-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FWjOOomhZ+FImoNkwSLSWlerVEsfJLX5cfKS8IfhGD04QLdtEvefZ1R5VoRfhHwh lr3YBW7tu6V6f4nbPUqAOg== 0000950123-02-005341.txt : 20020515 0000950123-02-005341.hdr.sgml : 20020515 20020515165147 ACCESSION NUMBER: 0000950123-02-005341 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROSS MEDIA MARKETING CORP CENTRAL INDEX KEY: 0001069201 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 134042921 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16023 FILM NUMBER: 02653320 BUSINESS ADDRESS: STREET 1: 461 FIFTH AVENUE 19TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022- BUSINESS PHONE: 2127549901 MAIL ADDRESS: STREET 1: 461 FIFTH AVENUE 19TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: SYMPOSIUM CORP DATE OF NAME CHANGE: 19991129 FORMER COMPANY: FORMER CONFORMED NAME: SYMPOSIUM TELECOM CORP DATE OF NAME CHANGE: 19990211 10-Q 1 y60744e10-q.txt CROSS MEDIA MARKETING CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 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 NO. 0-25435 CROSS MEDIA MARKETING CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-4042921 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 461 FIFTH AVENUE, 19TH FLOOR, NEW YORK, NY 10017 (Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 457-1200 Indicate by check [X] 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 As of May 15, 2002, there were 14,563,158 shares of the registrant's Common Stock, par value $.001, outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS MEDIA MARKETING CORPORATION FORM 10-Q MARCH 31, 2002 C O N T E N T S PART I. FINANCIAL INFORMATION
PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001................................ F-1 Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and March 31, 2001 (unaudited).............. F-2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and March 31, 2001 (unaudited).............. F-3 Notes to Condensed Consolidated Financial Statements (unaudited).... F-4 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 1 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 14 Item 2. Change in Securities........................................ 14 Item 3. Defaults Upon Securities.................................... 15 Item 4. Submission of Matters to Vote of Stockholders............... 15 Item 5. Other Information........................................... 15 Item 6. Reports on Form 8-K......................................... 15 SIGNATURE
i CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) (IN THOUSANDS) ASSETS: Current assets Cash and cash equivalents................................. $ 9,288 $ 12,490 Accounts receivable, net of reserves...................... 62,144 46,058 Other receivables......................................... 5,425 6,664 Inventory................................................. 3,841 -- Prepaid expenses and other................................ 3,442 1,829 Deferred expenses......................................... 4,472 2,239 -------- -------- Total current assets.............................. 88,612 69,280 Property and equipment, net............................... 6,460 4,425 Deferred taxes............................................ 1,546 2,800 Goodwill.................................................. 31,352 12,137 Intangibles, net.......................................... 2,945 5,733 Other assets.............................................. 1,893 856 -------- -------- $132,808 $ 95,231 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities Revolving credit facility................................. $ 26,036 $ 17,329 Accounts payable and accrued expenses..................... 15,802 6,916 Amounts due to publishers................................. 3,925 3,768 Deferred revenue.......................................... 534 3,191 Notes payable............................................. 1,869 -- -------- -------- Total current liabilities......................... 48,166 31,204 Long term liabilities Amounts due to publishers................................. 4,753 4,984 Capital lease obligations................................. 767 869 Notes payable............................................. 3,444 -- Minority interest........................................... 354 -- STOCKHOLDERS' EQUITY: Common stock, par value $.001 per share; authorized 40,000 shares; 14,490 issued and 14,392 outstanding at March 31, 2002 and 12,712 issued and 12,614 outstanding at December 31, 2001...................................... 14 13 Additional paid in capital................................ 122,237 106,183 Note receivable -- common stock........................... (698) (698) Treasury stock, 98 shares................................. (857) (857) Deferred compensation..................................... (53) (53) Accumulated deficit....................................... (45,319) (46,414) -------- -------- Total stockholders' equity........................ 75,324 58,174 -------- -------- $132,808 $ 95,231 ======== ========
The accompanying notes are an integral part of these statements. F-1 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, --------------------- 2002 2001 --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues, net............................................... $44,001 $19,678 Direct costs and expenses Commission expense........................................ 11,541 9,581 Other direct costs........................................ 21,835 5,204 ------- ------- 33,376 14,785 Gross profit........................................... 10,625 4,893 General and administrative expenses......................... 7,819 3,282 ------- ------- Income from operations...................................... 2,806 1,611 Other income(expense) Interest expense.......................................... (516) (458) Minority interest......................................... (332) -- Equity in income of affiliates............................ 140 -- ------- ------- Income before income taxes.................................. 2,098 1,153 Provision for income taxes.................................. 525 232 ------- ------- Net income before extraordinary item........................ 1,573 921 Extraordinary loss.......................................... 478 -- ------- ------- Net income.................................................. 1,095 921 Preferred dividends......................................... -- 1,131 ------- ------- Net income (loss) applicable to common stockholders......... $ 1,095 $ (210) ======= ======= Income (loss) per share applicable to common stockholders: Income (loss) per share before extraordinary item: Basic..................................................... $ 0.12 $ (0.03) ======= ======= Diluted................................................... $ 0.11 $ (0.03) ======= ======= Extraordinary loss per share: Basic..................................................... $ (0.04) $ -- ======= ======= Diluted................................................... $ (0.03) $ -- ======= ======= Income (loss) per share applicable to common stockholders: Basic..................................................... $ 0.08 $ (0.03) ======= ======= Diluted................................................... $ 0.08 $ (0.03) ======= ======= Weighted -- average shares of common stock: Basic..................................................... 13,258 6,558 ======= ======= Diluted................................................... 14,575 6,558 ======= =======
The accompanying notes are an integral part of these statements. F-2 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net Income................................................ $ 1,095 $ 921 Adjustments to reconcile results of operations to net cash effect of operating activities: Depreciation and amortization.......................... 457 317 Extraordinary Item -- non cash......................... 278 -- Net change in asset and liability accounts, net of businesses acquired Accounts receivable.................................... (11,753) (1,794) Inventories and other current assets................... 16 165 Other assets........................................... 1,114 215 Accounts payable and other current liabilities......... (3,232) 259 -------- -------- Net cash (used in) provided by operating activities....................................... (12,025) 83 Cash flows from investing activities: Net cash paid for NSI acquisition...................... (9,512) -- Additional cash paid for prior acquisitions............ (161) -- Purchase of equipment.................................. (1,962) (285) Investment in joint venture............................ 90 -- -------- -------- Net cash used in investing activities............. (11,545) (285) Cash flows from financing activities: Net proceeds from common stock offering................ 10,957 1,423 Net proceeds from exercise of options/warrants......... 1,496 -- Redemption of preferred stock.......................... -- (2,100) Net funds drawn on revolver for DSI acquisition........ -- 20,800 Net repayments of Coast credit agreement............... (17,952) (20,255) Preferred dividends paid............................... -- (168) Payment of NSI notes................................... (296) -- Net proceeds from revolving credit facility............ 28,158 -- Payment of bridge loan................................. (2,000) -- Proceeds from bridge loan.............................. 2,000 -- Payment of NSI notes................................... (1,500) -- Termination fee in connection with retirement of Coast credit facility....................................... (200) -- Deferred financing fees................................ (295) -- -------- -------- Net cash provided by (used in) financing activities....................................... 20,368 (300) -------- -------- Net decrease in cash and cash equivalents................... (3,202) (502) Cash and cash equivalents at beginning of period.......... 12,490 2,327 -------- -------- Cash and cash equivalents at end of period................ $ 9,288 $ 1,825 ======== ======== Supplemental disclosure of cash flow information: Interest paid during the period........................... $ 516 $ 458 ======== ======== Income taxes paid during the period....................... $ 470 $ -- ======== ========
The accompanying notes are an integral part of this statement. F-3 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) NOTE A -- NATURE OF BUSINESS Cross Media is a technology-driven direct marketing company that specializes in executing targeted, interactive sales campaigns utilizing multiple direct marketing channels, including direct mail, inbound and outbound telesales, print ads, web marketing and e-mail. The Company sells a variety of products through these multiple channels, including multi-magazine subscription packages, discount buying club memberships, collectibles, lifestyle products and telecom services. Cross Media utilizes its proprietary database management and profiling technology to augment and perpetually update its permission-based database of over 30 million consumers. Cross Media emphasizes its cross-channel marketing strategy, which is an effective integration of online and offline marketing techniques. By utilizing all available channels to make contact with the consumer, Cross Media seeks to maximize the synergies of cross-channel marketing. Cross Media frequently initiates contact with a consumer through one channel and consummates a transaction through another channel. For example, e-mails or direct mail often attract the interest of a consumer, who then responds by calling an 800 number. NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Condensed Consolidated Financial Statements: In the opinion of Cross Media, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of Cross Media as of March 31, 2002 and December 31, 2001, the results of operations for the three months ended March 31, 2002 and 2001, and cash flows for the three months ended March 31, 2002 and 2001. The condensed consolidated financial statements include the accounts of Cross Media and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. These financial statements are presented in accordance with the requirements of Form 10-Q and consequently may not include all disclosures normally required by generally accepted accounting principles or those normally made in the Company's Annual Report on Form 10-KSB. The accompanying condensed consolidated financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. Principles of Consolidation: The consolidated financial statements include the accounts of Cross Media and its wholly-owned subsidiaries and majority owned joint ventures. Segment Reporting: Cross Media is in the direct marketing business, which it considers its sole business segment. Magazine Revenue: Revenues derived from originating magazine subscriptions are recognized by Cross Media when Cross Media receives the first installment payment for subscriptions purchased. Revenues also include commissions earned from publishers in connection with originating paid subscriptions for certain publications. Commissions are also earned from outside parties for securing memberships in a discount-buying club and sales of long-distance telephone services. Commissions are recognized when the related subscriptions or memberships are obtained. Magazine revenues are reflected net of cancellation and collection reserves as well amounts due to publishers. Such cancellation and collection reserves are based upon Cross Media's historical cancellation and collection experience. In the first quarter ended March 31, 2002, two independent call centers accounted for approximately 32% of Cross Media's magazine subscription revenues. These call centers do not have any commitment to generate sales for Cross Media and could therefore, at any time, terminate their relationships with Cross Media without notice, which could have a material adverse effect on Cross Media's business. Cross Media continually evaluates actual collection and cancellation experience as it F-4 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) relates to magazines sales and adjusts collection and cancellation reserves based on actual experience. Based upon this evaluation, for the three months ended March 31, 2002, Cross Media adjusted net revenues by approximately $0.9 million. Upfront Revenue: Upfront sales relating to National Syndications Inc. and Preferred Consumer Marketing (collectively referred to as "NSI") operations are one time purchases made by customers. Upfront sales are usually generated by inbound calling in response to advertising space in Parade Magazine and USA Weekly and involve the one time sale of products such as coins, collectibles and other products. Sales are recognized when the product is shipped. If cash is received before the product is shipped, the sale is deferred until inventory has been released. Continuity Revenue: Continuity sales are recognized when the product is shipped. Cash and Cash Equivalents: Cross Media considers all highly liquid investments with maturities of three months or less to be cash equivalents. As of March 31, 2002, Cross Media had approximately $9.3 million in cash on hand to be used to in its operations. Property and Equipment: Property and equipment are recorded at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Goodwill Amortization: Goodwill represents the excess of the purchase price over the fair market value of net assets acquired in business combinations. The carrying value of goodwill is analyzed by Cross Media, based upon the expected revenue and profitability levels of the acquired enterprise, to determine whether the value and future benefit may indicate a decline in value. If Cross Media determines that there has been a decline in value of the acquired enterprise, Cross Media writes down the value of the goodwill to the revised fair value. In June 2001, Cross Media adopted Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and beginning January 1, 2002 Cross Media adopted SFAS No. 142, "Goodwill and Other Intangible Assets". (See Note F for more information). At each balance sheet date, Cross Media evaluates the realizability of goodwill based on expectations of discounted cash flows. If the sum of the discounted cash flows is less than the carrying amount of all assets, including intangible assets, Cross Media recognizes an impairment loss. Cross Media believes no material impairment to goodwill exists at March 31, 2002. Joint Ventures: Joint ventures are accounted under the equity method of accounting and relate to joint ventures entered into by NSI with third parties prior to the closing of the acquisition. Income Taxes: As part of the process of preparing Cross Media's consolidated financial statements, Cross Media is required to estimate its income taxes in each of the jurisdictions in which Cross Media operates. This process involves Cross Media estimating its actual current tax exposure together with assessing temporary differences resulting from different treatment of items. These differences result in deferred tax assets and liabilities, which are included within Cross Media's consolidated balance sheet. Cross Media must then look at the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent Cross Media believes that recovery is not likely, Cross Media must establish a valuation allowance. Deferred Financing Costs: Deferred financing costs are costs incurred in connection with obtaining outside financing and are amortized on a straight-line basis over the term of the related credit facility, which is two years. Accounting for Stock-Based Compensation: Cross Media has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25). Under APB No. 25, when the exercise price of an employee stock option granted by Cross Media is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-5 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net Income (Loss) Per Share Applicable to Common Stockholders: Net income (loss) per share applicable to common stockholders is presented under Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period plus potentially dilutive securities. The following table sets forth the computation of basic and diluted earnings per share:
FOR THE THREE MONTHS ENDED --------------------- MARCH 31, MARCH 31, 2002 2001 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income before extraordinary item and preferred dividends.............................................. $1,573 $ 921 Extraordinary loss........................................ 478 -- ------ ------ Net income................................................ 1,095 921 Preferred stock dividends................................. -- 1,131 ------ ------ Net income (loss) applicable to common stockholders....... $1,095 $ (210) ====== ====== Denominator: Basic -- weighted average shares.......................... 13,258 6,558 Stock options.......................................... 627 -- Warrants............................................... 690 -- ------ ------ Diluted weighted average shares........................... 14,575 6,558 ====== ====== Income (loss) per share before extraordinary item: -- basic.................................................. $ 0.12 $(0.03) ====== ====== -- diluted................................................ $ 0.11 $(0.03) ====== ====== Extraordinary loss per share: -- basic.................................................. $(0.04) -- ====== ====== -- diluted................................................ $(0.03) -- ====== ====== Income (loss) per share applicable to common stockholders: -- basic.................................................. $ 0.08 $(0.03) ====== ====== -- diluted................................................ $ 0.08 $(0.03) ====== ======
Stock options which were not included in the calculation, were the equivalent of 3.5 million shares as of March 31, 2002 and 3.4 million shares as of March 31, 2001 because they were antidilutive. In addition, the effect of the convertible preferred stock was also antidilutive in 2001. Commission Expense: Commission expense is recognized when Cross Media receives the first installment payment for subscriptions purchased. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist of purchased items ready for resale. F-6 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advertising and promotion costs: Costs related to advertising and promotion are amortized ratably over the estimated lifetime revenue stream generating from the advertising effort. Reclassification: Certain amounts in the March 31, 2001 financial statements have been reclassified to conform to the March 31, 2002 classifications. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to estimates of pay to maturity of accounts receivable used in recording net revenue, collectibility of accounts receivable, the realizability of goodwill and other intangible assets, amounts due to publishers and due from partners, accruals, income taxes and other factors. Management has exercised reasonable judgment in deriving these estimates, however, actual results could differ from these estimates. Consequently, change in conditions could affect Cross Media's estimates. Fair Value of Financial Instruments: The recorded values of cash, accounts receivable, and accrued liabilities reflected in the financial statements approximates their fair value due to the short-term nature of the instruments. Borrowings under the line of credit approximate fair value as such line is subject to a variable interest rate that reflects adjustments in the market rates of interest. The recorded value of the stock note receivable approximates fair value. Concentration of Credit Risk: Cross Media's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cross Media places its cash and cash equivalents with high quality credit institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Cross Media has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks. Financial instruments which potentially subject Cross Media to concentrations of credit risk consist principally of trade accounts receivable as Cross Media does not require collateral or other securities to support customer receivables. Cross Media sells primarily to individuals throughout the United States. However, credit risk concentration is mitigated, due to the significant number of customers with relatively small balances and the geographical dispersion of Cross Media's customer base. Leases: Leases, which meet certain criteria, are capitalized as capital leases. In such leases, assets and obligations are recorded initially at the fair market value of the leased assets. The capitalized leases are amortized using the straight-line method over the assets' estimated economic lives. Interest expense relating to the liabilities is recorded to effect a constant rate of interest over the term of the obligations. Leases not meeting capitalization criteria are classified as operating leases and related rentals are charged to expense as incurred. NOTE C -- ACQUISITIONS Acquisitions are accounted for as a purchase and, accordingly, have been included in Cross Media's consolidated results of operations since the acquisition date. The purchase price is allocated based on the estimate fair value of the assets acquired and the liabilities assumed. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisition is obtained. LIFEMINDERS ACQUISITION On October 24, 2001, Cross Media acquired the stock of LifeMinders, Inc., ("LFMN") an online direct marketer, through the merger of LifeMinders with and into Cross Media. The total purchase price of the F-7 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) merger was approximately $62 million. Cross Media received in aggregate approximately $18 million in cash after payments to existing LifeMinders shareholders of $24 million, $3.5 million for the redemption and inducement to convert Series A preferred stock and $4 million in transaction costs. In addition, Cross Media issued an aggregate of approximately 4.54 million shares of common stock to the former LifeMinders shareholders. Cross Media recorded goodwill of $5.0 million as a result of total consideration over the net assets acquired on the date of the merger. During the first quarter 2002, Cross Media finalized its valuation of intangibles acquired from the acquisition of LFMN and subsequently reduced the value recorded at December 31, 2001 from $6.0 million to $3.3 million based on an outside third party evaluation. This resulted in a decrease in intangibles and net deferred tax assets and an increase in goodwill. In connection with the merger, Cross Media assumed options to purchase 2,687,667 shares of LifeMinders common stock. The number of shares issuable on exercise of these options was adjusted by the per share exchange ratio of .2596 and the exercise price of these options was divided by the per share exchange ratio of .2596. As a result, these options are exercisable to purchase an aggregate of 697,825 shares of Cross Media common stock. This resulted in a $1.9 million increase to the total purchase of the acquisition of LifeMinders. Simultaneously with the closing of the merger with LifeMinders, Cross Media redeemed 25,312.5 Series A Shares for cash payment of $2,531,250 or ($100 per share) and converted the remaining 25,312.5 Series A Shares into 342,060 shares of Cross Media common stock at a conversion price of $7.40 per share. In addition, Cross Media made cash payment of $968,750 to the holders of Series A Shares and issued warrants to purchase 50,000 shares of common stock at an exercise price of $9.9225 per share. NSI On January 11, 2002, Cross Media acquired all of the capital stock of NSI. Cross Media recorded the cost of the NSI acquisition of approximately $19.8 million, as follows: (i) $9 million in cash, (ii) $3.1 million in negotiable promissory notes, (iii) $2.5 million in non-negotiable promissory notes, (iv) $3.2 million through the issuance of 279,859 shares of common stock, (v) a $1 million liability for the estimated current portion of the contingent consideration (described below) and (vi) approximately $1 million in transaction costs. Cross Media may pay up to approximately $3.1 million in contingent consideration based on three times the Joint Ventures' 2001 EBITDA and the aggregate Joint Ventures' income from January 1, 2001 through December 31, 2004. The contingent consideration will be accounted for as additional purchase price. The remaining balance of the $2.1 million contingent consideration has not been recorded on the balance sheet as of March 31, 2002, as the outcome of the contingency is not determinable beyond a reasonable doubt. Goodwill recorded as a result of the transaction was $14.9 million as of March 31, 2002. The operating results from NSI have been included in the consolidated results of operations since the date of the acquisition. The promissory notes bear interest at the rate of 7% per annum, are payable in 36 consecutive monthly installments on the last business day of each month, payments commenced on January 31, 2002, and are secured by the assets of NSI. Upon the closing, Cross Media obtained a letter of credit in the amount of $1 million from Fleet National Bank under the NSI existing credit agreement. On March 19, 2002, Cross Media obtained a letter of credit in the amount of $5.6 million, representing the full amount of the notes, under its credit facility (See Note D). As of March 31, 2002, $5.3 million was outstanding as a result of monthly payments made under the note agreement. F-8 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
(IN THOUSANDS) -------------- Accounts receivable......................................... $ 4,332 Inventory................................................... 3,701 Other current assets........................................ 1,928 Deferred costs.............................................. 3,372 Fixed assets................................................ 1,102 Other assets................................................ 1,551 ------- Total assets acquired............................. $15,986 Current liabilities......................................... 11,130 ------- Net assets acquired............................... $ 4,856 =======
F-9 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following pro forma information illustrates the estimated effects of the acquisitions of LifeMinders and NSI as if such transactions were consummated on January 1, 2001:
FOR THE THREE MONTHS ENDED --------------------- MARCH 31, MARCH 31, 2002 2001 --------- --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues, net............................................. As Reported $44,001 $ 19,678 Pro forma 44,001 30,698 Net income (loss) before extraordinary item............... As Reported $ 1,573 $ 921 Pro forma 1,373 (16,650) Extraordinary loss........................................ As Reported $ 478 $ -- Pro forma 478 -- Income (loss) applicable to common stockholders........... As Reported $ 1,095 $ (210) Pro forma 895 (17,781) Income (loss) per share before extraordinary item: -- basic............................................. As Reported $ 0.12 $ (0.03) Pro forma 0.11 (1.51) -- diluted........................................... As Reported $ 0.11 $ (0.03) Pro forma 0.09 (1.51) Extraordinary loss: -- basic............................................. As Reported $ (0.04) $ -- Pro forma (0.04) -- -- diluted........................................... As Reported $ (0.03) $ -- Pro forma (0.03) -- Income (loss) per share applicable to common stockholders: -- basic............................................. As Reported $ 0.08 $ (0.03) Pro forma 0.07 (1.51) -- diluted........................................... As Reported $ 0.08 $ (0.03) Pro forma 0.06 (1.51)
NOTE D -- REVOLVING CREDIT FACILITIES LANCER CREDIT FACILITY On March 1, 2002, Cross Media obtained a $2 million revolving credit facility from Lancer Offshore, Inc., a principal stockholder of Cross Media. The interest rate on borrowings under the revolving credit facility was 8% per annum and Lancer had the right to demand repayment of all borrowings at any time after March 31, 2002. Cross Media issued to Lancer two-year warrants to purchase 50,000 shares of common stock at an exercise price of $10.00 per share as an inducement for Lancer to provide Cross Media the revolving credit facility. On March 19, 2002, Cross Media repaid the $2 million of outstanding borrowings under the Lancer revolving credit facility plus accrued interest from the proceeds from the Fleet credit facility, and the Lancer revolving credit facility was terminated. F-10 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FLEET CREDIT FACILITY On March 19, 2002, Cross Media entered into a credit agreement with Fleet National Bank, as agent for the lenders and as issuing lender, to provide Cross Media a $35 million credit facility, subject to certain availability limitations. Cross Media may borrow funds under the credit facility as revolving prime rate or LIBOR rate loans and/or obtain letters of credit. Interest on the credit facility accrues at the prime rate designated from time to time by the agent, Fleet, plus an applicable margin, for prime rate loans, or at the LIBOR rate plus an applicable margin for LIBOR loans. The applicable margin is subject to adjustment based on Cross Media's leverage ratio. Cross Media also pays a commitment fee during the term of the facility based on the unused borrowings under the facility, and a letter of credit fee based on the applicable margin for the LIBOR rate loans during the time that letters of credit remain outstanding. All of Cross Media's subsidiaries are joint and several co-borrowers under the Fleet credit facility. Cross Media has pledged all of its assets and all of the assets and capital stock of its subsidiaries to secure its obligations under the facility. The Fleet credit facility imposes certain limitations on Cross Media's activities, including restrictions on acquisitions, incurring additional indebtedness, granting liens and declaring and paying dividends. Cross Media is also required to maintain minimum EBITDA levels and minimum leverage, consolidated net worth and fixed charge coverage ratios. Upon entering into the new credit agreement with Fleet, Cross Media terminated its credit agreement with Coast Business Credit ("Coast"). Cross Media repaid the remaining borrowings under the Coast Facility of approximately $18 million as well as an early termination fee of $0.2 million. As a result of the early termination of the Coast facility, Cross Media recorded an extraordinary charge of approximately $0.5 million. As of March 31, 2002, Cross Media had $26 million outstanding under the Fleet credit facility. NOTE E -- INCOME TAXES As of March 31, 2002, Cross Media has federal and state net operating loss carryforwards of approximately $95 million that will be available to offset future taxable income, if any, through December 2021. This consists primarily of net operating losses acquired in connection with the acquisition of LifeMinders, Inc. The utilization of net operating losses is subject to a substantial limitation due to the change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating losses before their utilization. A valuation allowance has been established to reserve for the remaining deferred tax assets arising from substantially all of the net operating losses and other temporary differences due to the uncertainty that their benefit will be realized in the future. NOTE F -- EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. As a result of the adoption of SFAS 142, Cross Media did not recognize goodwill amortization for the three months ended March 31, 2002. If SFAS No. 142 was in effect during the first quarter of 2001, Cross Media would not have recognized $0.2 million in goodwill amortization, therefore net income applicable to common stockholders would have increased to approximately $17,000 and earnings per share applicable to common stockholder would have increased by $0.03. In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement provides that companies should recognize the asset retirement F-11 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cost at its fair value as part of the cost of the asset and classify the accrued amount as a liability. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cross Media has not yet determined the effect that SFAS No. 143 will have on its consolidated financial position, results of operations or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." This statement is effective for fiscal years beginning after December 15, 2001. This supercedes SFAS 121, while retaining many of the requirements of such statement. Cross Media has determined that the impact of this statement is not material as of March 31, 2002. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income tax effect. This statement also amends SFAS 13 to require that certain lease modifications with economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification of gains and losses in all prior periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in Accounting Principles Board Opinion ("APB") 30. The statement is effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. The Company will adopt SFAS No. 145 effective January 1, 2003. Cross Media will reclassify the extraordinary loss of $0.5 million recorded as of March 31, 2002 into income from operations in the first quarter of 2003. NOTE G -- COMMITMENTS AND CONTINGENCIES Cross Media provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has incurred and the amount of such liability can be reasonably estimated. In March 2002, a complaint was filed in the United States District Court for the District of Kansas by J.M. Thies, John Minnick and William Sharp against LifeMinders, Inc. (which Cross Media acquired on October 24, 2001), Douglas Lindgren and Jonathan Bulkeley, directors of Cross Media and former officers and directors of LifeMinders, requesting monetary damages in an amount not less than $4.2 million and punitive damages in an amount not less than $5 million against the defendants. In accordance with the terms of Cross Media's merger agreement with LifeMinders, Cross Media is obligated to indemnify the other defendants. The plaintiffs, former stockholders of eCoupons.com, Inc., a company that merged with and into LifeMinders in December 2000, allege that the defendants made misrepresentations to the plaintiffs to induce them to merge eCoupons with and into LifeMinders. Cross Media was aware of the dispute prior to closing the Lifeminders acquisition and believes that it has adequate insurance to cover any award of monetary damages in the lawsuit. Cross Media is vigorously defending these claims. In April 2002, the United States Justice Department, on behalf of the Federal Trade Commission ("FTC"), filed a complaint in the United States District Court for the Northern District of Georgia against Cross Media, Media Outsourcing, Inc. ("MOS"), Ronald Altbach, Dennis Gougion, an officer of Media Outsourcing, and Richard Prochnow, a consultant to MOS. The complaint alleged violations of the Federal Telemarketing Sales Rule and the Federal Trade Commission Act and non-compliance with a previous FTC order entered into by Prochnow, individually and doing business as Direct Sales International, Inc., and Gougion, individually. MOS acquired certain assets of Direct Sales International in January 2000. The complaint seeks monetary civil penalties, redress, injunctive, and other relief against any such future violations. Simultaneous with the filing of the complaint, plaintiffs filed a motion for a temporary restraining order against the defendants seeking, among other things, compliance with the Telemarketing Sale Rule, the FTC Act, and the previous FTC order. At the hearing for the temporary restraining motion, the parties agreed to F-12 CROSS MEDIA MARKETING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) postpone the hearing for a later date. Upon mutual agreement of the parties, the rescheduled hearing was postponed for an undetermined date to facilitate settlement discussions. Because this matter is in its early stages, Cross Media is unable to predict the outcome and the potential effect, if any, on its financial statements. NOTE H -- STOCKHOLDERS' EQUITY At March 31, 2002, Cross Media was authorized to issue 40,000,000 shares of common stock, $.001 par value. As of March 31, 2002 there were approximately 14,392,000 shares of common stock outstanding. All prior year share amounts have been properly restated to reflect the 1:5 reverse stock split effected on October 24, 2001. If the holders of all outstanding options and common stock purchase warrants converted them into common stock as of March 31, 2002, Cross Media would have been required to issue approximately 4.8 million additional shares of common stock. During the quarter ended March 31, 2002, Cross Media received proceeds of $1.5 million from the exercise of approximately 393,000 warrants and stock options. In March 2002, Cross Media completed a private placement in which it sold 1,105,475 shares of its common stock at a price of $10.50 per share to a limited number of accredited investors and received gross proceeds of approximately $11.6 million. Stonegate Securities, Inc. served as placement agent, for which it received a placement agent fee equal to 6% of the gross proceeds and five-year warrants to purchase 110,548 shares of Cross Media common stock at an exercise price of $10.50 per share. F-13 FORWARD-LOOKING STATEMENTS The statements contained in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could affect Cross Media's ability to achieve the anticipated financial results. Additionally, certain statements contained herein and in the information posted on the website of Cross Media that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Cross Media intends that forward-looking statements contained herein and on its website be subject to the safe harbor created thereby. Such forward-looking statements are based on current expectations of management but involve certain risks and uncertainties. Cross Media's actual results, performance or achievements could differ materially from the results, performance or achievements projected in, or implied by, such forward-looking statements as a result of risk factors, including, without limitation, the following: Cross Media's ability to integrate the recently acquired National Syndications operations and to make additional strategically appropriate acquisitions; the adequacy of accounts receivable reserves, changes in economic conditions or a material decline in the availability of consumer credit, interest rate fluctuations, Cross Media's limited operating history, competitive factors, the need to manage growth, volatility in the market price of the common stock and the securities markets generally, risks relating to government regulation of telemarketing and Internet marketing activities, Cross Media's ability to exploit its database and technological innovations and potential dilution. These factors are described in detail in this Form 10-Q. PART I -- FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with the Condensed Consolidated Financial Statements of Cross Media Marketing Corporation and the notes to the Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Cross Media for the three-month periods ended March 31, 2002 and 2001. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies". The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Cross Media's significant accounting policies are described in Note B in the Notes to the Condensed Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. REVENUE RECOGNITION During the quarter ended March 31, 2002, Cross Media derived revenues from the sale of magazine subscription contracts. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of Cross Media's revenue for any period if Cross Media's management made different judgments or utilized different estimates. Revenues derived from originating magazine subscriptions for others are recognized by Cross Media when Cross Media receives the first installment for subscriptions purchased. Magazine subscription revenues are recorded net of cancellations, collection reserves, and payments made to publishers for fulfillment costs. Cross Media performs an ongoing review of its cancellation and collection reserve using a static pool analysis pay to maturity of Cross Media's portfolio of consumer receivables. This evaluation is inherently judgmental 1 and requires material estimates based on historical experience of collectibility and economic trends. A one percent change in the estimated cancellation and collection rate at March 31, 2002 could have resulted in a change in the cancellation and collection reserve, and a change in net revenue of $0.2 million. VALUATION OF INTANGIBLE ASSETS Cross Media assesses the impairment of goodwill and identifiable intangibles whenever changes in circumstances, such as recurring losses, indicate that the fair value is less than the stated value reported on the consolidated financial statements. Management has utilized an outside valuation specialist to assist in estimating the value of such intangibles. Cross Media amortizes its finite lived intangibles over a period of three to five years. The evaluation of the estimated useful lives of intangible assets requires management to assess the period over which such intangibles will provide future economic benefit and to the extent the period decreases, the finite lived intangible assets will be expensed over the shorter period. RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001 Revenues, net: During the three months ended March 31, 2002, net revenues were $44 million, a 124% increase from net revenues of $19.7 million for the three months ended March 31, 2001. Net revenues increased as a result of higher sales of magazine contracts, increased revenue from sales of memberships, as well as revenues from the sale of coins, collectibles and other products. For the quarter ended March 31, 2002, net revenues consisted of (1) $27.8 million in sales of magazine contracts, (2) $3.5 million in other revenues consisting of commission revenues from sales of memberships to discount third party buying clubs, publisher fees and other revenues relating to Cross Media's magazine business and (3) $12.7 million in revenues from the sale of coins, collectibles and other products sold through our print and outbound telesales channels. Sales of magazine contracts increased 77% while other revenues relating to the magazine business decreased 12% over the same period in prior year. Cross Media continually evaluates actual collection and cancellations experience activity and adjusts collection and cancellation reserves based on actual experience. Based upon this evaluation, for the three months ended March 31, 2002, Cross Media adjusted net revenues by approximately $0.9 million. Commission Expense: Commission expense increased 20.5% to $11.5 million in the three months ended March 31, 2002 from $9.6 million in the same period of 2001 as a result of higher sales of magazine contracts. Commission expense decreased as a percentage of net magazine revenues from 61% for the three months ended March 31, 2001 compared to 42% for the three months ended March 31, 2002 as a result of the use of Cross Media's company owned and operated call centers which are generating a greater portion of the sale of magazine contracts compared to the same period in the prior year. Other Direct Costs: Other direct costs increased $16.6 million from $5.2 million for the three months ended March 31, 2001 to $21.8 million for the three months ended March 31, 2002. This is a result of a $3.5 million increase relating to the expansion of Cross Media's company owned and operated call centers, a $2.7 million increase in direct recurring payroll, rent and other costs relating to the expansion of Cross Media's operations and a $10.4 million increase relating to cost of sales and promotional advertising costs incurred in connection with the sale of coins, collectibles and other products relating to our print and outbound telesales channels. For the three months ended March 31, 2002 and 2001, other direct costs as a percentage of net revenues associated with Cross Media's magazine business were 36% and 26%, respectively. The increase is related to a greater portion of Cross Media's magazine contracts generated from company owned operations and call centers. General and Administrative Expenses: General and administrative expenses increased $4.5 million to $7.8 million for the quarter ended March 31, 2002 from $3.3 million in the quarter ended March 31, 2001. The increase is attributable to $1.7 million of general and administrative costs relating to acquired operations and an additional $2.8 million relating to the expansion of Cross Media's operations. 2 Other Income (Expense): For the three months ended March 31, 2002, other expense increased approximately $251,000 compared to the same period in the prior year relating to higher interest expense due to a higher average outstanding balance during the current quarter, a reduction for minority interest relating to Cross Media's 50% ownership in J Cross Marketing LLC of approximately $332,000, offset by $140,000 in income from NSI's 49% ownership of several joint ventures. Provision for Income Taxes: Cross Media recorded a provision of $.5 million for income taxes for the three months ended March 31, 2002 reflecting estimated taxes due based on a 25% effective tax rate estimated for fiscal 2002. Extraordinary Loss: Upon entering into the new credit agreement with Fleet, Cross Media terminated its credit agreement with Coast Business Credit ("Coast"). Cross Media repaid the remaining borrowings under the Coast facility of approximately $18 million as well as an early termination fee of $0.2 million. As a result of the early termination of the Coast facility, in the quarter ended March 31, 2002 Cross Media recorded an extraordinary charge of approximately $0.5 million relating to the early termination fee and the write off of the unamortized balance of deferred financing costs relating to the Coast facility. Preferred Dividends: For the three months ended March 31, 2002, Cross Media did not record preferred dividends as a result of the redemption and conversion of all preferred stock in 2001, compared to $1.1 million of preferred dividends recorded in the first quarter of 2001. The $1.1 million of dividends recorded in 2001 included $0.9 million of non-cash deemed dividends and approximately $0.2 million of contractual dividends. On February 15, 2001, Cross Media redeemed 22,992 shares of preferred stock. An additional 39,463 shares of preferred stock were converted into 789,250 shares of common stock. In consideration of the agreement of the holders to convert the preferred stock, Cross Media issued to the holders a total of 133,280 additional shares of common stock, pro rata in accordance with the number of shares each holder converted. The non-cash deemed dividend of $0.9 million represents the fair value of the additional shares issued. Net Income (Loss) Applicable to Common Stockholders: For the three months ended March 31, 2002, Cross Media had net income applicable to common stockholders of approximately $1.1 million, which resulted in diluted earnings per share applicable to common stockholders of $0.08. Net loss applicable to common stockholders for the quarter ended March 31, 2001 was $0.2 million, or $(0.03) per share. The increase is primarily the result of the impact of $1.1 million of preferred dividends recorded for the quarter ended March 31, 2001 and earnings of NSI. LIQUIDITY AND FINANCIAL CONDITION At March 31, 2002, Cross Media had cash on hand of $9.3 million. During the quarter ended March 31, 2002 Cross Media used $12 million in operating activities, used $11.5 million in investing activities, relating to the net cash paid in connection with the NSI acquisition plus purchases of equipment, and generated $20.4 million from financing activities in connection with the private placement of Cross Media common stock and new Fleet credit facility. Cross Media generates cash flow from the sale of magazines and collection of consumer receivables, commissions earned from publishers in connection with originating paid subscriptions for certain publications, and commissions earned on the sale of third-party discount buying club memberships. Cross Media also generates cash flow through the sale of coins, collectibles and other products relating the print and outbound sales channels. At May 15, 2002, Cross Media had cash on hand of approximately $0.3 million. This reduction in available cash is primarily due to the use of approximately $10 million of cash proceeds from the March 2002 private placement described below to reduce outstanding borrowings under the Fleet credit facility. In the event that cash on hand, together with available borrowings under the Fleet credit facility ($9.7 million as of May 15, 2002) are not sufficient to fund operations, Cross Media will need to obtain additional debt or equity financing. 3 NSI ACQUISITION On January 11, 2002, Cross Media acquired all of the capital stock of National Syndications, Inc. and all of the capital stock of Preferred Consumer Marketing, Inc. (which are collectively referred to as "NSI"). Cross Media recorded the cost of the NSI acquisition of approximately $19.8 million, as follows: (i) $9.0 million in cash, (ii) $3.1 million in negotiable promissory notes, (iii) $2.5 million in non-negotiable promissory notes, (iv) $3.2 million through the issuance of 279,859 shares of common stock, (v) a $1 million liability for the current portion of the contingent consideration (described below) and (vi) 1 million in transaction costs. Cross Media may pay up to approximately $3.1 million in contingent consideration based on three times the Joint Ventures' 2001 EBITDA and the aggregate Joint Ventures' income from January 1, 2001 through December 31, 2004. The contingent consideration will be accounted for as additional purchase price. The remaining balance of $2.1 million of the contingent consideration has not been recorded on the balance sheet as of March 31, 2002, as the outcome of the contingency is not determinable beyond a reasonable doubt. Goodwill recorded as a result of the transaction was $14.9 million as of March 31, 2002. The promissory notes bear interest at the rate of 7% per annum, are payable in 36 consecutive monthly installments on the last business day of each month, payments commenced on January 31, 2002, and are secured by the assets of NSI. Upon the closing, Cross Media obtained a letter of credit in the amount of $1 million from Fleet National Bank under the NSI existing credit agreement. On March 19, 2002, Cross Media obtained a letter of credit in the amount of $5.6 million, representing the full amount of the notes, under its credit facility. As of March 31, 2002 $5.3 million of the line of credit was outstanding due to repayments made in the first quarter. CREDIT FACILITIES On March 1, 2002, Cross Media obtained a $2 million revolving credit facility from Lancer, a principal stockholder of Cross Media. The interest rate on borrowings under the revolving credit facility was 8% per annum and Lancer had the right to demand repayment of all borrowings at any time after March 31, 2002. Cross Media issued to Lancer two-year warrants to purchase 50,000 shares of common stock at an exercise price of $10.00 per share as an inducement for Lancer to provide Cross Media the revolving credit facility. On March 19, 2002, all outstanding amounts owed under the Lancer facility were paid off upon entering into the Fleet credit facility, and subsequently the Lancer facility was terminated. On March 19, 2002, Cross Media entered into a credit agreement with Fleet National Bank, as agent for the lender banks and as issuing lender, to provide Cross Media a $35 million credit facility, subject to certain availability limitations. Cross Media may borrow funds under the credit facility as revolving prime rate or LIBOR rate loans and/or obtain letters of credit. Interest on the credit facility accrues at the prime rate designated from time to time by the agent, Fleet, plus an applicable margin, for prime rate loans, or at the LIBOR rate plus an applicable margin for LIBOR loans. The applicable margin is subject to adjustment based on Cross Media's leverage ratio. Cross Media also pays a commitment fee during the term of the facility based on the unused borrowings under the facility, and a letter of credit fee based on the applicable margin for the LIBOR rate loans during the time that letters of credit remain outstanding. Cross Media's active subsidiaries are joint and several co-borrowers under the Fleet credit facility. Cross Media has pledged all of its assets and all of the assets and capital stock of its subsidiaries to secure its obligations under the facility. The Fleet credit facility imposes certain limitations on Cross Media's activities, including restrictions on acquisitions, incurring additional indebtedness, granting liens and declaring and paying dividends. Cross Media is also required to maintain minimum EBITDA levels and minimum leverage, consolidated net worth and fixed charge coverage ratios. As of the execution of the agreement, the interest rate on the outstanding loans was 4.75%, the commitment fee was .375% and the letter of credit fee was 2.5%. As of March 31, 2002, Cross Media had outstanding debt of $26 million under the Fleet credit facility and $5.6 million in letters of credit. 4 Upon entering into the new credit agreement with Fleet, Cross Media terminated its credit agreement with Coast. Cross Media repaid the remaining borrowings under the Coast Facility of approximately $18 million as well as an early termination fee of $0.2 million. As a result of the early termination of the Coast facility, Cross Media recorded an extraordinary charge of approximately $0.5 million. PRIVATE PLACEMENT In March 2002, Cross Media completed a private placement in which it sold 1,105,475 shares of its common stock at a price of $10.50 per share to a limited number of accredited investors and received gross proceeds of approximately $11.6 million. Stonegate Securities, Inc. served as placement agent, for which it received a placement agent fee equal to 6% of the gross proceeds and five-year warrants to purchase 110,548 shares of Cross Media common stock at an exercise price of $10.50 per share. The proceeds were used to reduce borrowings under the Fleet credit facility subsequent to March 31, 2002. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. As a result of the adoption of SFAS 142, Cross Media did not recognize goodwill amortization for the three months ended March 31, 2002. If SFAS No. 142 was in effect during the first quarter of 2001, Cross Media would not have recognized $0.2 million in goodwill amortization, therefore net income applicable to common stockholders would increase to approximately $16,000 and earnings per share applicable to common stockholder would have increased by $0.03. In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement provides that companies should recognize the asset retirement cost at its fair value as part of the cost of the asset and classify the accrued amount as a liability. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cross Media has not yet determined the effect of SFAS No. 143 will have on its consolidated financial position, results of operations or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." This statement is effective for fiscal years beginning after December 15, 2001. This supercedes SFAS 121, while retaining many of the requirements of such statement. Cross Media has determined that this impact of this statement is not material as of March 31, 2002. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement eliminates the requirement under SFAS 4 to aggregate and classify all gains and losses from extinguishment of debt as an extraordinary item, net of related income tax effect. This statement also amends SFAS No. 13 to require that certain lease modifications with economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification of gains and losses in all prior periods presented in comparative financial statements related to debt extinguishment that do not meet the criteria for extraordinary item in Accounting Principles Board Opinion ("APB") 30. The statement is effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. The Company will adopt SFAS No. 145 effective January 1, 2003. Cross Media will reclassify the extraordinary loss of $0.5 million recorded as of March 31, 2002 into income from operations in the first quarter of 2003. 5 RISK FACTORS CROSS MEDIA HAS A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE ITS PROSPECTS. Cross Media developed its business strategy in 1999, completed its first acquisition in January 2000, and opened its first company-owned and operated call center and undertook its first email campaign in the last quarter of 2000. Therefore, Cross Media has a limited history of operations under its current business strategy upon which the likelihood of its success can be evaluated. Moreover, prior to the merger, LifeMinders had only a limited operating history. The implementation of a new business strategy frequently involves risks, expenses and uncertainties that may adversely affect Cross Media's business, results of operations, financial condition and prospects, including: - the ability to compete effectively against other companies; - the need to retain and motivate qualified personnel; - the ability to anticipate and adapt to the changing market; - the ability to develop and introduce new products and services and continue to develop and upgrade technology; and - the need to attract and retain a large number of customers from a variety of industries. THE ANTICIPATED BENEFITS OF THE ACQUISITIONS OF NSI MAY NOT BE REALIZED IN A TIMELY FASHION, OR AT ALL. IN ADDITION, CROSS MEDIA'S OPERATIONS MAY BE ADVERSELY AFFECTED IF THE OPERATION OF NSI'S BUSINESS DIVERTS TOO MUCH ATTENTION AWAY FROM CROSS MEDIA'S BUSINESS. The success of the acquisition of NSI will depend, in part, on Cross Media's ability to realize the anticipated revenue enhancements, growth opportunities and synergies of the combined company and effectively utilize resources Cross Media now has after the acquisition. There are risks related to the integration and management of the acquired technology and operations and personnel. The integration of the businesses will be a complex, time-consuming and potentially expensive process and may disrupt Cross Media's business if not completed in a timely and efficient manner. Some of the difficulties that may be encountered include: - the diversion of management's attention from other ongoing business concerns; - the inability to utilize the acquired member database and technology effectively to grow Cross Media business; and - potential conflicts between business cultures. If management focuses too much time, money and effort to integrate NSI's operations and assets, they may not be able to execute its overall business strategy. CROSS MEDIA MAY NEED ADDITIONAL FINANCING TO IMPLEMENT ITS STRATEGY AND EXPAND ITS BUSINESS. Cross Media may need additional debt or equity financing to pursue its strategy of expanding its business through the acquisition of companies whose businesses are strategically appropriate for it or for its existing operations. Any financing that Cross Media needs may not be available at all and, if available, may not be available on terms that are acceptable to Cross Media. The failure to obtain financing on a timely basis, or on economically favorable terms, could prevent Cross Media from continuing its strategy or from responding to changing business or economic conditions, and could cause Cross Media to experience difficulty in withstanding adverse operating results or competing effectively. If Cross Media raises additional funds by issuing equity securities, Cross Media stockholders may experience dilution of their ownership interest. Moreover, Cross Media could issue preferred stock that has rights senior to those of its common stock. If Cross Media raises funds by issuing debt securities, these 6 securities would have rights, preferences and privileges senior to holders of common stock and lenders may place limitations on Cross Media's operations. CROSS MEDIA IS SUBJECT TO RESTRICTIVE CREDIT FACILITY COVENANTS WHICH COULD HARM ITS FINANCIAL STATUS AND HAVE A NEGATIVE IMPACT ON ITS STOCK PRICE. In March 2002, Cross Media entered into a credit agreement with Fleet National Bank, as issuing lender. Cross Media has pledged all of its assets and the assets and stock of its subsidiaries to Fleet and all assets to secure its obligations under the facility. Under the agreement with Fleet, Cross Media is required, among other things, to maintain minimum financial ratios. If Cross Media cannot satisfy these or other covenants under the facility, Cross Media will be required to seek a waiver or amendment. If it should require waivers or amendments to the agreement, there can be no assurance that the lenders will agree. If Cross Media defaults in performing its obligations to the lenders, the lenders would be entitled to accelerate the maturity of outstanding indebtedness under the credit facility, $26 million as of March 31, 2002, and to enforce its security interest in the pledged assets and stock. IF CROSS MEDIA IS UNABLE TO COLLECT ITS RECEIVABLES IN A TIMELY MANNER ITS CASH FLOW FROM OPERATIONS WILL BE NEGATIVELY IMPACTED. Cross Media is subject to the risks associated with selling products on credit, including delays in collection or uncollectibility of accounts receivable. If Cross Media experiences significant delays in collection or uncollectibility of accounts receivable, its liquidity and working capital position could suffer. IF SUBSCRIPTION CANCELLATION RESERVES ARE NOT ADEQUATE, CROSS MEDIA COULD BE REQUIRED TO INCREASE ITS RESERVES, WHICH WILL RESULT IN A REDUCTION OF REVENUES. Cross Media extends credit to subscribers who purchase multi-magazine subscription packages. Cross Media has established a reserve to cover subscription cancellation based upon its past history with magazine subscription orders. If Cross Media's accounts subscription cancellation reserves are inadequate, it will be required to increase reserves, which will reduce revenues and could otherwise materially adversely effect Cross Media's results of operations. INTERNET ADVERTISING CUSTOMERS AND THE COMPANIES WITH WHICH CROSS MEDIA HAVE OTHER BUSINESS RELATIONSHIPS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY EFFECT ITS BUSINESS. Some of Cross Media's customers may experience difficulty in supporting their current operations and implementing their business plans. These customers may reduce their spending on LifeMinders' products and services, or may not be able to discharge their payment and other obligations. The non-payment or late payment of amounts due from a significant customer could negatively impact Cross Media's financial condition. In addition to intense competition, the overall market for Internet advertising has been characterized in recent quarters by increasing softness of demand, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from advertisers, and the reduction of Internet advertising budgets, especially by Internet-related companies. Customers may experience difficulty in raising capital, or may be anticipating such difficulties, and therefore may elect to scale back the resources they devote to advertising, including on LifeMinders' system. Other companies in the Internet industry have depleted their available capital, and could cease operations or file for bankruptcy protection. In addition, Cross Media's business may be adversely affected by periods of economic slowdown, inflation or recession, which may be accompanied by a decrease in the availability of consumer credit. Any material decline in the availability of consumer credit may result in a decrease in consumer demand to make credit card purchases, which could adversely affect the demand for Cross Media's products and services. 7 FUTURE GROWTH COULD PLACE SIGNIFICANT STRAIN ON CROSS MEDIA'S RESOURCES AND CROSS MEDIA MAY BE UNABLE TO MANAGE FUTURE GROWTH. Growth in Cross Media's operations could place a significant strain on operational systems and employee resources. As a result, Cross Media may have to implement new operational and financial systems, procedures and controls. In order to manage and accommodate Cross Media's planned growth, if it occurs, Cross Media will need to continue to improve and adapt its financial planning, accounting systems, information systems and management structures. Cross Media will also need to expand, train, retain and manage its employee base. If Cross Media is unable to manage growth effectively, financial condition and results of operations could be materially adversely affected. IF CROSS MEDIA ACQUIRES OR MAKES STRATEGIC INVESTMENTS IN OTHER BUSINESSES OR ACQUIRES OR LICENSES TECHNOLOGY AND OTHER ASSETS, CROSS MEDIA MAY HAVE DIFFICULTY INTEGRATING THESE BUSINESSES, TECHNOLOGIES AND ASSETS OR GENERATING AN ACCEPTABLE RETURN ON ITS INVESTMENTS. Cross Media may acquire or enter into strategic relationships with other businesses and acquire or license technology and other assets. Cross Media cannot assure you that acquisition or licensing opportunities will be available on terms acceptable to it or at all. Any future acquisitions and strategic relationships will involve risks, including: - inability to raise the required capital; - difficulty in assimilating the acquired assets, operations and personnel; - disruption of ongoing business; - distraction of management from other responsibilities; and - lack of the necessary experience to enter new markets. Cross Media may not successfully overcome problems encountered in connection with potential acquisitions or licensing arrangements. In addition, acquisitions or strategic relationships could materially impair Cross Media's operating results, causing Cross Media to incur additional debt, or requiring Cross Media to amortize acquisition expenses and acquired assets. THE LOSS OF CROSS MEDIA'S LARGEST CALL CENTERS WOULD LIKELY RESULT IN A REDUCTION OF REVENUES AND OTHERWISE ADVERSELY AFFECT OPERATING RESULTS. For the three months ended March 31, 2002 and the year ended December 31, 2001, two independent call centers accounted for approximately 32% and 39%, respectively of Cross Media's magazine subscription revenues. These call centers do not have any commitment to generate sales for Cross Media and could therefore, at any time, terminate their relationships with Cross Media without notice, which could have a material adverse effect on Cross Media's business. IF CROSS MEDIA DOES NOT MAINTAIN LIFEMINDERS ENGAGED MEMBER BASE, CROSS MEDIA MAY NOT BE ABLE TO COMPETE EFFECTIVELY FOR, OR MAINTAIN, ADVERTISERS AND ITS BUSINESS COULD BE ADVERSELY AFFECTED. Although Cross Media intends to continue to produce and distribute emails to LifeMinders' members, prior to the merger, LifeMinders scaled back its business operations and reduced the number of emails it sends to members. A significant portion of LifeMinders' revenue was historically derived from performance-based and revenue sharing arrangements. Under these arrangements, advertisers pay LifeMinders in part based on member responses to advertisements and promotions placed in email newsletters. If LifeMinders' members do not respond to advertisements and promotions placed in email newsletters, revenues from these operations could be materially and adversely affected. If Cross Media is unable to maintain LifeMinders engaged member base by keeping current members active (i.e., opening email newsletters and responding to the advertisements contained in those newsletters), advertisers could find its audience less attractive and effective for promoting their products and its services. 8 CROSS MEDIA RELIES HEAVILY ON ITS INTELLECTUAL PROPERTY RIGHTS AND OTHER PROPRIETARY INFORMATION, AND ANY FAILURE TO PROTECT AND MAINTAIN THESE RIGHTS AND INFORMATION COULD PREVENT CROSS MEDIA FROM COMPETING EFFECTIVELY. Cross Media seeks to protect through a combination of patent, copyright, trade secret and trademark law, as well as confidentiality or license agreements with employees, consultants, and corporate and strategic partners. If Cross Media is unable to prevent the unauthorized use of its proprietary information or if its competitors are able to develop similar technologies independently, the competitive benefits of Cross Media's technologies, intellectual property rights and proprietary information will be diminished. CROSS MEDIA DEPENDS HEAVILY ON ITS NETWORK INFRASTRUCTURE AND IF THIS FAILS IT COULD RESULT IN UNANTICIPATED EXPENSES, AS WELL AS PREVENT ITS LIFEMINDERS' MEMBERS FROM EFFECTIVELY UTILIZING LIFEMINDERS' SERVICES. THIS COULD NEGATIVELY IMPACT CROSS MEDIA'S ABILITY TO RETAIN LIFEMINDERS' MEMBERS AND ADVERTISERS. Cross Media's ability to successfully create and deliver its LifeMinders' email newsletters depends in large part on the capacity, reliability and security of its networking hardware, software and telecommunications infrastructure. Failures of the network infrastructure could result in unanticipated expenses to address such failures and could prevent LifeMinders' members from effectively utilizing LifeMinders' services, which could prevent Cross Media from retaining members and advertisers. Cross Media does not have fully redundant systems or a formal disaster recovery plan. The system is susceptible to natural and man-made disasters, including earthquakes, fires, floods, loss and vandalism. Further, telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of the systems. Cross Media's insurance policies may not adequately compensate it for any power losses that may occur due to any damages or interruptions in the systems. Accordingly, Cross Media could be required to make capital expenditures in the event of unanticipated damage. In addition, LifeMinders' members depend on Internet service providers, or ISPs, for access to LifeMinders website due to the rapid growth of the Internet, ISPs and websites have experienced significant system failures and could experience outages, delays and other difficulties due to system failures unrelated to Cross Media's systems. These problems could harm LifeMinders' business by preventing members from effectively utilizing its services. THE CONTENT CONTAINED IN LIFEMINDERS' EMAILS MAY SUBJECT IT TO SIGNIFICANT LIABILITY FOR NEGLIGENCE, COPYRIGHT OR TRADEMARK INFRINGEMENT OR OTHER MATTERS. If any of the content that Cross Media creates and delivers to LifeMinders' members or any content that is accessible from LifeMinders' emails through links to other websites contains errors, third parties could make claims against Cross Media for losses incurred in reliance on such information. In addition, the content contained in or accessible from LifeMinders' emails could include material that is defamatory, violates the copyright or trademark rights of third parties, or subjects it to liability for other types of claims. Cross Media general liability insurance may not cover claims of these types or may not be adequate to indemnify it for all liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could result in significant costs and expenses and damage Cross Media's reputation. Cross Media has also entered into agreements with certain e-commerce partners under which Cross Media may be entitled to receive a share of certain revenue generated from the purchase of goods and services through direct links to LifeMinders' e-commerce partners from the emails sent by Cross Media. These agreements may expose Cross Media to additional legal risks and uncertainties, including potential liabilities to consumers of those products and services by virtue of Cross Media's involvement in providing access to those products or services, even if Cross Media does not provide those products or services. Any indemnification provided to Cross Media in its agreements with these parties, if available, may not adequately protect Cross Media. 9 CONCERNS ABOUT, OR BREACHES OF, THE SECURITY OF LIFEMINDERS' MEMBER DATABASE COULD RESULT IN SIGNIFICANT EXPENSES TO PREVENT BREACHES, AND SUBJECT CROSS MEDIA TO LIABILITY FOR FAILING TO PROTECT THE MEMBERS' INFORMATION. Cross Media maintains a database containing information about LifeMinders members. Unauthorized users accessing LifeMinders' systems remotely may access its database or authorized users may make unauthorized copies of all or part of the database for their own use in violation of specific agreements to the contrary. As a result of these security and privacy concerns, Cross Media may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by security breaches, and may be unable to effectively target direct marketing offers to members or may be subject to legal claims of members if unauthorized third parties gain access to LifeMinders' system and alter or destroy information in its database. Also, any public perception that Cross Media engaged in the unauthorized release of member information, whether or not correct, would adversely affect Cross Media's ability to retain members. PROBLEMS WITH THE PERFORMANCE AND RELIABILITY OF THE INTERNET INFRASTRUCTURE COULD ADVERSELY AFFECT THE QUALITY AND RELIABILITY OF THE PRODUCTS AND SERVICES OFFER MEMBERS AND ADVERTISERS. Cross Media depends on the Internet infrastructure to deliver attractive, reliable and timely email newsletters to LifeMinders members. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, and its performance and reliability may decline. Among other things, continued development of the Internet infrastructure will require a reliable network backbone with necessary speed, data capacity and security. Currently, there are regular failures of the Internet network infrastructure, including outages and delays, and the frequency of these failures may increase in the future. These failures may reduce the benefits of LifeMinders' products and services to LifeMinders' members and undermine advertising partners' and members' confidence in the Internet as a viable commercial medium. In addition, the Internet could lose its viability as a commercial medium due to delays in the development or adoption of new technology required to accommodate increased levels of Internet activity or due to government regulation. CROSS MEDIA MAY HAVE TO LITIGATE TO PROTECT ITS INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS OR TO DEFEND CLAIMS OF THIRD PARTIES, AND SUCH LITIGATION MAY SUBJECT IT TO SIGNIFICANT LIABILITY AND EXPENSE. There is a substantial risk of litigation regarding intellectual property rights in Internet-related businesses. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving. Cross Media may have to litigate in the future to enforce its intellectual property rights, protect its trade secrets or defend itself against claims of violating the proprietary rights of third parties. This litigation may subject Cross Media to significant liability for damages and result in invalidation of proprietary rights. In addition, such litigation could be time-consuming and expensive to defend, even if not meritorious, and result in the diversion of management time and attention. Any of these factors could adversely affect Cross Media's business operations. THE UNITED STATES JUSTICE DEPARTMENT HAS FILED A COMPLAINT AGAINST CROSS MEDIA, MOS AND TWO OF THEIR OFFICERS, ALLEGING VIOLATIONS OF THE TELEMARKING SALES RULE AND THE FEDERAL TRADE COMMISSION ACT. In April 2002, the United States Justice Department, on behalf of the Federal Trade Commission, filed a complaint in the United States District Court for the Northern District of Georgia against Cross Media, Media Outsourcing, Inc., Ronald Altbach, Dennis Gougion, an officer of Media Outsourcing, and Richard Prochnow, a consultant to MOS. The complaint alleged violations of the Federal Telemarketing Sales Rule and the Federal Trade Commission Act and non-compliance with a previous FTC order entered into by Prochnow, individually and doing business as Direct Sales International, Inc., and Gougion, individually. MOS acquired certain assets of Direct Sales International in January 2000. The complaint seeks monetary civil penalties, redress, injunctive, and other relief against any such future violations. Simultaneous with the filing of the complaint, plaintiffs filed a motion for a temporary restraining order against the defendants seeking, among other things, compliance with the Telemarketing Sale Rule, the FTC 10 Act, and the previous FTC order. At the hearing for the temporary restraining motion, the parties agreed to postpone the hearing for a later date. Upon mutual agreement of the parties, the rescheduled hearing was postponed for an undetermined date to facilitate settlement discussions. However, because this matter is in the early stages, Cross Media is unable to predict the outcome. In the event that Cross Media is unable to resolve this matter amicably, it could be subject to monetary damages and injunctive relief which could have a material adverse effect on Cross Media. Even if Cross Media is able to resolve this matter amicably, it may have to agree to modify MOS' operating practices which could have a material adverse effect on Cross Media. Moreover, any adverse developments could effect Cross Media's ability to make additional borrowings under the Fleet credit facility. GOVERNMENT REGULATION COULD ADD SIGNIFICANT ADDITIONAL COSTS TO CROSS MEDIA'S BUSINESS AND IMPOSE RESTRICTIONS ON CROSS MEDIA'S MARKETING PRACTICES WHICH COULD INTERFERE WITH CROSS MEDIA'S OPERATIONS AND HAVE A SIGNIFICANT ADVERSE EFFECT ON REVENUES. Laws and regulations applicable to direct marketing, telemarketing, Internet marketing, consumer protection and membership club services are becoming more prevalent. Each of the 50 states and the Federal government has laws regulating telemarketing, sweepstakes promotions, promotional incentives and advertising to consumers, which vary from state to state. While Cross Media reviews its telemarketing scripts and advertising copy to ensure that they comply with applicable laws, there is no guarantee that Federal or state authorities will not find that Cross Media's marketing efforts do not comply with these laws. In addition, it is likely that additional Federal and/or state regulations regarding telemarketing, sweepstakes, email marketing and other marketing practices engaged in by Cross Media will be enacted. If enacted, these regulations could have an adverse effect on revenues and result in additional expenses to Cross Media and could require Cross Media to refrain from engaging in specific activities or modify its business practices. The Federal Trade Commission is currently in the process of reviewing the provisions of the Telemarketing Sales Rule and Negative Option Rule to determine if any changes to the rule should be made. The Federal Trade Commission recently issued a Notice of Proposed Rulemaking in which it proposed substantial changes in the Telemarketing Sales Rule, which if adopted could have a significant adverse effect on Cross Media's business. In 1999, Congress enacted the Deceptive Mail Prevention and Enforcement Act, which imposes various restrictions on the offering of sweepstakes through the mail. Additional sweepstake legislation has been enacted or is pending in various states. This additional regulation could have an adverse impact on Cross Media's marketing activities. EXTENSIVE GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATED TO DOING BUSINESS ON THE INTERNET COULD LIMIT SALES OR ADD SIGNIFICANT ADDITIONAL COSTS TO CROSS MEDIA'S BUSINESS. Laws and regulations directly applicable to Internet communications, commerce, marketing and data protection are becoming more prevalent. If any of these laws hinder the growth of Internet use generally or decreases the acceptance of the Internet as a medium of communications, commerce and marketing Cross Media's business and prospects may suffer materially. The United States Congress has enacted Internet laws regarding children's privacy, copyrights and taxation. Other laws and regulations may be adopted covering issues such as user privacy, marketing activities, pricing, content, taxation and quality of products and services. The governments of some states and foreign countries have begun to regulate Cross Media's transactions and levy sales or other taxes relating to its activities and will likely continue to do so. The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet advertising and marketing services. In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet. 11 Laws and regulations governing the transmission of unsolicited email marketing messages are being considered in many jurisdictions. Legislation of that type has recently been adopted by numerous states, and similar legislation is pending in several states and in Congress. These laws could have an adverse impact on Cross Media Internet marketing activities. The Telecommunications Act of 1996 prohibits some types of information and content from being transmitted over the Internet. The prohibition's scope and the liability associated with a Telecommunications Act violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act were held to be unconstitutional, Cross Media cannot be certain that similar legislation will not be enacted and upheld in the future. CHANGES IN LAWS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF INTERNET USERS AND CONSUMERS COULD HARM CROSS MEDIA'S BUSINESS. There have been increasing public debate about the collection, distribution and use of information about consumers. New limitations on the collection and use of information relating to Internet users are currently being considered by legislatures and regulatory agencies in the United States and internationally. Cross Media is unable to predict whether any particular proposal will pass, or the nature of the limitations in those proposals that do pass. Since many of the proposals are in their developmental stages, Cross Media is unable to determine the impact these may have on Cross Media's business. In addition, it is possible that changes to existing law, including new interpretations of existing law, could have a material and adverse impact on Cross Media's business, financial condition and results of operations. CROSS MEDIA IS DEFENDING A LAWSUIT WHICH, IF DETERMINED ADVERSELY AGAINST IT AND IF ITS INSURANCE DOES NOT ADEQUATELY COVER THE DAMAGES, COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In March 2002, a complaint was filed in the United States District Court for the District of Kansas by J.M. Thies, John Minnick and William Sharp, on their behalf and on behalf of other former stockholders of eCoupons.com, Inc., against LifeMinders, Inc. (which Cross Media acquired on October 24, 2001), Douglas Lindgren and Jonathan Bulkeley, directors of Cross Media, and former officers and directors of LifeMinders, requesting monetary damages in an amount not less than $4.2 million and punitive damages in an amount not less than $5 million against the defendants. In accordance with the terms of the merger agreement with LifeMinders, Cross Media is obligated to indemnify the other defendants. The plaintiffs, former stockholders of eCoupons.com, Inc., a company that merged with and into LifeMinders in December 2000, allege that the defendants made misrepresentations to the plaintiffs to induce them to merge eCoupons with and into LifeMinders. Cross Media was aware of the dispute prior to closing the LifeMinders acquisition and believes that it has adequate insurance to cover any award of monetary damages in the lawsuit. THE SUBSTANTIAL NUMBER OF OPTIONS AND WARRANTS TO PURCHASE CROSS MEDIA COMMON STOCK COULD RESULT IN DILUTION TO CROSS MEDIA STOCKHOLDERS. If the holders of the outstanding Cross Media options and common stock purchase warrants exercise those options and warrants, including those issued in connection with the merger and warrants being issued as partial consideration for conversion of outstanding preferred stock, and the holders of all outstanding convertible securities converted them into common stock, Cross Media would be required to issue approximately 4.8 million additional shares of common stock, based on current exercise and conversion prices. The exercise of options and warrants and convertible rights, most of which have exercise prices or conversion rates below the current market price of Cross Media common stock, will result in dilution to Cross Media stockholders. BECAUSE OWNERSHIP OF CROSS MEDIA IS CONCENTRATED, A SMALL NUMBER OF STOCKHOLDERS EXERT SIGNIFICANT INFLUENCE OVER CROSS MEDIA. If a few of the largest stockholders of Cross Media Cross were to act together, as a result of their aggregate ownership, they would have the ability to exert significant influence over Cross Media's business, 12 including the election of directors and the approval of any other action requiring the approval of stockholders. This concentration of share ownership may: - delay or prevent a change of control of Cross Media; - impede a merger, consolidation, takeover or other business combination involving Cross Media; and/or - discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Cross Media. PROVISIONS OF CROSS MEDIA'S CORPORATE CHARTER DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL. Cross Media's certificate of incorporation authorizes the board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by Cross Media's board of directors, without further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. Specific rights granted to future holders of preferred stock could be used to restrict Cross Media's ability to merge with, or sell its assets to, a third party. The ability of Cross Media's board of directors to issue preferred stock could discourage, delay, or prevent a takeover of Cross Media, thereby preserving control by the current stockholders. As a Delaware corporation, Cross Media is subject to the General Corporation Law of the State of Delaware, including Section 203, an anti-takeover law enacted in 1988. In general, Section 203 restricts the ability of a public 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. Subject to exceptions, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of a corporation's voting stock. As a result of the application of Section 203, potential acquirers may be discouraged from attempting to acquire Cross Media, thereby possibly depriving its stockholders of acquisition opportunities to sell or otherwise dispose of its stock at above-market prices typical of acquisitions. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No significant changes have occurred with respect to legal proceedings as disclosed in Part I, Item 3, of the Company's 2001 Annual Report on Form 10-KSB, except as follows: In April 2002, the United States Justice Department, on behalf of the Federal Trade Commission, filed a complaint in the United States District Court for the Northern District of Georgia against Cross Media, Media Outsourcing, Inc., Ronald Altbach, Dennis Gougion, an officer of Media Outsourcing, and Richard Prochnow, a consultant to MOS. The complaint alleged violations of the Federal Telemarketing Sales Rule and the Federal Trade Commission Act and non-compliance with a previous FTC order entered into by Prochnow, individually and doing business as Direct Sales International, Inc., and Gougion, individually. MOS acquired certain assets of Direct Sales International in January 2000. The complaint seeks monetary civil penalties, redress, injunctive, and other relief against any such future violations. Simultaneous with the filing of the complaint, plaintiffs filed a motion for a temporary restraining order against the defendants seeking, among other things, compliance with the Telemarketing Sale Rule, the FTC Act, and the previous FTC order. At the hearing for the temporary restraining motion, the parties agreed to postpone the hearing for a later date. Upon mutual agreement of the parties, the rescheduled hearing was postponed for an undetermined date to facilitate settlement discussions. ITEM 2. CHANGES IN SECURITIES RECENT ISSUANCES OF UNREGISTERED SECURITIES On January 11, 2002, Cross Media issued an aggregate of 279,859 shares of common stock to Bud Pironti and the two other stockholders at NSI in connection with Cross Media's acquisition of NSI. The issuance of these securities was made in reliance on Section 4 (2) of the Securities Act as a transaction not involving any public offering, because: (1) Bud Pironti and the two other stockholders of NSI represented that each were acquiring the securities for investment purposes; and (2) Cross Media did not engage in any general advertisement or general solicitation in connection with the issuance of the securities. On January 11, 2002, Cross Media issued five-year warrants to purchase 20,000 shares of common stock to Transaction Marketing Partners for consulting services rendered to Cross Media in connection with the acquisition of NSI. The issuance of these securities was made in reliance on Section 4 (2) of the Securities Act as a transaction not involving any public offering, because: (1) Transactional Marketing Partners represented that it was acquiring the securities for investment purposes; and (2) Cross Media did not engage in any general advertisement or general solicitation in connection with the issuance of the securities. On February 8, 2002, Cross Media issued five-year warrants to purchase 10,000 shares of common stock to Capital Research for consulting services rendered to Cross Media in connection with the acquisition of NSI. The issuance of these securities was made in reliance on Section 4 (2) of the Securities Act as a transaction not involving any public offering, because: (1) Capital Research represented that it was an accredited investor and was acquiring the securities for investment purposes; and (2) Cross Media did not engage in any general advertisement or general solicitation in connection with the issuance of the securities. On March 1, 2002, Cross Media issued two-year warrants to purchase 50,000 shares of common stock to Lancer Offshore, Inc. in connection with the $2 million revolving credit facility. The issuance of these securities was made in reliance on Section 4 (2) of the Securities Act as a transaction not involving any public offering, because: (1) Lancer Offshore, Inc. represented that it was an accredited investor and was acquiring the securities for investment purposes; and (2) Cross Media did not engage in any general advertisement or general solicitation in connection with the issuance of the securities. On March 27, 2002, Cross Media issued five-year warrants to purchase in aggregate 110,540 shares of common stock to Scott Griffith and Jesse Shelmire, as designees of Stonegate Securities, Inc., as placement agent compensation in connection with the private placement with Stonegate Securities Inc. The issuance of 14 these securities was made in reliance on Section 4 (2) of the Securities Act as a transaction not involving any public offering, because: (1) Each represented that he was an accredited investor and was acquiring the securities for investment purposes; and (2) Cross Media did not engage in any general advertisement or general solicitation in connection with the issuance of the securities. ITEM 3. DEFAULTS UPON SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO VOTE OF STOCKHOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. REPORTS ON FORM 8-K We filed the following Current Report on Form 8-K during the fiscal quarter ended March 31, 2002: (i) On January 11, 2002, we filed a Current Report on Form 8-K regarding the acquisition of NSI. (ii) On January 11, 2002, we filed a Current Report on Form 8-K regarding the unaudited pro forma combined condensed statement of operations relating to the acquisition of NSI. CROSS MEDIA MARKETING CORPORATION (Registrant) By: /s/ CHET BORGIDA ------------------------------------ Name: Chet Borgida Title: Senior Vice President and Chief Financial Officer (principal financial and accounting officer) Dated: May 15, 2002 15 -----END PRIVACY-ENHANCED MESSAGE-----