Quarterly Reports

First Half Year Report As of June 30, 1999

Top Line Up Strongly
We are pleased to present our first half-yearly report as a public company.  We have made significant progress in each and every segment of our business, resulting in a 329% increase in year-over-year topline performance to US$1.6 million.
Auctions Have Strong Start  
Auction activity leads the way, with US$498,000 in proceeds at June 30th, 1999 after commencing operations in March of this year. By June 30th we sold 115 lots for an average sale of US$4,331 when many in the art world said art auctions on the Internet could not be done. artnet’s experience mirrors the conventional art auction business where roughly 80% of sales are lots below US$5,000. Among our lots were several firsts, including Roy Lichtenstein’s Nude with Blue Hair selling for US$18,620, the highest ever at auction, and Andy Warhol’s $9 selling for US$11,025, highest price at auction in the past 10 years. The success of auction sales has drawn more consignments from a larger number of dealers, providing a wider variety of offerings. It has also spurred higher sales in the Gallery/Artist sector of our business.
Gallery/Artist Customers Increase  
Turning to galleries, sales in the Advertising category, consisting primarily of Gallery/Artist web pages and hosting, rose 259% to US$863,100 in the six months compared to the same period last year. While the new auction services were part of the sales story, the real credit goes to a highly focused sales effort building on the strong foundation laid in prior years. New clients are being drawn by the expanding database of galleries, artists and works found online, the increasing visibility of artnet, and the greater range of services on the site. Renewal rates were in the 80% range in a period when the yield per customer increased, demonstrating that we provide results for our Gallery/Artist clients.
Auction Database Enjoys Brisk Sign-Up Rate  
Subscriptions to our unique, proprietary fine arts auction database rose 77% to US$215,300 demonstrating continuing growth in this traditional backbone of our business. In February we instituted a 50% price increase and changed our billing policy to a monthly subscription basis, and we continue to enjoy a brisk sign-up rate. In addition to being a revenue source, the fine arts auction database provides data for individual lots in the auction, assisting customers in formulating their bids, which other auction houses can not provide. As well, it is an effective cross-selling tool.
Bookstore Ramping Up  
Other revenue totaled US$15,500, up 75% from the same period a year ago. This is primarily due to our bookstore, which commenced operation in February, and by June 30th had already produced revenue in its short existence. It is currently reported in the "other revenue" category, which totaled US$15,500, up 75% from the same period a year ago. By June 30th the bookstore featured 12,500 titles, with cross-references to artists featured in the auctions, the galleries database and the magazine. Today it has 14,000 titles as it continues to ramp up operations. As an added service it has begun offering special orders for rare and out-of-print books, to popular acclaim. In addition to being a new revenue source our bookstore also provides cross-selling opportunities with each area of our site.
Artnet Magazine Key Asset  
Our online magazine, offered free, is edited by art world authority Walter Robinson. It is a key element of our offering and an important feature for each segment of our customer base – gallery clients, established collectors and art enthusiasts. The magazine is able to attract celebrity contributors, including former Metropolitan Museum of Art Director Thomas Hoving, Interior Design Editorial Director Stanley Abercrombie, and Sotheby’s Senior Vice President of American Decorative Arts Wendell Garrett. Their features are in turn used to attract sponsorship revenue.
Content, Commerce, Community  
In sum, our business is being built on the three pillars of content, commerce and community. It starts with a very solid foundation of content, unlike any other art-related e-commerce site on the web. Beginning with our CEO, a prominent art world figure and successful gallerist, and continuing with our many specialists drawn from prominent auction houses and art insititutions, we understand the needs, interests and challenges facing our clientele. Our highly respected magazine, the only daily of its kind, has become a must-read destination and a major drawing card to our site. Our auction database is a valuable industry resource for dealers, museums and collectors alike. Our knowledge of how the art business operates gives us unmatched access to the gallery community.

 Our content is followed by commerce developed in the true web style – approaching a fragmented and inefficient industry in an entirely new way. While initial results are predictably small, each success multiplies into bursts of new customers as doubtful observers are converted to committed participants. This is true of our Gallery/Artist web pages as well as the auction business as we continue to bring more and more of the art world online.

IPO Proceeds Fund Marketing  
With the proceeds of our stock offering we are now turning to the community element. We are negotiating with several parties to market our site to a broader audience to expand our market and our economic opportunities within it. Over the next few months you will be seeing a series of initiatives designed to build exposure, audience and revenue based on development of a larger community. Several initiatives are discussed below in Upcoming Business Development Activities.

Gross Profit:
Gross Profit Increases
Turning to the other elements of our results, gross profit was negative at US$ (92,229), but a 36% improvement from US$(144,517) in the year-ago period. While we instituted price increases for several of our services this year, they will take time to show in the numbers until annual contracts roll over. However, in this phase of strong customer growth particularly in the auction business it will be important for us to maintain promotional pricing. Our focus needs to be on development of the market more than exercise of pricing power.

Expenses and Net Loss:
Operating Expenses Increase to Support Growth  
Operating expenses were US$5.0 million, up from US$1.2 million in the year-ago period. Cash operating expenses, meaning operating expenses less non-cash compensation, depreciation and amortization and bad debt expense, were US$2.2 million, up from US$.9 million in the year-ago period reflecting primarily the greater investment being made in sales, marketing and infrastructure to develop and scale our business. As the year proceeds we expect this investment to intensify as we add employees, enter new businesses and expend significant amounts in print advertising, web advertising and promotional campaigns to build the artnet brand.

The increase in non-cash expenditure reflects a charge to compensation arising from the initial public offering where under US GAAP rule APB 25, "Accounting for Employee Stock Option Programs," the difference between strike price and initial public offering price of employee stock options must be reflected in the accounts over the five-year vesting period of the options. artnet, like other Internet companies, regards the ability to issue employee stock options an important recruiting tool in the highly competitive technology job market. Fortunately, future option grants will not incur a charge to earnings under current accounting rules since they will be issued at then-current market prices. The increase in depreciation and amortization relates to the purchase of computer equipment and leasehold improvements required to support the growth of our business, while the decrease in bad debt accruals reflects an improvement in collections experience.

Net Loss Widens  
Interest income and expense and other transactions were inconsequential, leaving a loss before minority interest at US$(5.0) million compared to US$ (1.4) million in the year-ago period. After minority interest, net loss was US$ (3.9) million for the six months ended June 30, 1999 compared to a net loss of US$(1.4) million for the six months ended June 30, 1998.

Liquidity and Capital Resources:
Company Has Significant Financial Resources  
The Company finished the six-month period with US$23.4 million in cash following its initial public offering on May 17, 1999. Since inception the Company has financed its operations primarily with equity securities.

Net cash used in operating activities was US$2.0 million in the current period compared to US$1.4 million in the year-ago period. Cash used resulted primarily from operating losses. Net cash used in investing activities was US$1.4 million compared with zero in the year-ago period. As part of the initial public offering transaction, cash was invested in the purchase of 79.6% of Artnet Worldwide Corporation and in treasury stock. As well, cash was invested in fixed asset purchases, primarily computer equipment. Net cash provided by financing activities was US$25.6 million compared with US$1.5 million in the year-ago period. Proceeds from the sale of common stock provided US$25.2 million in the first six months of 1999 compared to US$1.5 million in the first six months of 1998.

Upcoming Business Development Opportunities
Theme Sales Drive Traffic and Revenue  
We are going into autumn with a very active marketing calendar. artnet ushers in the Fall with a monthly calendar of company-wide theme sales. The first theme sale, Icons of the 20th Century, launches on September 16th and highlights the entire site with important artworks by 20th century masters in the auctions, a boutique in the bookstore, a special exhibition of works from the galleries, and feature articles in the magazine. Icons will be advertised in The New York Times, other important newspapers, the art trade publications, and with our first online campaign on a major Internet portal. The Icons event will be followed by Vintage Posters in October, comprising popular French advertising posters from the late 19th and early 20th centuries by well-known artists such as Mucha, Toulouse-Lautrec and Cassandre. The November event Nudes in Art, will feature the human figure celebrated in art.
Major Advertising Campaign  
Also this Fall, artnet will launch a major brand-building advertising campaign. It has been designed to differentiate artnet from our competitors and will be the primary focus of our print advertising strategy. In addition, artnet will be the lead sponsor of the Com und Artnet Neuer Markt Cup, a very popular Germany-based stock market game, to reach the segment of the German market that has both a familiarity with Internet and an interest in investment.

New Auction Category  
In the auctions we launched a new category, 20th Century Decorative Arts, at the end of August. The 20th century design market is the strongest ever with 20th century furniture and decorative objects reaching record prices internationally. James Zemaitis, who joined artnet after three years as a specialist at Christie’s, is overseeing the launch.

artnet At The Art Fairs  
In the gallery/artist business, the sales department is building on artnet’s success in bringing in new advertisers at Art Basel in June by promoting artnet at the biggest art fairs around the world, including the European Art Forum in Berlin in September, Art San Francisco in October, and Art Cologne in November.

Attention-Getting New York Events  
In New York City we will be sponsoring the Downtown Arts Festival from September 9-30, which kicks off the Autumn art season with influential galleries participating in high-visibility events including a gala opening and a series of popular art walks around the city. It draws large crowds of international art professionals and art enthusiasts. artnet is a sponsor to the event, and festival founder Simon Watson will contribute a number of columns to Artnet Magazine.

In November, artnet will be the primary sponsor of ARTWALK NY, a day-long event and gala auction to benefit homeless New Yorkers hosted by Peter Jennings and Madonna. For the first time ever, bidders in cyberspace will compete with attendees on artnet to bid on a select number of works of art from the silent auction while raising money for charity. ARTWALK NY is one of the most popular charity events of the season among high-profile art collectors.

Other Business Developments:
Infrastructure Build-Out  
In the background a number of critically important activities are underway to strengthen the company infrastructure and support our rapid growth. A site rebuild and expansion is planned to accommodate growth in auction categories and efficiencies across the site. Though the prior rebuild was only in February, in an Internet environment it is imperative to regularly relaunch the site, presenting a fresh look to our ‘retail store’. As well, customer service is being upgraded with additional staff training and a 24x7 hotline. Vendor relationships are being reviewed in keeping with our increasing size and purchasing power. Management information systems are being instituted to measure and improve performance. In sum, the Company is being scaled up to meet the challenges of rapid growth and leverage our existing strengths.

Employees and Management:
Executive Ranks Broadened  
At June 1999, employees numbered 76 compared to 57 at December 1998 and 37 at June 1995. Included in the new hires is Chief Operating Officer Barbara Krasne, with 9 years experience in CEO and General Manager roles, most recently from Publicitas Advertising Services and USA Today International. Barbara’s expertise in managing growth businesses in the US and Europe adds an important strength as Artnet reaches an entirely new level. Barry Hintze joined as Vice President Finance and Accounting, with 20 years’ experience in all aspects of financial management and accounting. Barry was hired for his expertise with public company responsibilities and abilities to institute controls and performance measurement systems. Subsequent to June 30th, Grace Schalkwyk joined as Vice President Corporate Development and Investor Relations from a 15-year career in investment banking and corporate development. Grace’s abilities in strategy, transactions and investor relations will help position the Company for further growth.

Market Context -- Growth of Internet and E-Commerce:
Compelling Case for E-Commerce  
Worldwide Internet adoption is rising fast, from 28 million or 17% of PC users in 1996 to 157 million or 58% of PC users in 2000, according to the Morgan Stanley Dean Witter Technology Team. In the US 63% of adults use the web daily, and 79% of web users buy online. The 34 million European Internet users will not be far behind. The OECD predicts worldwide e-commerce revenue will reach US$300 billion by 2002, or 5% of OECD-7 retail sales. The OECD study notes enormous efficiencies are gained in distribution from e-commerce – for example, airline tickets cost 87% less to distribute, banking products 89%, life insurance 50%. Thus consumers will demand e-commerce for the lower prices it brings, and businesses will use it to lower costs.

Market Context -- The Art Market
Art Market Can Be Made More Efficient  
The conventional art market remains highly inefficient, with high sales commissions, high dealer costs for exhibitions, catalogues and transportation, high auction house costs, geographic limitations to marketing art objects broadly, limited flow of pricing information, and myriad other factors. The Internet is a good way for dealers to turn over their inventory, and also acquire new inventory cost-effectively. The Internet is a good way for art purchasers to view a wide selection from one location, and determine proper value. Forbes Magazine estimates the art market today at US$15 billion, at least US$5 billion of which is attributable to the conventional auction houses. This is a significant target market for artnet to address with its more efficient approach to the purchase and sale of art.
Opportunity for Market Growth  
Add to that a sizeable new potential market of upper income, educated, Internet-friendly art enthusiasts in the key 18-49 age group and our market opportunity is tremendous. As one measure of the art enthusiast population, 42.8 million people attended museums in 1997 in the US alone, according to the American Association of Museum Directors.
A Dealer Says:  
"We sold an important Modern Master to an institutional collector. Thanks to artnet, the client found us, was able to view our inventory online, and bought the piece. Based on this experience we consider the Internet and artnet in particular as an important marketing tool to find new clients."

Hans Neuendorf remarks, "By bringing increased transparency, access, liquidity and information, the Internet will completely transform the art market, and artnet will be there to transform it."

Consolidated Balance Sheet


For the periods ending:

Current Assets

June 30, 1999


December 31, 1998





Accounts Receivable, Net



Prepaids & Other Current Assets



Total Current Assets



Property, Plant & Equipment, Net



Leased Assets, Net



Trademark Fees, Net



Security Deposits



Total Assets




Current Liabilities:

Accounts Payable



Placement Fee-Payable



Accrued Consignor’s Payments



Other Accrued Expenses



Accrued Executive Compensation



Unearned Revenue



Capital Leases (current)



Total Current Liabilities



Capital Leases (non-current)



Total Liabilities



Minority Interest

Stockholders’ Equity



Additional Paid-in Capital



Treasury Stock



Receivable from Shareholder



Retained Earnings



Current Earnings



Total Stockholders’ Equity



Total Liabilities & Equity



Consolidated Statement of Operations


For the Six Months Ended:

June 30, 1999


June 30, 1998





Auction Proceeds


498, 034













Other Revenue




Total Proceeds and Revenue




Auction Payouts




Net Revenue




Costs of Revenues




Gross Profit




Operating Expenses:      
Selling and Marketing




General and Administrative




Non-cash Compensation Expense




Depreciation and Amortization




Total Operating Expenses




Loss from Operations




Interest Expense




Interest Income




Other Income




Loss from Operations




Minority Interest in Net Loss




Net Loss




Consolidated Statement of Cash Flows

For the Six Months Ended:

June 30, 1999


June 30, 1998


Operating Activities    
Net Loss



Depreciation and Amortization



Non-cash Compensation Related to Stock Options



Minority Interests


Changes in Operating Assets and Liabilities:    
Accounts Receivable



Other Current Assets



Security Deposits



Accounts Payable



Accrued Expenses



Unearned Revenue



Net Cash Used in Operating Activities



Investing Activities


Purchase of Treasury Stock



Purchases of Fixed Assets



Net Cash Used in Investing Activities



Financing Activities


Payments on Notes Payable to Related Parties



Principal Payments on Capital Leases



Principal Payments on Unsecured Note



Proceeds from Sale of Common Stock



Repayments/Loans to Shareholders



Net Cash Provided by Financing Activities



Change in Cash



Cash at Beginning of Period



Cash at End of Period