own technologies and methodologies for counting clicks and
from time to time we have had to resolve differences between our measurements
and theirs. Any significant dispute over the proper measurement of clicks or
other user responses to advertisements could cause us to lose our customers or
advertising inventory.
ITEM 2. PROPERTIES
Our principal executive offices are located in New York, New York, where we
lease approximately 5,100 square feet under a lease that expires on February 12,
2009. In addition, we lease space for our sales and marketing efforts in
Chicago, IL; Greenwich, CT; San Francisco, CA; Santa Monica, CA and Seattle, WA.
We also leased space in Marina del Rey, CA, which formerly housed our
headquarters. This lease was terminated on April 7, 2003. Our MaxDirect business
was operated from space we leased in Valhalla, NY and Woodbury, MN. As a result
of our sale of MaxDirect, we no longer lease the Valhalla, NY and Woodbury, MN
spaces. We are continually evaluating our facility requirements. We believe that
our existing leased space is sufficient for our current operations and that
suitable replacement space will be available in the future on commercially
reasonable terms. If the MaxOnline Sale is consummated, Focus will assume the
leases for our facilities spaces in Chicago, IL; Greenwich, CT; New York, NY and
Santa Monica, CA.
ITEM 3. LEGAL PROCEEDINGS
We are a party to lawsuits in the normal course of our business. Litigation in
general, and securities and intellectual property litigation in particular, can
be expensive and disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict. Other than as described
below, we are not a party to any material legal proceedings.
General Litigation
On April 2, 2001, EMI Communications Corp. filed a lawsuit against us in the
Queen's Bench (Brandon Centre), Manitoba, Canada. The suit alleges breach of
contract by L90, our wholly owned subsidiary. We believe this suit is without
merit and intend to vigorously defend against these claims. However, due to the
inherent uncertainties of litigation, we cannot accurately predict the ultimate
outcome of the litigation.
On November 21, 2001, Frank Addante, our former Chief Technology Officer, filed
a Demand for Arbitration with the American Arbitration Association in Los
Angeles, California. Mr. Addante claimed copyright infringement, breach of
contract, fraud, conversion, securities fraud and breach of fiduciary duty. He
sought an unspecified amount of damages, declaratory relief, injunctive relief
and an accounting (to determine monetary damages). In November 2002, we settled
this dispute with Mr. Addante. As part of the settlement and mutual release, we
paid $250,000 to Mr. Addante.
On May 2, 2002, John Bohan, the Company's former Chief Executive Officer, filed
an action against us in the Court of Chancery for the State of Delaware, seeking
an order requiring the Company to advance his defense costs in connection with
the Commission's investigation and the related civil litigation in accordance
with his indemnification agreement with the Company and its charter documents.
On June 6, 2002, the parties entered into a stipulation and order establishing a
procedure for the advancement of expenses subject to an undertaking by Mr. Bohan
to repay the Company if it is determined that indemnification is not warranted.
During the calendar years 2002 and 2003, the Company paid legal and other
professional fees and expenses of approximately $1.9 million, in the aggregate,
on behalf of certain former officers and directors, including Mr. Bohan,
pursuant to their indemnification agreements with the Company and the Company's
charter documents. Mr. Bohan was initially subject to an undertaking with the
Company pursuant to which he was obligated to repay all amounts advanced to him
by the Company in the event it was determined that that indemnification was not
warranted. In April 2003, the Company entered into an agreement, pursuant to
which it agreed to terminate Mr. Bohan's obligations to the Company under this
undertaking in exchange for a release from Mr. Bohan of all future
indemnification obligations of the Company to Mr. Bohan under his
indemnification agreement with the Company and its charter documents. The
payment made under this agreement is included in the $1.9 million of costs
described above.
On February 3, 2003, Anthony Hauser, a former founder of webMillion.com, Inc.,
filed against us, certain former officers and directors and William Apfelbaum,
our Chairman of the Board of Directors a Demand for Arbitration with the
American Arbitration Association in Los Angeles, California. Mr. Hauser claims
breach of contract, breach of fiduciary duty, misrepresentation and fraud and
securities law violations arising out of our acquisition of webMillion.com. He
has asserted damages in the amount of $6.0 million. We believe this arbitration
claim is without merit and intend to vigorously defend against these claims.
However, due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the litigation. Any unfavorable outcome in
litigation could materially and adversely affect our business, financial
condition, results of operations and any distribution to shareholders in a
liquidation.
The Securities and Exchange Commission's Investigation and Nasdaq Delisting
15
On January 25, 2002, the Commission issued a formal order of investigation in
connection with non-specified accounting matters, financial reports, public
disclosures and trading activity in our securities. In connection with this
investigation, the Commission requested that we provide it with certain
documents and other information. We have reached an agreement with the staff of
the Commission to settle the Commission's investigation. Pursuant to the
settlement, we consented to the entry by the Commission of an order relating to
certain cash transactions that substantially offset one another when aggregated
and appear to represent barter arrangements that do not meet the criteria for
revenue recognition under GAAP. The Commission's findings in the proposed order,
which we will not admit or deny, include findings that we improperly recorded
and reported revenue from certain barter transactions and misclassified certain
research and development expenses in 2000 and 2001. The order requires us to
cease and desist from further violations of sections 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Securities Exchange Act and Rules 12b-20, 13a-1 and 13a-13.
The order does not require us to pay any fine or monetary damages. In addition,
in January 2002, we were notified that the Nasdaq National Stock Market Listing
Investigations requested certain documents and other information relating to
certain transactions pursuant to Marketplace Rule 4330(c). On August 20, 2002,
our common stock was delisted from the Nasdaq National Stock Market as a result
of our failure to timely file our quarterly report on Form 10-Q for the quarter
ended June 30, 2002.
On February 1, 2002, our Board of Directors authorized the Audit Committee of
the Board of Directors to commence an independent internal investigation into
the matters investigated by the Commission. The Audit Committee and we each
engaged special counsel and a forensic accounting firm to conduct a
comprehensive examination of our financial records. On May 6, 2002, we announced
that the Audit Committee had concluded its internal investigation and determined
that certain of our financial results for the years ended December 31, 2001 and
December 31, 2000 would be restated. As a result, we restated certain of our
financial results as reflected in (i) our annual report on Form 10-K for the
year ended December 31, 2001, which we filed with the Commission on May 16,
2002, (ii) our amended quarterly reports on Form 10-Q for the quarters ended
March 31, 2002, September 30, 2000, March 31, 2001, June 30, 2001, and September
30, 2001, which we filed with the Commission on June 11, 2002.
Following our dismissal of Arthur Andersen as our independent accountants, we
engaged PricewaterhouseCoopers LLP as our new independent accountants on July 9,
2002. During the course of our preparation of our quarterly report on Form 10-Q
for the quarter ended June 30, 2002, we discovered certain errors in the
application of generally accepted accounting principles in the United States
("GAAP") which required restatement of our previously issued financial
statements. Because the auditors that previously reported on the 2001 and 2000
consolidated financial statements have ceased operations, we engaged our current
auditors to re-audit our financial results for the years ended December 31, 2001
and 2000. These audits have resulted in a restatement of our financial
statements for the years ended December 31, 2001 and 2000 and for the quarter
ended March 30, 2002. As a result of this discovery we were unable to file on a
timely basis our 10-Q for the quarters ended June 30, 2002 and September 30,
2002. Following the delay in our filing of our 10-Q for the quarter ended June
30, 2002; Nasdaq informed us that our stock would no longer be listed on their
stock exchange. For a description of the restatements, see Note 3 to our
consolidated financial statements.
Securities Class Actions
Beginning on March 21, 2002, following the announcement of the Commission's
investigation and the internal investigation conducted by of the Audit Committee
of the Board of Directors, a number of securities class action complaints were
filed against us and certain of our former officers and directors in the United
States District Court for the Central District of California. The complaints
have been filed as purported class actions by individuals who allege that they
purchased our common stock during the purported class period. The complaints
generally allege that during 2000 and 2001 we, and the other named defendants,
made false or misleading statements of material fact about our financial
statements, including our revenue, revenue recognition policies, business
operations and prospects for the years 2000, 2001 and beyond. The complaints
seek an unspecified amount of damages on behalf of persons who purchased our
common stock during the purported class period. On July 17, 2002, the securities
class actions were consolidated in a single action for all purposes. On July 22,
2002, the court appointed John A. Levin & Co. as the lead plaintiff in the
consolidated action. On September 20, 2002, the lead plaintiff filed its
consolidated amended class action complaint. On March 18, 2003 the court granted
our motion to dismiss the consolidated class action lawsuit for failure to state
a claim upon which any relief may be granted and the consolidated class action
lawsuit was dismissed without prejudice. Because the class action lawsuit was
dismissed without prejudice, plaintiffs have an opportunity to amend the
complaint against the defendants. We have reached an agreement in principle with
the lead plaintiff to settle the class action for $5.0 million. Final terms of
the settlement are still under negotiation and are subject to certain terms and
conditions, including court approval.
Derivative Actions
Beginning on March 22, 2002, we have been named as a nominal defendant in at
least two derivative actions, purportedly brought on our behalf, filed in the
Superior Court of the State of California for the County of Los Angeles. The
derivative complaints allege that certain of our current and former officers and
directors breached their fiduciary duties to us, engaged in abuses of their
control of us, wasted corporate assets, and grossly mismanaged the Company. The
plaintiffs seek unspecified damages on our behalf from each of
16
the defendants. We have reached an agreement in principle, subject to certain
conditions, including court approval, to settle these derivative actions for
$775,000 in attorneys' fees and the adoption of certain corporate therapeutic
actions. We have received insurance proceeds sufficient to satisfy the $775,000
to be paid by us in settlement of the derivative suits.
Other Legal Matters
We periodically may become subject to other legal proceedings in the ordinary
course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year
covered by this Report.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for common stock
Beginning on January 28, 2000, the date of our initial public offering, our
common stock was quoted on the Nasdaq National Market under the symbol LNTY. On
April 18, 2002, the symbol under which we traded was changed to LNTYE pursuant
to Nasdaq Marketplace Rule 4310(c)(14) as a result of our delay in filing our
annual report on Form 10-K for the year ended December 31, 2001. The symbol was
later changed back to LNTY on June 20, 2002. On July 10, 2002, we reorganized
into a holding company format and began trading under the symbol MAXW. On August
20, 2002, our common stock was delisted from the Nasdaq National Stock Market.
The symbol under which we trade in the "Pink Sheets" is MAXW.PK. Prior to
January 28, 2000, there was no public market for our common stock. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of our common stock.
Period High Low
- ------ -------- -------
First Quarter (January 1, 2001 through March 31, 2001) $ 6.63 $ 2.28
Second Quarter (April 1, 2001 through June 30, 2001) 3.00 1.68
Third Quarter (July 1, 2001 through September 30, 2001) 2.63 0.95
Fourth Quarter (October 1, 2001 through December 31, 2001) 1.71 0.93
First Quarter (January 1, 2002 through March 31, 2002) 2.07 0.92
Second Quarter (April 1, 2002 through June 30, 2002) 1.40 0.84
Third Quarter (July 1, 2002 through September 30, 2002) 0.96 0.20
Fourth Quarter (October 1, 2002 through December 31, 2002) 0.64 0.40
On March 31, 2003, the last sale price of our common stock reported by the Pink
Sheets was $0.67 per share. As of March 31, 2003, we had approximately 89
holders of record of our common stock.
Dividend Policy
During the fiscal years ending December 31, 2002 and, 2001, we did not declare
or pay cash dividends on any of our common stock.
Sale of Unregistered Securities
On July 10, 2002, we issued an aggregate of 4.8 million shares of common stock
to DoubleClick. These securities were issued, among other consideration, in
exchange for the North American media business of DoubleClick. These securities
were issued and sold in reliance upon the exemption provided for by Section 4(2)
of the Securities Act and Regulation D promulgated thereunder.
Use of Proceeds from our Initial Public Offering
The effective date of our initial public offering of shares of common stock was
January 28, 2000 (SEC Registration No. 333-87607). We completed our initial
public offering on February 2, 2000, through which we sold 7,475,000 shares of
our common stock, inclusive of the underwriters' over allotment, at an initial
public offering price of $15.00 per share. Our initial public offering was
managed by SG Cowen Securities Corporation, Banc of America Securities LLC, CIBC
Oppenheimer Corp. and Wit Capital Corporation. The initial public offering
resulted in gross proceeds of approximately $112.1 million, approximately $7.8
million of which was applied toward the underwriting discount and commission.
Expenses related to the offering totaled approximately $1.5 million. Our net
proceeds from the offering were approximately $102.6 million. From the time of
receipt through the date of this report, these net proceeds have been applied
toward general corporate purposes and strategic acquisitions.
18
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities remaining
issued upon exercise of price of outstanding options, available for future issuance
outstanding options, warrants warrants and rights under equity compensation plans
and rights (excluding securities reflected
in column (a))
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 3,067,414 $2.51 5,518,288
approved by security holders
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 31,833 $1.37. none.
approved by security holders
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,099,247 $2.50 5,518,288
- ------------------------------------------------------------------------------------------------------------------------------------
19
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data with the consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Form 10-K. The Statement of Operations data for the fiscal years ended December
31, 2002, 2001 and 2000 and the balance sheet data as of December 31, 2002 and
2001 are derived from our restated consolidated financial statements that are
included elsewhere herein. The Statement of Operations data for the fiscal years
ended December 31, 1999 and 1998 and the balance sheet data as of December 31,
2000, 1999 and 1998 were derived from our unaudited financial statements.
On January 25, 2002, the Securities and Exchange Commission (the "Commission")
issued a formal order of investigation in connection with non-specified
accounting matters, financial reports, public disclosure and trading activity in
our securities. On February 1, 2002, our Board of Directors authorized the Audit
Committee to commence an independent internal investigation into the matters
that prompted the Commission's investigation. To assist in this inquiry, we and
the Audit Committee each engaged separate special counsel and forensic
accounting firms. As a result, certain of our financial results for the years
ended December 31, 2001 and December 31, 2000 were restated in our Form 10-K
filed with the Commission May 16, 2002. During July 2002 we retained
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") as our new independent
accountants. During the course of our preparation of our quarterly report on
Form 10-Q for the quarter ended June 30, 2002, we discovered misclassifications
of certain research and development expenses in our previously reported
financial statements. As a result, we engaged PricewaterhouseCoopers to re-audit
our financial results for the years ended December 31, 2001 and 2000. This
engagement is in addition to our original engagement of PricewaterhouseCoopers
to audit our financial results for the year ended December 31, 2002. These
audits have resulted in a restatement of our financial statements for the years
ended December 31, 2001 and 2000 and for the quarter ended March 30, 2002.
In addition, we determined that certain expenses previously classified as
research and development expenses ("R & D") in our 1999 and 1998 financial
statements should be more appropriately classified in other captions within our
Consolidated Statement of Operations. We concluded that of the $2.5 million of
previously reported research and development expense in 1999, approximately $1.8
million should have been recorded as cost of revenue as they represented costs
associated with running our adMonitor product, and approximately $0.2 million of
personnel-related costs associated with business development personnel should
have been recorded to sales and marketing expense. The remaining balance of
approximately $0.5 million represents personnel costs associated with enhancing
existing products. The Company has determined that such costs are more
appropriately classified as product development expense. The Company also
determined that with respect to the $0.1 million of previously reported 1998
research and development expense it is more appropriate to classify this expense
as product development expense in the unaudited financial statements.
Furthermore, we determined that due to certain features of our Series A, B and C
preferred stock, the Company inappropriately included such preferred stock
within "Stockholders' Equity" in its previously reported financial statements.
The Company has determined that these securities should have been classified
outside of stockholders' equity for the periods they were outstanding. All
outstanding preferred stock was converted into common stock upon the initial
public offering of the Company's common stock in February 2000. These
adjustments have resulted in stockholders' equity being reduced by $16.0 million
and $2.0 million at December 31, 1999 and 1998, respectively.
As a result, our consolidated financial statements for 1999 and 1998 have been
restated and are therefore considered unaudited.
The selected five-year financial data has been restated to reflect the
adjustments made to our financial statements related to the improper application
of generally accepted accounting principles in prior periods. As a result of
these items, we have reduced our reported revenue by approximately $3.6 million
for the year ended December 31, 2000 and by approximately $1.1 million for the
year ended December 31, 2001. Cost of revenue increased by approximately $10.3
million and approximately $9.8 million for the years ended December 31, 2000 and
December 31, 2001 respectively. Operating expenses decreased by approximately
$7.4 million to approximately $36.8 million and decreased $19.7 million to $55.2
for the years ended December 31, 2000 and 2001, respectively. Our net loss for
the year ended December 31, 2000 increased from approximately $20.5 million to
approximately $26.0 million and our net loss for the year ended December 31,
2001 decreased from approximately $52.6 million to approximately $47.6 million.
Additionally we made certain reclassifications between operating and
non-operating expenses. The effect of these adjustments on our quarterly results
for the year ended December 31, 2001, along with additional adjustments relating
to the first quarter of 2002, are reflected in Note 18 to our consolidated
financial statements.
20
(in thousands, except per share data)
Years Ended December 31,
-----------------------------------------------------------
Statement of Operations 2002 2001 2000 1999 1998
----------- ----------- ------------ ---------- -----------
(restated) (restated) (restated) (restated)
Revenue:
Service fee-based revenue $ 14,779 $ 19,142 $ 43,582 $ 7,283 $ -
Commission-based revenue 8,033 7,405 1,520 1,918 2,189
----------- ----------- ------------ ----------------------
Total revenue 22,812 26,547 45,102 9,201 2,189
Cost of revenue 11,762 23,025 41,403 6,502 -
----------- ----------- ------------ ---------- -----------
Gross profit 11,050 3,522 3,699 2,699 2,189
----------- ----------- ------------ ---------- -----------
Operating expenses (income):
Sales and marketing 9,766 15,736 16,548 5,082 1,362
Product development - 2,322 1,250 614 138
General and administrative 18,284 19,863 18,833 4,520 995
Special charges 9,893 - - - -
Impairment of goodwill and other intangible assets 4,398 10,921 - - -
Other impairment charges 1,915 3,271 162 - -
(Gain) loss on sale of adMonitor (4,255) 3,068 - - -
----------- ----------- ------------ ---------- -----------
Total operating expenses 40,001 55,181 36,793 10,216 2,495
----------- ----------- ------------ ---------- -----------
Operating loss (28,951) (51,659) (33,094) (7,517) (306)
Other income, net 207 2,125 1,772 29 16
Investment impairment - (1,000) - - -
Interest income 740 2,921 5,367 - -
----------- ----------- ------------ ---------- -----------
Loss before provision for income taxes (28,004) (47,613) (25,955) (7,488) (290)
Provision for income taxes - 2 2 - -
----------- ----------- ------------ ---------- -----------
Net loss (28,004) (47,615) (25,957) (7,488) (290)
Cumulative dividends on participating preferred stock - - 2 1,470 23
----------- ----------- ------------ ---------- -----------
Net loss attributable to common stockholders $(28,004) $(47,615) $ (25,959) $(8,958) $ (313)
Basic and diluted net loss per share attributable to common
stockholders: $ (1.11) $ (1.94) $ (1.18) $ (0.93) $ (0.04)
=========== =========== ============ ========== ===========
Weighted average number of common shares outstanding: 25,253 24,579 21,957 9,609 7,112
=========== =========== ============ ========== ===========
(in thousands)
Years Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ------------ ---------- -----------
Balance Sheet Data: (restated) (restated) (restated) (restated)
Cash and cash equivalents $ 33,253 $ 63,831 $ 72,653 $ 6,896 $ 2,112
Working capital 25,439 54,624 74,870 4,914 1,996
Total assets 61,943 85,335 120,993 16,136 3,936
Other liabilities 78 1,031 777 2,043 248
Convertible preferred stock - - - 16,006 2,000
Total stockholders' equity (deficit) 35,708 62,150 107,701 (8,694) 132
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results
of operations together with the financial statements and the notes to financial
statements included elsewhere in this report. This discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those anticipated in these
forward-looking statements.
MaxWorldwide, Inc.'s consolidated financial statements for the years ended
December 31, 2001 and 2000, as filed with the Securities and Exchange Commission
on May 16, 2002, have been restated. Accordingly, all financial data in this
Report reflects the effects of this restatement. See Note 3 to MaxWorldwide,
Inc.'s Consolidated Financial Statements for a description of the restatements.
Overview
References in this Report to "MaxWorldwide," "we," "our" and "us" refer to
MaxWorldwide, Inc. and our consolidated subsidiaries. We are a leading provider
of marketing services for marketers. We design and implement online marketing
campaigns for our marketing clients and strategically place their ads on both
our internal network of Web sites and an external network of Web sites with
which we partner on individual marketing campaigns. Since our acquisition of the
list marketing business of Novus List Marketing in May 2001 until the sale of
our MaxDirect division in February 2003, our business consisted of two
divisions:
1. MaxOnline - which primarily consists of online website and e-mail
advertising; and
2. MaxDirect - which primarily consisted of offline direct marketing list
management, list mailing fulfillment and database management. We sold our
MaxDirect division to American List Counsel in February 2003 and therefore no
longer provide these services.
Our 2002 fiscal year presented a number of opportunities and challenges that led
to several significant events for our company. We began 2002 by entering into an
agreement to sell substantially all of our assets to eUniverse. We also
anticipated making a special distribution of a significant portion of our cash
to our shareholders in connection with the eUniverse transaction. However, in
January 2002 we were notified that the Commission had initiated an inquiry into
the manner in which we recorded certain transactions in 2000 and 2001. In light
of this inquiry, in March 2002 we and eUniverse agreed to terminate the proposed
sale and, as a result, we elected not to make the special distribution to our
shareholders. In response to the Commission's inquiry, we, including our Audit
Committee, immediately launched an internal investigation and hired forensic
accountants to review certain of our prior transactions. In May 2002, we
concluded our investigation and restated certain of our previously reported
financial results.
In March 2002 certain of our stockholders filed a number of securities class
action complaints against us and certain of our former officers and directors.
We also had derivative actions filed, purportedly brought on our behalf. We have
been defending these actions vigorously and we have had to devote a considerable
resources to defending these actions. We have reached an agreement in principle,
subject to certain conditions, including court approval, to settle the
derivative actions for $775,000 in attorneys' fees and the adoption of certain
corporate therapeutic actions. As referenced above in the "Legal Proceedings"
section, we have also reached an agreement in principle to settle the class
action complaint for $5.0 million. The final settlement is subject to certain
terms and conditions, including court approval. The majority of these settlement
amounts will be paid for by the Company's insurers.
Fiscal year 2002 also saw a significant change in our management team. In March
2002, Mitchell Cannold, a seasoned executive in the media industry, replaced
John Bohan as our President and Chief Executive Officer. In July 2002 William H.
Mitchell became our Chief Financial Officer following the resignation of Thomas
Sebastian in March 2002.
Under our new management team, in July 2002 we acquired the North America media
assets of a significant competitor, DoubleClick Media. In connection with this
acquisition, we changed our name to MaxWorldwide and reorganized into a holding
company structure.
Fiscal year 2002 also saw a change in our independent accountants from Arthur
Andersen to PricewaterhouseCoopers LLP. Following this change in July 2002, we
determined in August 2002 that it would be necessary to further restate certain
of our prior reported operating results. As a result, we were unable to file our
quarterly reports for the quarters ending June 30, 2002 and September 30, 2002.
This led to the de-listing of our common stock from The Nasdaq National Market
in August 2002. Our stock now trades on the Pink Sheets.
22
During the last quarter of 2002 we commenced the re-audit of our financial
statements for 2001 and 2000 with PricewaterhouseCoopers LLP. During the process
of our re-audit we determined that we would need to restate our historical
financial statements for issues primarily associated with the following:
activity formerly recorded as Research and Development, the webMillion and Novus
List Marketing acquisition accounting, the adMonitor transaction, our investment
in Zondigo, impairments of facility leases and fixed assets, revenue recognition
and bad debt expense. See Note 3 to the Company's Consolidated Financial
Statements for a description of the restatem