As filed with the Securities and Exchange Commission on August 12, 1998
Registration No. 333-56085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 3 to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
24/7 MEDIA, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7319 13-3995672
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1250 Broadway, New York, NY 10001
(212) 231-7100
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------
DAVID J. MOORE
Chief Executive Officer
24/7 Media, Inc.
1250 Broadway, New York, New York 10001
(212) 231-7100
Fax (212) 760-1774
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies of Communications to:
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<S> <C>
Ronald R. Papa, Esq. Larry W. Sonsini, Esq.
Proskauer Rose LLP David Drummond, Esq.
1585 Broadway Wilson Sonsini Goodrich & Rosati
New York, New York 10036-8299 Professional Corporation
(212) 969-3000 650 Page Mill Road
Fax (212) 969-2900 Palo Alto, California 94304
(650) 493-9300
Fax (650) 493-6811
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
EDGAR GRAPHIC-IMAGES DESCRIPTION:
INSIDE FRONT COVER
Graphic: Logo of Company
Language: 24/7 Media provides advertising solutions to advertisers and
websites by offering media expertise combined with sophisticated
technology. 24/7 Media more than 1/3 of the on line audience.
Source: Media Metrix study, 5/98 indicating that 24/7 Media
reached over 15 million users representing 35.7% of the online
audience.
INSIDE FRONT GATEFOLD
Title: 24/7 MEDIA AT A GLANCE
Caption 1: STRATEGIES FOR CONTINUED GROWTH. 24/7 Media's objective is to
provide superior turnkey advertising solutions for websites and by
maximizing the effectiveness of internet advertising campaigns.
- Expand the Company's networks of websites.
- Maximize sales and marketing effectiveness.
- Enhance capabilities of ad targeting technology.
- Increase value of ad inventory.
- Provide highest level of customer service.
Caption 2: BRAND NAME WEBSITES. 24/7 Media provides advertising sales
solutions for more than 150 high profile websites. (see inside
back cover for additional websites). Free EDGAR (logo); AT&T
WorldNet Service (logo); The Wire News from AP (logo); Comedy
Central (logo).
Caption 3: INDUSTRY GROWTH. Revenue from internet advertising and direct
marketing in the U.S. is estimated to increase from over $1
billion in 1997 to over $9 billion in 2002.
- Graphic bar chart depicting growth of industry.
- Source: Jupiter Communications 1998 Online Advertising Report
- There can be no assurance that such rapid industry growth rates
will be achieved or that the Company will experience similar rates
of growth.
Caption 4: EXPERIENCED MANAGEMENT TEAM. 24/7 Media's senior managers have
extensive media sales and technology expertise. Combined: More
than 85 years experience in advertising sales and media; More than
30 years experience in technology and operations.
Caption 5: REACH. During May 1998, the 420 million impressions generated
by the Company's networks of websites reached more than one-third
of U.S. internet users.
- Graphic bar chart depicting reach statistics of Company and
other websites.
- Top Web Properties. Source: Media Metrix, 5/98.
*Based upon 24/7 Media's submitted list of site URL's to Media
Metrix.
Caption 6: ENHANCED TECHNOLOGY. More than ad serving - a technology
platform designed with database marketing in mind. Adfinity[TM]
and dbCommerce[TM] were developed to address the opportunities
presented by online database marketing.
<PAGE>
Adfinity's[TM] management system serves ads to and supports the
company's networks of websites.
Caption 7: PRESTIGIOUS ADVERTISERS. 24/7 Media maintains sales and
marketing relationships with leading internet and traditional
advertisers and advertising agencies. (see insider back cover for
additional advertisers).
- Amazon.com; American Express; Anderson & Lembke; Bell Atlantic;
Compaq; Disney; Ford; Grey Interactive; Hewlett Packard;
Microsoft; Ogilvy & Mather; Procter & Gamble; Sony.
INSIDE BACK COVER
Caption: 24/7 MEDIA.
Provides turnkey advertising sales solutions to top websites and
maintains sales and marketing relationships with leading
advertisers.
-(Advertisers:) Agency.com; Amazon.com; American
Express; Anderson & Lembke; BBDO Interactive; Bell Atlantic;
Bloomberg; CKS/Site Specific; Compaq; Disney; DMB&B; Ford; General
Motors; Grey Interactive; Hewlett Packard; Intel; J. Walter
Thompson; Left Field; Microsoft; Modem Media; Olgivy & Mather;
Procter & Gamble; Sony; US Interactive; Visa; Y&R Wunderman.
-(Websites:) Free EDGAR (logo); AT&T WorldNet Service (logo); The
Wire News from AP (logo); Comedy Central (logo); match.com (logo);
Accu Weather (logo); Thompson Investors Network (logo); Earthlink
(logo); Mapquest (logo); Headland (logo); Spinner.com (logo);
Delphi Forums (logo).
- This is a partial, but representative, list of 24/7 Media's
advertisers and websites.
- See the "Business" section of this Prospectus for additional
advertisers and websites.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 12, 1998
PROSPECTUS
3,250,000 Shares
[LOGO OF 24/7 MEDIA]
Common Stock
----------------
All of the shares of Common Stock, par value $.01 per share, (the "Common
Stock") offered hereby (the "Offering") are being sold by 24/7 Media, Inc.
("24/7 Media" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price for the Common Stock will be between $12.00 and $14.00
per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price of the Common
Stock.
Shares of Common Stock may be reserved for sale at the public offering price
to the Company's employees, directors and other persons with relationships with
the Company. Such employees, directors and other persons may purchase, in the
aggregate, not more than 10% of the Common Stock offered hereby. See
"Underwriting."
The Company has been approved for a listing of the Common Stock on the Nasdaq
National Market under the symbol "TFSM."
See "Risk Factors" beginning on page 5 for a discussion of certain factors
which should be considered by prospective purchasers of the Common Stock
offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
================================================================================
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share........................ $ $ $
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Total (3) ........................ $ $ $
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================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 487,500 shares of Common Stock to cover over-allotments. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York, on or about , 1998.
----------------
Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
----------------
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
(including the Notes thereto), appearing elsewhere in this Prospectus. The
discussion in this prospectus contains forward looking statements that involve
risks and uncertainties including, but not limited to, those specifically
discussed in this Prospectus. 24/7 Media's actual results could differ
materially from those discussed herein. The terms "24/7 Media" and "the
Company" mean 24/7 Media, Inc. and its subsidiary and each of its predecessor
entities. In addition, unless otherwise indicated, all information herein (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the automatic conversion of 13,621,507 shares of the Company's Series A
Preferred Stock into an aggregate of 3,577,076 shares of Common Stock and the
automatic conversion of 3,000 shares of the Company's Series B Preferred Stock
into an aggregate of 248,139 shares of Common Stock, each to be effected
simultaneously with the closing of the Offering (collectively, the "Preferred
Stock Conversion"), (iii) reflects the conversion of long-term debt of the
Company with a stated value of $500,000 and accrued interest thereon, into
77,450 shares of Common Stock (the "Senior Note Conversion") and (iv) has been
adjusted to give effect to a 1-for-4 reverse split of the Company's Common
Stock (the "Stock Split") effected on July 20, 1998.
The Company
Overview
24/7 Media, an Internet advertising and direct marketing firm, enables
both advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and electronic commerce.
The Company generates revenue by selling advertisements and promotions for
Websites affiliated with the Company ("Affiliated Websites"). In particular,
24/7 Media: (i) operates the 24/7 Network (the "24/7 Network"), a network of
over 85 high profile Affiliated Websites to which the Company delivered an
aggregate of over 335 million advertisements in May 1998; (ii) operates the
CliqNow! network (the "CliqNow! network"), a network of over 75 medium to
large-sized Affiliated Websites to which an aggregate of over 45 million
advertisements were delivered in May 1998; (iii) operates the ContentZone (the
"ContentZone"), a network of over 2,000 small to medium-sized Affiliated
Websites to which the Company delivered an aggregate of over 40 million
advertisements in May 1998; (iv) licenses its Adfinity[TM] advertising
management system ("Adfinity[TM]") to independent Websites to manage and serve
high-volume Internet advertising and direct marketing campaigns; and (v)
markets its dbCommerce[TM] software ("db Commerce[TM]") to Web commerce
companies ("e-commerce merchants") to enable the delivery of targeted
promotions.
The Company operates in the rapidly growing Internet advertising industry.
International Data Corp. ("IDC") estimates that at the end of 1997 there were
over 38 million users on the World Wide Web (the "Web") in the United States
and over 68 million Web users worldwide, and that by the end of 2002 the number
of Web users will increase to over 135 million in the United States and to over
319 million worldwide. Jupiter Communications projects that the dollar value of
Internet advertising in the United States will increase from $940 million in
1997 to $7.7 billion in 2002. There can be no assurance that such rapid
industry growth rates will be achieved or that the Company will experience
similar rates of growth.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated "reach" (the number of unique Web users that visit a
Website or set of Websites at least once in the given month). The Company
delivered an aggregate of 420 million impressions in May 1998 and, according to
a study prepared for the Company by Media Metrix, the Company's networks
reached 35.7%, or more than one third, of all Internet users. The Company
believes that this reach figure is among the highest in the Internet
advertising industry. The Company plans to aggressively recruit Websites for
its networks in order to (i) further extend the Company's reach, (ii) provide
advertisers with a broad and diverse base of online content and Web pages
viewed by Internet users ("page views") and (iii) improve the Company's brand
awareness and visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
deliver highly targeted messages efficiently. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns in order to
reach desired audiences, while reducing costs, easing time pressures and
alleviating the need to purchase a series of ad campaigns from numerous Web
publishers. Advertisers and direct marketers can achieve their objectives by
buying ad space on a specific Website, within a particular content channel or
across an entire network.
1
<PAGE>
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience provides Web publishers access to media buyers at large ad
agencies and enables them to sell advertising without incurring the costs and
challenges associated with building and maintaining an ad sales force.
Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
The Company's Adfinity[TM] and dbCommerce[TM] technologies allow 24/7
Media to provide comprehensive advertising solutions for advertisers, direct
marketers and Web publishers. Adfinity[TM] is designed to target, deliver, and
track advertisements and direct marketing promotions across the Company's
networks. Adfinity[TM] can create a profile of an Internet user by integrating
such user's online behavior with third party demographic and lifestyle data.
These profiles can allow Adfinity[TM] to deliver targeted advertisements to
"the right person at the right time." dbCommerce[TM] software is designed to
enable e-commerce merchants to deliver promotions and messages to targeted
customer audiences by integrating database marketing techniques with customer
transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to seek to
maximize the value of ad campaigns for both advertisers and Affiliated
Websites.
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998 to
consolidate three Internet advertising companies: (i) Petry Interactive, Inc.
("Petry"), a Delaware corporation that sold advertising for Websites organized
in a network, (ii) Advercomm, Inc. ("Advercomm"), a newly-formed Delaware
corporation that brought a number of high profile Websites to the 24/7 Network,
and (iii) Interactive Imaginations, Inc. ("Interactive Imaginations"), a New
York corporation that operated the ContentZone and Riddler.com. Subsequently,
the Company acquired both Intelligent Interactions Corporation ("Intelligent
Interactions"), a Delaware corporation that develops and licenses ad serving
technology and e-commerce software, and the CliqNow! division ("CliqNow!") of
K2 Design, Inc., a network of over 75 medium to large-sized Websites.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 25, 1998, the Company simultaneously consummated the
merger of each of Petry and Advercomm with and into the Company (together with
the concurrent investment of approximately $10 million by certain third party
investors including an existing investor of Interactive Imaginations, the
"Initial Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's
then parent) was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. On April 13,
1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company, and as of June 1, 1998, the Company acquired
CliqNow! (collectively, the "Acquisitions").
The Company's principal executive offices are located at 1250 Broadway,
New York, New York, 10001, and its telephone number at that location is (212)
231-7100. The Company's main Website address is www.247media.com.
2
<PAGE>
The Offering
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<S> <C>
Common stock offered ........................... 3,250,000 shares
Common stock to be outstanding after the
Offering ...................................... 15,108,297 shares(1)
Use of proceeds ................................ For general corporate purposes, including working capital,
expansion of sales and marketing capabilities, and
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol ......... The Company has been approved for a listing of the
Common Stock on the Nasdaq National Market under the
symbol "TFSM."
</TABLE>
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(1) Excludes approximately 1,258,755 shares of Common Stock issuable upon
exercise of stock options outstanding at August 5, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 174,578 are vested and
exercisable at August 5, 1998) and approximately 1,667,557 shares of
Common Stock reserved for issuance pursuant to future grants under the
1998 Stock Incentive Plan. The outstanding stock options have a weighted
average exercise price of $4.72 per share. Also excludes approximately
3,988,144 shares of Common Stock issuable upon exercise of outstanding
warrants at August 5, 1998. Such warrants have a weighted average exercise
price of $8.34 per share.
3
<PAGE>
Summary Consolidated Financial Data
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<CAPTION>
Year Ended
December 31,
1997
----------------
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Pro Forma (1)
- ------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 3,632,793
Consulting and license fees ....... 1,746,896
Total revenue ................... 5,379,689
Gross profit ...................... 2,070,013
Operating loss (2) ................ (16,791,493)
Net loss .......................... (16,887,098)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... (546,000)
Net loss attributable to common
stockholders ..................... $ (17,433,098)
=============
Pro forma:
Basic net loss per share (3) ..... $ (3.92)
Shares outstanding (3) ........... 4,443,053
Historical
- -------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 1,467,105
Consulting and license fees ....... 1,681,464
Total revenue ................... 3,148,569
Gross profit ...................... 1,493,229
Operating loss .................... (5,209,362)
Net loss .......................... (5,305,828)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... --
Net loss attributable to common
stockholders ..................... (5,305,828)
Basic net loss per share (6) ...... $ (4.88)
Shares outstanding (6) ............ 1,086,614
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Pro Forma (1)
- -------------------------------------
Consolidated Statement of Operations
Data:
Advertising revenue ............... $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees ....... 805,245 639,588 244,890 57,173 88,362
Total revenue ................... 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Gross profit ...................... 741,263 626,595 147,149 555,006 542,938
Operating loss (2) ................ (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Net loss .......................... (3,133,895) (4,433,098) (5,882,888) (3,437,217) (4,590,761)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... (136,500) (136,500) (136,500) (136,500) (136,500)
Net loss attributable to common
stockholders ..................... $ (3,270,895) $ (4,569,598) $ (6,019,388) $ (3,573,717) $ (4,727,261)
============ ============ ============ ============ ============
Pro forma:
Basic net loss per share (3) ..... $ (0.86) $ (0.98) $ (1.30) $ (0.76) $ (0.75)
Shares outstanding (3) ........... 3,786,202 4,652,006 4,652,006 4,681,998 6,342,350
Historical
- -------------------------------------
Consolidated Statement of Operations
Data:
Advertising revenue ............... $ 388,892 $ 355,346 $ 315,697 $ 407,170 $ 1,076,250
Consulting and license fees ....... 805,245 630,588 233,130 12,501 --
Total revenue ................... 1,194,137 985,934 548,827 419,671 1,076,250
Gross profit ...................... 734,550 551,294 37,361 170,024 146,247
Operating loss .................... (798,059) (1,423,535) (2,400,167) (587,601) (2,130,580)
Net loss .......................... (784,377) (1,427,594) (2,433,302) (660,555) (2,297,838)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... -- -- -- -- (33,500)
Net loss attributable to common
stockholders ..................... (784,377) (1,427,594) (2,433,302) (666,555) (2,331,338)
Basic net loss per share (6) ...... $ (0.73) $ (1.32) $ (2.25) $ (0.59) $ (0.76)
Shares outstanding (6) ............ 1,079,116 1,079,116 1,079,116 1,109,108 3,055,432
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------------------------------------
Pro Forma
Actual Pro Forma (4) As Adjusted (5)
------------- --------------- ----------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .................................. $ 7,764,695 $ 6,473,103 $44,565,603
Working capital ............................................ 6,317,136 4,767,597 42,860,097
Goodwill, net .............................................. 7,870,174 14,992,403 14,992,403
Total assets ............................................... 18,201,993 24,946,615 63,039,115
Long-term debt ............................................. 479,408 -- --
Mandatorily redeemable convertible preferred stock ......... 10,093,502 -- --
Total stockholders' equity ................................. 4,264,180 20,575,805 58,668,305
</TABLE>
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(1) Pro forma consolidated statement of operations data reflects the
consolidation of the results of operations of Petry, Advercomm,
Intelligent Interactions and CliqNow! as if each entity had been acquired
on January 1, 1997 (or inception, if later) but does not give effect to
the Preferred Stock Conversion or Senior Note Conversion which have taken
place or will take place immediately prior to the Offering.
(2) Includes acquisition related non-cash charges for amortization of goodwill.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Pro Forma Consolidated Financial
Information and the related Notes thereto.
(3) See Note F to the Company's Pro Forma Consolidated Financial Information
for the determination of shares used in computing pro forma basic net loss
per share.
(4) Pro forma consolidated balance sheet data give effect to (i) the
Acquisitions of Intelligent Interactions and CliqNow!, each of which
occurred after March 31, 1998, as if such Acquisitions occurred on March
31, 1998, (ii) an increase in accumulated deficit in connection with
Intelligent Interactions' write-off of acquired in-process technology of
$5,477,300 and (iii) the conversion of all outstanding shares of
mandatorily redeemable convertible preferred stock into 3,825,215 shares
of Common Stock and conversion of senior convertible notes payable into
77,450 shares of Common Stock prior to the closing of this Offering.
(5) Adjusted to reflect the sale of 3,250,000 shares of Common Stock by the
Company, the net proceeds from which are estimated to be approximately
$38,092,500, assuming an initial offering price of $13.00 per share and
after deducting underwriting discounts and estimated Offering expenses
payable by 24/7 Media. The Company intends to use the net proceeds of the
Offering for general corporate purposes, including working capital, and
for the expansion of its operations and sales and marketing capabilities.
See "Use of Proceeds."
(6) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing basic net loss per share.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that are based largely on
the Company's current expectations and that are subject to a number of risks
and uncertainties, including those set forth below. The Company's actual
results could differ materially from the results discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus.
Extremely Limited Operating History; History of Losses;
Integration of Acquired Entities
Because none of the predecessor companies that were combined to form 24/7
Media had an operating history of more than four years, the Company has an
extremely limited operating history upon which an evaluation of the Company can
be based. The Company and its prospects must be considered in light of the
risks, expenses and difficulties encountered by companies with limited
operating histories, particularly companies in the new and rapidly evolving
Internet market. To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing relationships with
customers, business and technology partners and other third parties; further
develop and upgrade its technology; improve its technical support and service;
respond to competitive developments; implement and improve operational,
financial and managerial information systems; and attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed in
addressing such risks and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition.
Although the Company has experienced revenue growth in recent periods,
such growth may not be sustained and is not necessarily indicative of future
operating results. The Company incurred pro forma net losses of $16.9 million
for the year ended December 31, 1997 and $4.6 million for the three months
ended March 31, 1998. Each of the predecessors of the Company had net losses in
each year since its inception. The Company anticipates that it will incur
operating losses for the foreseeable future due to a high level of planned
operating and capital expenditures. There can be no assurance that operating
losses will not increase in the future or that the Company will ever achieve or
sustain profitability. The Company's business, results of operations and
financial condition may be materially and adversely affected if revenues do not
grow at anticipated rates or if the Company is unable to adjust operating
expenses to appropriate levels for revenue levels achieved.
24/7 Media did not conduct any substantial operations until February 1998.
In February 1998, the Company closed a transaction pursuant to which Petry and
Advercomm were merged into the Company. In April 1998, the Company completed
two transactions pursuant to which Interactive Imaginations was merged into the
Company and Intelligent Interactions became a wholly-owned subsidiary of the
Company. In June 1998, the Company acquired CliqNow! See "Prospectus
Summary--Formation of the Company." In order to integrate effectively the
previously independent operations, the Company must continue to integrate and
improve its financial and management controls, ad serving technology, reporting
systems and procedures, and expand, train and manage its work force. Completion
of such integration may take a significant period of time and will require the
dedication of management and other resources, which may distract management's
attention from other operations of the Company. See "--Management of Growth;
Risks Associated with Acquisitions; Risks of International Expansion."
Potential Fluctuations in Quarterly Operating Results; Seasonality
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are beyond the
Company's control. These factors include the addition of new or loss of current
advertisers or Affiliated Websites, changes in fees paid by advertisers,
changes in the level of user traffic and number of available impressions on the
Websites in the Company's networks, changes in service fees payable by the
Company to Web publishers, the introduction of new Internet advertising
services by the Company or its competitors, variations in the levels of capital
expenditures and other costs relating to the expansion of the Company's
operations, and general economic conditions. Future revenues and results of
operations of the Company may be difficult to forecast due to such factors.
Management believes that its revenues are also subject to seasonal
fluctuations because advertisers generally place fewer advertisements during
the first and third calendar quarters of each year. Additional seasonal
patterns in Internet advertising spending may emerge as the industry matures.
Expenditures by advertisers tend to vary in cycles that reflect overall
economic conditions as well as budgeting and buying patterns. The Company's
business could be materially adversely affected by a decline in the economic
prospects of advertisers or the economy
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generally, which could alter current or prospective advertisers' spending
priorities or budget cycles or extend the Company's sales cycle with respect to
certain of its advertisers.
The Company's current and future expense levels are based in large part on
its investment plans and estimates of future revenues. In particular, the
Company expects to increase significantly its operating expenses in order to
expand its sales and marketing organization and to enhance its Adfinity[TM]
technology. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition would be materially and adversely affected. The Company
may be unable to, or may elect not to, adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Therefore, any significant
shortfall in revenues in relation to the Company's expectations would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Due to the foregoing factors, 24/7 Media believes that period-to-period
comparisons of its results of operations may not be meaningful and should not
be relied upon as indicators of future performance. Furthermore it is possible
that in some future periods the Company's results of operations may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Developing Market; Unproven Effectiveness of Web Advertising
and Online Direct Marketing
In the new and rapidly evolving Internet advertising market, demand and
market acceptance for products and services are subject to high levels of
uncertainty, and a significant number of entrants continually seek to penetrate
the market. Since 24/7 Media expects to derive substantially all of its
revenues in the foreseeable future from Internet advertising, the future
success of the Company is highly dependent on the increased use of the Internet
as an advertising medium.
The Internet as an advertising medium has not been in existence for a
sufficient period of time in order to demonstrate its effectiveness as compared
with traditional advertising media. Most of the Company's current or potential
advertising customers have limited or no experience using the Internet as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Internet advertising and may not find Internet advertising to
be effective for promoting their products and services relative to advertising
across traditional media. Companies adopting Internet advertising, particularly
those that use traditional media for advertising, must accept new ways of
conducting business and exchanging information. In addition, most Web
publishers have limited or no experience in generating revenues from the sale
of advertising space on their Websites. There can be no assurance that the
market for Internet advertising will continue to emerge or be sustainable.
Online advertising must demonstrate a level of effectiveness necessary to
justify a reallocation of resources from traditional forms of advertising to
this developing medium. There are currently no widely accepted standards to
measure the effectiveness of Internet advertising and there can be no assurance
that such standards will develop to support Internet advertising sufficiently
as a significant advertising medium. Advertisers may not accept the Company's
or third-party measurements of impressions on Websites utilizing the Company's
services or that such measurements will not contain errors. In addition, the
effectiveness of Internet advertising is dependent upon the accuracy of
information contained in the databases used to target advertisements. There can
be no assurance that the information in the Company's database will be accurate
or that advertisers will be willing to have advertisements targeted by any
database containing such potential inaccuracies. Actual or perceived
ineffectiveness of online advertising generally, or accuracy of measurements or
database information in particular, could limit the long-term growth of online
advertising, which would have a material adverse effect on the Company's
business, results of operations and financial condition.
Banner advertising, from which the Company currently derives most of its
revenues, may not be an effective advertising method in the future. There can
be no assurance that any other forms of Internet advertising will be developed
or accepted by the market and if so developed, that the Company would
effectively transition to the marketing and sale of such other forms of online
advertising. Moreover, "filter" software programs that limit advertising from
being delivered to a Website are currently available. Failure to develop
successfully alternative forms of online advertising or widespread adoption of
filter software could have a material adverse effect upon the Internet
advertising market and 24/7 Media's business, results of operations and
financial condition.
Adoption of online direct marketing, particularly by those entities that
have historically relied upon traditional means of direct marketing (such as
telemarketing and direct mail), requires the broad acceptance of a new and
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substantially different approach to direct marketing. As with online
advertising and other new markets, intensive marketing and sales efforts may be
necessary to educate prospective advertisers regarding the uses and benefits of
the Company's products and services in order to generate demand for the
Company's services. Enterprises that have already invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new approach that may replace, limit, or compete with their existing
systems. In addition, since online direct marketing is emerging as a new and
distinct market apart from online advertising, potential adoptors of online
direct marketing services will increasingly demand functionality tailored to
their specific requirements.
Reliance on a Limited Number of Web Publishers; Dependence on the 24/7 Network
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Websites of a limited number of Web
publishers on the 24/7 Network. The 24/7 Network consists of a limited number
of Affiliated Websites that have contracted for the Company's services under
agreements cancellable upon a specified notice period. For the three months
ended March 31, 1998 and for the year ended December 31, 1997, approximately
66% and 68%, respectively, of the 24/7 Network's pro forma advertising revenues
were derived from advertisements on the top ten Affiliated Websites on the 24/7
Network. The top ten Websites for the year ended December 31, 1997 included
AT&T WorldNet Service, Reuters, USA.NET, Columbia House, Comedy Central,
Reuters-MoneyNet, Maps on Us, Universal Media, FlashNet Communications and
FoxNews Internet. For the three months ended March 31, 1998, the top ten
Websites included AT&T WorldNet Service, Netscape Communications, Reuters,
Comedy Central, Maps on Us, Reuters-MoneyNet, Universal Media, Encompass, Inc.,
Columbia House and Fortune City Ltd. The Company from time to time experiences
turnover in its Affiliated Websites, and there can be no assurance that the
Websites named above remain or will remain associated with the Company.
Affiliated Websites generally measure satisfaction by acceptable revenue
levels, adequate "click-thru rates" (the number of times users click on an
advertisement as a percentage of page views), high levels of customer service
and timely and accurate reporting. There can be no assurance that the
Affiliated Websites will maintain consistent or increasing levels of traffic
over time, or that the Company would be able to replace any departed Affiliated
Website with another Web publisher with comparable traffic patterns and user
demographics. The loss or reduction in traffic of such Websites may cause
advertisers or Web publishers to withdraw from the 24/7 Network, which, in
turn, could materially adversely affect the Company's business, results of
operations and financial condition. The failure of the Company to market its
networks successfully or the failure of Affiliated Websites to maintain
consistent or increasing levels of traffic would have a material adverse effect
on the Company's business, results of operations and financial condition.
Reliance on a Limited Number of Advertisers and Ad Agencies
The Company's revenues have been derived from a limited number of
advertisers and ad agencies that purchase space on Affiliated Websites and the
Company expects that a limited number of these entities may continue to account
for a significant percentage of the Company's revenues for the foreseeable
future. In particular, for the year ended December 31, 1997 and the three
months ended March 31, 1998, the Company's top ten advertisers and ad agencies
accounted for an aggregate of approximately 48% and 51%, respectively, of the
24/7 Network's pro forma advertising revenues, and for the five months ended
May 31, 1998, CardSecure accounted for 12.9% of the Company's revenues.
Recently, CardSecure has substantially reduced its advertising with the
Company, and has accounted for less than 5% of the Company's revenues since
June 30, 1998. The Company believes that such reduction will not have a
material effect on the financial condition of the Company. See "Management's
Discussion and Analysis--General." Advertisers and ad agencies typically
purchase advertising pursuant to purchase order agreements that run for a
limited time. There can be no assurance that current advertisers and ad
agencies will continue to purchase advertising from the Company or that the
Company will be able to attract additional advertisers and ad agencies
successfully. The loss of one or more of the advertisers or ad agencies that
represent a material portion of the revenues generated on the Company's
networks could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the non-payment or
late payment of amounts due to the Company from a significant advertiser or ad
agency could have a material adverse effect on the Company's business, results
of operations and financial condition.
Integration of Adfinity[TM] Technology; Dependence on Third Party Technology
The Company has utilized the AdForce advertisement management service from
IMGIS, Inc. to deliver its advertisements to the 24/7 Network. 24/7 Media is in
the process of replacing the AdForce service with the Company's Adfinity[TM]
system, which is expected to become the technology platform for all of the
Company's networks. The Company anticipates that Adfinity[TM] will enable it to
deliver targeted advertisements based on
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demographic profiles and consumer behavior. There can be no assurance that the
information required to develop user profiles will be available and, if
available, that the utilization of such information will not be cost
prohibitive. The Company's ability to deliver increased value to advertisers
and Web publishers in the future is therefore based, in large part, on the
successful integration of Adfinity[TM] as the technology platform for the
Company's networks. In order to complete the transition to Adfinity[TM], the
Company must, among other things, ensure scalability of the Adfinity[TM]
system, assimilate the Company's current sales and reporting functions into the
Adfinity[TM] model and work with certain existing Affiliated Websites to re-tag
such Websites. Although the Company expects that the transition to Adfinity[TM]
will be completed in the third quarter of 1998, there can be no assurance that
the Company will be able to complete the integration of Adfinity[TM] on a
timely basis. The failure of the Company to effect a successful transition to
Adfinity[TM] could result in a loss of Affiliated Websites, a disruption in the
Company's ability to deliver advertisements effectively and a negative impact
on its business in general until Adfinity[TM] or an alternative advertisement
management technology is integrated. If the Company is unable to integrate the
Adfinity[TM] technology successfully on a timely basis, or if the Adfinity[TM]
technology does not enable the Company to target advertisements effectively
based on demographic profiles and consumer behavior, or if the information to
develop user profiles is not available, the Company's business, results of
operations and financial condition would be materially adversely affected.
Until the integration of Adfinity[TM] is completed, the Company may be
dependent upon AdForce to deliver ads to the 24/7 Network. If the AdForce
service becomes unavailable or if AdForce fails to serve the Company's
advertisements effectively, the Company's business, results of operations and
financial condition would be materially adversely affected. In addition to the
delivery of advertisements, AdForce also produces frequent operational reports
for use by the Company, advertisers and the Affiliated Websites. However, the
AdForce system requires the Company to employ a significant amount of effort to
prepare information for financial reporting. This causes difficulties in
preparing financial statements and reporting information on a timely basis. The
Company is in the process of upgrading its systems in order to integrate newly
developed and/or purchased modules with its existing systems and with
Adfinity[TM] in order to improve its accounting, control and reporting methods.
The Company's inability to add additional software and hardware or to develop
further and upgrade its existing technologies, systems or network
infrastructure may cause unanticipated delays in delivering its customers'
advertisements and providing timely reporting of accurate financial
information.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to increase. The Company
believes that its ability to compete depends upon many factors both within and
beyond its control, including the timing and market acceptance of new products
and enhancements of existing services developed by the Company and its
competitors; changing demands regarding customer service and support; shifts in
sales and marketing efforts by the Company and its competitors; and the ease of
use, performance, price and reliability of the Company's services and products.
The Company competes with large Web publishers and Web search engine
companies, such as America Online, Excite, GeoCities, Infoseek, Lycos and
Yahoo!, for Internet advertising revenues. Further, the Company's networks
compete with a variety of Internet advertising networks, including DoubleClick
and Link Exchange. In marketing the Company's networks and its Adfinity[TM]
service to Web publishers, the Company also competes with providers of
advertisement software and related services, including NetGravity and
Accipiter, a division of CMG Information Services, Inc. In marketing
dbCommerce[TM], the Company competes with a variety of entities, including
BroadVision. The Company also encounters competition from a number of other
sources, including content aggregators, companies engaged in advertising sales
networks, advertising agencies and other entities that facilitate Internet
advertising. Many of the Company's existing competitors, as well as a number of
potential new competitors, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, the Internet, in general, and the Company,
specifically, also must compete for a share of advertisers' total budgets with
traditional advertising media, such as television, radio, cable and print. To
the extent that the Internet is perceived to be a limited or ineffective
advertising medium, advertisers may be reluctant to devote a significant
portion of their advertising budgets to Internet advertising, which could limit
the growth of Internet advertising and would have a material adverse effect on
the Company's business, results of operations and financial condition.
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Technological Change
The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequent new product announcements, introductions
and enhancements, and changing customer demands. The introduction of new
products and services embodying new technologies and the emergence of new
industry standards and practices can render existing products and services
obsolete and unmarketable or require unanticipated investments in research and
development. These market characteristics are heightened by the emerging nature
of the Internet industry. The Company's future success depends on its ability
to adapt to rapidly changing technologies and to improve the performance,
features and reliability of its services and products in response to changing
customer and industry demands. The failure of the Company to successfully adapt
to such technological change could adversely affect its business, results of
operations and financial condition.
Furthermore, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of services, or that any new
services or enhancements to existing services will adequately meet the
requirements of its current and prospective advertisers and Affiliated Websites
and achieve any degree of significant market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or enhancements to existing services in a timely manner or in response
to changing market conditions or customer requirements, or if its services or
enhancements contain errors or do not achieve a significant degree of market
acceptance, the Company's business, results of operations and financial
condition would be materially and adversely affected.
Dependence on the Web Infrastructure
24/7 Media's success depends upon, among other things, the continued
expansion of, and reliance on, the Internet and the development and maintenance
of a viable Web network infrastructure. The maintenance and improvement of this
infrastructure will require timely development of products, such as high speed
modems and communications equipment, in order to continue to provide reliable
Web access and improved content. The current Web infrastructure may not be able
to support an increased number of users or the increased bandwidth requirements
of users and, as such, the performance or reliability of the Web may be
adversely affected. Furthermore, the Web has experienced certain outages and
delays as a result of damage to portions of its infrastructure. Such outages
and delays, including those resulting from Year 2000 problems, could adversely
affect Websites and the level of traffic on the Company's networks. The
effectiveness of the Web may decline due to delays in the development or
adoption of new standards and protocols (for example, the next-generation
Internet protocol) designed to support increased levels of activity. There can
be no assurance that the infrastructure or products or services necessary to
maintain the Web will be developed, or that the Web will be a viable commercial
medium for advertisers. If the necessary infrastructure, standards, protocols,
products, services or facilities are not developed, or if the Web does not
become a viable commercial medium, 24/7 Media's business, results of operations
and financial condition could be materially and adversely affected. Even if
such infrastructure, standards or protocols or complementary products, services
or facilities are developed, there can be no assurance that the Company will
not be required to incur substantial expenditures in order to adapt its
services to changing or emerging technologies, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Moreover, critical issues concerning the commercial use and
government regulation of the Internet (including security, cost, ease of use
and access, intellectual property ownership and other legal liability issues)
remain unresolved and could materially and adversely impact both the growth of
the Internet and the Company's business, results of operations and financial
condition.
Dependence on Third Party Systems; Risk of System Failure; Capacity Constraints
A key to the Company's strategy is to generate a high volume of traffic
for its products and services. In particular, the future success of the Company
depends on the performance of Adfinity[TM] and third party service providers.
Adfinity's computer hardware and software is housed at GlobalCenter, Inc.
("GlobalCenter"), a third party provider of Internet communication services.
See "Business--Facilities and Systems." Any Adfinity[TM] or third party ad
server system failure, including failures that delay the delivery of
advertisements to Websites, could reduce customer satisfaction and result in a
material adverse effect on the Company's business, results of operations and
financial condition.
In general, the Company's operations are dependent upon the proper
operation of its own and third party computer systems. Any damage from fire,
power loss, telecommunications failures, vandalism and other malicious acts,
and similar unexpected events could adversely affect 24/7 Media's business,
results of operations and financial condition. In addition, failure of the
Company's telecommunications providers to provide the data communications
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capacity in the time frame required by the Company for any reason could cause
interruptions in the services provided by the Company. Despite precautions
taken by the Company, unanticipated problems affecting the Company's computer
and telecommunications systems in the future could cause interruptions in the
delivery of the Company's services. Any damage or failure that interrupts or
delays the Company's operations could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, large increases in the volume of advertising delivered
through the Company's ad servers could strain the capacity of the software or
hardware deployed by the Company, which could lead to slower response time or
system failures and could have a material adverse effect on the Company's
business, results of operations and financial condition.
Unproven Business Model
Since the markets for online advertising and direct marketing are in the
early stages of development, there can be no assurance that the Company's model
for pricing its products and services will remain an acceptable model. The
Company's business model is to generate revenues primarily by providing
Internet advertising services to advertisers and Web publishers. The profit
potential of the Company's business model is unproven. To be successful, the
Company must develop and market services that are broadly accepted by
advertisers and Web publishers. There can be no assurance that Internet
advertising, in general, or that the Company's services, in particular, will
achieve broad market acceptance. The Company's ability to generate significant
revenues from advertisers will depend, in part, on the continued development of
a large base of Web publishers that utilize the Company's services and have
Websites with adequate available ad space inventory, and whose Websites
generate sufficient user traffic with demographic characteristics that are
attractive to such advertisers. A variety of related pricing models have
developed in the Company's marketplace, making it difficult to project future
levels of advertising revenues and applicable gross margins that can be
sustained by the Company. A key component of the Company's strategy is to
enhance the value of the ad inventory on its networks by seeking to sell 100%
of its inventory of available page views and by increasing the breadth and
depth of its content channels. The Company has limited experience in
implementing and following such a strategy and there can be no assurance that
such strategy will succeed or that the Company will be able to maintain
sufficient gross margins.
Management of Growth; Risks Associated with Acquisitions; Risks of
International Expansion
24/7 Media has experienced rapid growth and expansion in operations that
have placed a significant strain on the Company's managerial, operational and
financial resources. The Company has grown from approximately 60 employees on a
pro forma basis as of September 30, 1997 to approximately 115 employees as of
June 30, 1998 and expects the number of employees to increase in the future. In
order to successfully compete in the evolving Internet industry, 24/7 Media
must continue to improve its financial and management controls, enhance its
reporting systems and procedures, and expand, train and manage its work force.
There can be no assurance that the Company's systems, procedures or controls
will be adequate to support 24/7 Media's expanding operations, or that
management will be able to respond effectively to such growth. The Company's
future results of operations also depend on the expansion of its sales,
marketing and customer support organizations. 24/7 Media's business, results of
operations and financial condition could be materially adversely affected if
growth is not managed effectively.
24/7 Media intends to pursue selective acquisitions of businesses,
technologies and product lines as a key component of its growth strategy. 24/7
Media regularly seeks to identify and acquire or invest in companies or assets
that will enhance 24/7 Media's revenue growth, operations and profitability.
Any future acquisition or investment may result in the use of significant
amounts of cash, potentially dilutive issuances of equity securities,
incurrence of debt and amortization expenses related to goodwill and other
intangible assets, each of which could materially adversely affect the
Company's business, results of operations or financial condition. In addition,
acquisitions involve numerous risks, including the difficulties in the
integration and assimilation of the operations, technologies, products and
personnel of any acquired business; the diversion of management's attention
from other business concerns; the availability of favorable acquisition
financing for future acquisitions; and the potential loss of key employees of
any acquired business. In the event that an acquisition does occur, there can
be no assurance that 24/7 Media will be able to successfully integrate the
acquired business, and the failure to do so could have a material adverse
effect on the Company's results of operations and financial position. See
"--Integration of Adfinity[TM] Technology; Dependence on Third Party
Technology."
The Company has entered into a number of international alliances. These
alliances involve certain inherent risks, such as unexpected changes in
regulatory requirements, potentially adverse tax consequences, general export
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restrictions and export controls relating to encryption technology, tariffs and
other trade barriers, political instability and fluctuations in currency
exchange rates, and seasonal reductions in business activity. Any of the above
could have a material adverse effect on the success of the Company's future
international initiatives.
Dependence on Key Personnel
The Company's success depends upon its senior management and its key sales
and technical personnel, particularly David J. Moore, Chief Executive Officer,
Jacob I. Friesel, Executive Vice President, and Yale R. Brown, Executive Vice
President. The loss of the services of one or more of these persons could
materially adversely affect 24/7 Media's business, results of operations and
financial condition. 24/7 Media's success also depends on its ability to
attract and retain qualified technical, sales and marketing, customer support,
financial and accounting, and managerial personnel. Competition for such
personnel in the Internet industry is intense, and there can be no assurance
that the Company will be able to retain its key personnel or that it can
attract, assimilate or retain other highly qualified personnel in the future.
The Company has experienced in the past, and may continue to experience in the
future, difficulty in hiring and retaining candidates with appropriate
qualifications, especially in sales and marketing positions. Although the
Company has not experienced any material impact from the difficulty in hiring
and retaining qualified employees, there can be no assurance that the Company
will not be materially impacted in the future from such hiring difficulties.
The failure by the Company to successfully hire and retain candidates with
appropriate qualifications could have a material adverse effect on the
Company's business, results of operations and financial condition.
Trademarks, Patents and Proprietary Rights; Risk of Infringement
24/7 Media relies upon patent, trademark, copyright and trade secret laws
to protect its intellectual property. The Company has pursued the protection of
its trademarks by applying to register them (including the trademarks of
Adfinity[TM] and dbCommerce[TM] technologies) in the United States and
internationally (based on anticipated use). The Company is the owner of a
registration for the 24/7 Media trademark in the United States. There can be no
assurance that all of the Company's trademark registrations or patent
applications will be approved or granted or that they will not be successfully
challenged by others or invalidated through administrative process of
litigation. Further, if the Company's trademark registrations are not approved
or granted due to the prior issuance of trademarks to third parties or for
other reasons, there can be no assurance that the Company would be able to
enter into arrangements with such third parties on commercially reasonable
terms to allow the Company to continue to use such trademarks. Such patent,
trademark, copyright and trade secret protection may not be available in every
country in which the Company's services are distributed or made available. In
addition, 24/7 Media protects its proprietary rights through the use of
confidentiality agreements with employees and affiliates. 24/7 Media also
licenses certain proprietary rights to third parties. There can be no assurance
that such agreements and licenses will provide adequate protection of 24/7
Media's proprietary rights; that the Company's employees and affiliates may not
keep such information confidential; and such proprietary information may
otherwise become known, or be independently developed by competitors.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within the industry. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate or that third
parties will not infringe or misappropriate the Company's proprietary rights.
Any such infringement or misappropriation, should it occur, could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others, or
that other parties will not assert infringement claims against the Company. The
Company anticipates that it may be subject to claims in the ordinary course of
its business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by the Company and its
business partners. Such claims and any resultant litigation, should it occur,
could subject the Company to significant liability for damages and could result
in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Privacy Concerns
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the Company's networks and the Websites of independent
Web publishers using the Company's services. There can be no assurance
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that any trade secret, copyright or other protection will be available for such
data or that others will not claim rights to such data. 24/7 Media must also
keep certain information regarding Web publishers confidential pursuant to its
contracts with Web publishers. Adfinity[TM] enables the use of "cookies," in
addition to other mechanisms, to deliver targeted advertising, to help compile
demographic information, and to limit the frequency with which an advertisement
is shown to the user. Cookies are bits of information keyed to a specific
server, file pathway or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software.
Cookies are placed on the user's hard drive without the user's knowledge or
consent, but can be removed by the user at any time through the modification of
the user's browser settings. Due to privacy concerns, some Internet
commentators, advocates and governmental bodies have suggested that the use of
cookies be limited or eliminated. In addition, certain currently available
Internet browsers allow a user to delete cookies or prevent cookies from being
stored on the user's hard drive.
Government Regulation
Due to the increasing popularity and use of the Web, a number of laws and
regulations may be adopted regarding user privacy, pricing, acceptable content,
taxation and quality of products and services. Although there are currently few
laws or regulations directly governing access to or commerce on the Internet,
any new legislation could inhibit the growth in use of the Web and decrease the
acceptance of the Web as a communications and commercial medium, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, the growing use of the Web has burdened
existing telecommunications infrastructure and has caused interruptions in
telephone service. Certain telephone carriers have petitioned the government to
regulate and impose fees on Internet service providers and online service
providers in a manner similar to long distance telephone carriers. Any such
regulations could affect the costs of communicating on the Web and adversely
affect the growth in use of the Web, which could in turn decrease the demand
for the Company's products or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. Further, due
to the global nature of the Web, governments of states or foreign countries may
attempt to regulate Internet transmissions or levy sales or other taxes
relating to the Company's activities. There can be no assurance that violations
of local laws will not be alleged by applicable governments, 24/7 Media will
not violate such laws or new laws will not be enacted in the future. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
Year 2000 Compliance
Beginning in the year 2000, the date fields coded in certain software
products and computer systems will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. The Company is working with its
external suppliers and service providers to ensure that they and their systems
will be able to support the Company's needs and, where necessary, interoperate
with the Company's hardware and software infrastructure in preparation for the
year 2000. Management does not anticipate that the Company will incur material
expenses to make its computer software programs and operating systems Year 2000
compliant. However, there can be no assurance that unanticipated costs
associated with any Year 2000 compliance will not exceed the Company's present
expectations and have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company's ad
servers and certain of its customers may also be impacted by Year 2000
complications. Any failure by the Company or its ad servers or its customers to
make their products Year 2000 compliant could result in a decrease in sales of
the Company's products, an increase in the allocation of resources to address
Year 2000 problems of the Company's customers without additional revenue
commensurate with such dedication of resources, or an increase in litigation
costs relating to losses suffered by the Company's customers due to such Year
2000 problems. The occurrence of any such event could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Control by Principal Stockholders, Officers and Directors
After the Offering, the directors and executive officers and their
affiliates will beneficially own approximately 51.7% of the outstanding Common
Stock. As a result, these stockholders will be able to exercise control over
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate
12
<PAGE>
transactions. This concentration of ownership may have the effect of delaying
or preventing a change in control of the Company. See "Management" and
"Security Ownership of Certain Beneficial Owners and Management."
Broad Discretion in Use of Proceeds
The net proceeds of the offering will be added to the Company's working
capital and will be available for general corporate purposes, including capital
expenditures and potential future acquisitions. As of the date of this
Prospectus, the Company cannot specify with certainty the particular uses for
the net proceeds to be received upon completion of the offering. Accordingly,
the Company's management will have broad discretion in the application of the
net proceeds. See "Use of Proceeds."
Shares Eligible for Future Sale; Registration Rights
Sales of significant amounts of Common Stock in the public market after
the offering, or the perception that such sales will occur, could materially
affect the market price of the Common Stock or the future ability of the
Company to raise capital through an offering of its equity securities. The
Company will have 15,108,297 shares of Common Stock outstanding after the
offering. The 3,250,000 shares offered hereby will be eligible for immediate
sale in the public market without restriction, except shares purchased by
"affiliates" of the Company within the meaning of Rule 144 promulgated under
the Securities Act. The remaining 11,858,297 shares of Common Stock held by
existing stockholders are "restricted securities" within the meaning of Rule
144 under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act. The
Company's directors and officers and a majority of its stockholders have agreed
that they will not sell, directly or indirectly, any Common Stock without the
prior consent of the representatives of the Underwriters for a period of 180
days from the date of this Prospectus. See "Underwriting." As a result of
contractual restrictions and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 64,585 shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 11,655,790 shares will be eligible for sale upon the
expiration of lock-up agreements 180 days after the date of this Prospectus and
(iii) 137,922 shares will be eligible for sale upon the later of 90 days after
the date of this Prospectus or the expiration of their respective one-year
holding periods. In addition, there are outstanding options to purchase
1,258,755 shares of Common Stock, 62,400 of which will, upon exercise, be
eligible for sale in the public market between 90 days and 180 days after the
date of this Prospectus and an additional 115,594 of which will be eligible for
sale in the public market 180 days after the date of this Prospectus. There are
also outstanding warrants to purchase 3,988,144 shares of Common Stock, none of
which will, upon exercise, be eligible for sale in the public market until
expiration of lock-up agreements 180 days after the date of this Prospectus. In
addition, certain stockholders, representing approximately 9,413,381 shares of
Common Stock, have the right, subject to certain conditions, to include their
shares in future registration statements relating to the Company's securities
and/or to cause the Company to register certain shares of Common Stock owned by
them. See "Shares Eligible For Future Sale."
Lack of Public Market for Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common
Stock. Accordingly, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting." The trading price of the Common Stock could be subject to
wide fluctuations caused by, among other things, variations in quarterly
results of operations, the gain or loss of significant advertisers or
Affiliated Websites, changes in earning estimates of 24/7 Media by industry
analysts, announcements of technological innovations or new services by 24/7
Media or its competitors, or general conditions in the economy in general or in
Internet-related industries.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price for many companies in
industries similar or related to that of the Company and that have been
unrelated to the operating performance of these companies. These market
fluctuations may have a material adverse effect on the market price of the
Company's Common Stock.
13
<PAGE>
Anti-Takeover Effects of Certain Charter, Bylaws And Delaware Law Provisions;
Possible Issuance of Preferred Stock
After the Offering and upon receipt of the requisite stockholder approval,
the Company's board of directors may issue up to 10,000,000 shares of preferred
stock without any further vote or action by the stockholders, and determine the
price, rights, preferences, privileges and restrictions, including voting
rights of such shares. The preferred stock may be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The issuance of preferred stock could make it difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. Further,
certain provisions of the Company's certificate of incorporation, the Company's
bylaws and Delaware law could have the effect of delaying or preventing a
change in control of the Company. See "Description of Capital Stock--Delaware
Anti-Takeover Law and Certain Charter Provisions."
Dilution
Investors purchasing shares of Common Stock in the offering will incur
immediate and substantial dilution in net tangible book value per share. To the
extent outstanding options or warrants to purchase Common Stock are exercised,
there will be further dilution. See "Dilution."
Litigation
24/7 Media has been subject to legal claims in the ordinary course of its
business. Such claims have not had a material adverse effect on the Company's
business, results of operations or financial condition. Nonetheless, these
claims and future claims, if successful, could subject the Company to liability
for damages, invalidate 24/7 Media's proprietary rights and/or divert
management's time and attention, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
USE OF PROCEEDS
The net proceeds to 24/7 Media from the sale of the 3,250,000 shares of
Common Stock sold pursuant to the Offering are estimated to be approximately
$38,092,500 ($43,986,375 if the Underwriter's over-allotment option is
exercised in full), assuming an initial offering price of $13.00 per share and
after deducting underwriting discounts and estimated Offering expenses payable
by 24/7 Media. The primary purposes of the Offering are to create a public
market for the Common Stock, to facilitate the Company's future access to the
public equity markets and to obtain additional working capital.
The Company intends to use the net proceeds of the Offering for general
corporate purposes, including working capital, and for the expansion of its
operations and sales and marketing capabilities. In addition, the Company may
use a portion of the net proceeds of the Offering to acquire or invest in
complementary businesses, technologies, services or products, although there
are no current agreements with respect to any such acquisitions, investments or
other transactions. As of the date of this Prospectus, the Company cannot
specify with certainty the particular uses for the net proceeds to be received
upon completion of the Offering. Accordingly, the Company's management will
have broad discretion in the application of the net proceeds. Pending such
uses, the net proceeds will be primarily invested in short-term, investment
grade instruments, certificates of deposit or direct or guaranteed obligations
of the United States.
DIVIDEND POLICY
24/7 Media has not declared or paid any dividends on its capital stock
since inception and does not anticipate paying dividends in the foreseeable
future. It is the present policy of the board of directors to retain earnings,
if any, to finance the expansion of the Company's business. The future payment
of dividends will depend on the results of operations, financial condition,
capital expenditure plans and other factors deemed relevant by 24/7 Media and
will be at the sole discretion of the board of directors of the Company.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of 24/7 Media as of
March 31, 1998 (i) on an actual basis, after giving effect to a 1 for 4 reverse
stock split effected July 20, 1998 (ii) on a pro forma basis, giving effect to
the Acquisitions, the Preferred Stock Conversion and the Senior Note Conversion
and (iii) on a pro forma as adjusted basis to give effect to the sale by the
Company of 3,250,000 shares of Common Stock, the net proceeds from which are
estimated to be approximately $38,092,500, assuming an initial offering price
of $13.00 per share and after deducting underwriting discounts and estimated
Offering expenses payable by 24/7 Media. See "Use of Proceeds." The
capitalization information set forth in the table below is qualified by and
should be read in conjunction with the more detailed Consolidated Financial
Statements and Pro Forma Consolidated Financial Information and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------
Pro Pro Forma
Actual Forma As Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Long-term debt (1) .............................................. $ 479,408 $ -- $ --
Mandatorily redeemable convertible preferred stock Series
A and Series B; $.01 par value; 30,000,000 shares
authorized; 10,060,002 shares outstanding actual(2)(3) ......... 10,093,502 -- --
Stockholders' equity (1)(3)(4):
Common stock, $.01 par value; 100,000,000 shares
authorized; 6,926,550 shares issued and outstanding
actual; 11,778,456 shares issued and outstanding on a
pro forma basis and 15,028,456 shares issued and
outstanding on a pro forma as adjusted basis ................. 69,267 117,785 150,285
Additional paid-in-capital ...................................... 19,919,169 41,659,576 79,687,076
Deferred stock compensation ..................................... (87,500) (87,500) (87,500)
Accumulated deficit ............................................. (15,636,756) (21,114,056) (21,114,056)
------------- ------------- -------------
Total stockholders' equity .................................... 4,264,180 20,575,805 58,635,805
------------- ------------- -------------
Total capitalization ......................................... $ 14,837,090 $ 20,575,805 $ 58,635,805
============= ============= =============
</TABLE>
- ----------------
(1) In June 1998, the Company issued a mandatory redemption notice with respect
to the long-term debt in anticipation of the Offering. The holder of the
long-term debt, with a stated value of $500,000 and accrued interest
thereon, elected to convert such long-term debt into 77,450 shares of
Common Stock due to the pending Offering.
(2) Upon consummation of the Offering, each share of the Company's Series A
mandatorily redeemable convertible preferred stock is, by its terms,
automatically convertible into 0.2626 shares of the Company's Common
Stock, or 3,577,076 shares of Common Stock in the aggregate (includes
935,269 shares of Common Stock relating to Series A Preferred issued in
connection with Intelligent Interactions acquisition), and each share of
the Company's Series B mandatorily redeemable convertible preferred stock
issued in connection with the April 1998 acquisition of CliqNow! is, by
its terms, automatically convertible into 82.71 shares of the Company's
Common Stock, or 248,139 shares of Common Stock in the aggregate. See
Notes 5 and 11 to the Company's Consolidated Financial Statements.
(3) Simultaneously with the closing of the Offering, the Company intends to
file an amendment to its Certificate of Incorporation which will reduce
the number of authorized shares of common and preferred stock to
70,000,000 and 10,000,000, respectively. See "Description of Capital
Stock."
(4) Excludes approximately 1,258,755 shares of Common Stock issuable upon
exercise of stock options outstanding at August 5, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 174,578 are vested and
exercisable at August 5, 1998) and approximately 1,667,557 shares of
Common Stock reserved for issuance pursuant to future grants under the
1998 Stock Incentive Plan. The outstanding stock options have a weighted
average exercise price of $4.72 per share. Also excludes approximately
3,988,144 shares of Common Stock issuable upon exercise of outstanding
warrants at August 5, 1998. Such warrants have a weighted average exercise
price of $8.34 per share.
15
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value of 24/7 Media
was $5,567,751 in the aggregate, or $0.47 per share. Pro forma net tangible
book value per share represents 24/7 Media's total tangible assets less total
liabilities, divided by the number of outstanding shares of Common Stock giving
effect to the Acquisitions, the Senior Note Conversion and the Preferred Stock
Conversion. Dilution per share represents the difference between the amount per
share paid by investors in this Offering of Common Stock and the net tangible
book value per share after the Offering. After giving effect to the sale of
shares of 3,250,000 Common Stock (at an assumed initial public offering price
of $13.00 per share) and after application by the Company of the estimated net
proceeds from the Offering, the Company's pro forma net tangible book value as
of March 31, 1998 would have been $43,660,251 in the aggregate, or $2.91 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.44 per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $10.09 per share to new investors
purchasing shares of Common Stock in the Offering. If the initial public
offering price is higher or lower, the dilution to the new investors will
increase or decrease accordingly. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share .............................. $ 13.00
Pro forma net tangible book value per share before the Offering ............. 0.47
Pro forma increase in net tangible book value per share attributable
to new investors .......................................................... 2.44
----
Pro forma net tangible book value per share after the Offering ............... 2.91
--------
Pro forma dilution in net tangible book value per share to new investors ..... $ 10.09
--------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
after giving effect to the Acquisitions, the Preferred Stock Conversion and the
Senior Note Conversion, the total number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price per share paid by existing shareholders and by new investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- ------------------------ price per
Number Percent Amount Percent share
------------- --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 11,778,456 78.4% $41,777,361 49.7% $ 3.55
New investors ................. 3,250,000 21.6 42,250,000 50.3 13.00
---------- ----- ----------- -----
Total ......................... 15,028,456 100.0% $84,027,361 100.0% 5.59
</TABLE>
The calculations in the above tables assume no exercise of the
Underwriters' over-allotment option or exercise of any outstanding stock
options or warrants. If such outstanding options or warrants are exercised,
there will be further dilution to new investors. See "Management--1998 Stock
Incentive Plan."
16
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated statement of operations data reflect
the Merger and the Acquisitions, as if each had occurred on January 1, 1997 (or
inception, if later). The pro forma consolidated balance sheet data reflect the
Acquisitions as if they occurred on March 31, 1998, the Preferred Stock
Conversion, and the Senior Note Conversion, each of which has taken place or
will take place prior to the closing of this Offering. The pro forma financial
data is presented for informational purposes only and may not be indicative of
the results of operations had the mergers and acquisitions occurred on March
31, 1998 for balance sheet purposes and on January 1, 1997 for Statement of
Operations Data purposes, nor do they purport to indicate the future results of
operations of the Company. The following pro forma financial data should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and the Pro Forma Consolidated Financial Information and related Notes
appearing elsewhere in this Prospectus. Management believes that all
adjustments necessary to present fairly such pro forma financial data have been
made.
<TABLE>
<CAPTION>
Pro Forma
Year
Ended
Dec. 31,
1997
----------------
<S> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................. $ 3,632,793
Consulting and license fees .................. 1,746,896
-------------
Total revenues .............................. 5,379,689
Cost of revenues .............................. 3,309,676
-------------
Gross profit 2,070,013
Operating expenses:
Sales and marketing .......................... 5,070,513
General and administrative ................... 5,385,460
Product development .......................... 1,745,745
Other expenses (1) ........................... 989,099
Amortization of goodwill (2) ................. 5,670,689
-------------
Total operating expenses .................... 18,861,506
Operating loss ............................... (16,791,493)
Interest (expense) income:
Interest income ............................ 29,412
Interest expense ........................... (125,017)
-------------
Total interest (expense) income .............. (95,605)
-------------
Net loss ..................................... (16,887,098)
Cumulative dividends on mandatorily
redeemable convertible preferred stock ...... (546,000)
Net loss attributable to common
stockholders ................................ $ (17,433,098)
=============
Pro forma:
Basic net loss
per share (3) ............................... $ (3.92)
Shares outstanding (3) ...................... 4,443,053
<CAPTION>
Pro Forma
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................. $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees .................. 805,245 639,588 244,890 57,173 88,362
------------ ------------ ------------ ------------ ------------
Total revenues .............................. 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Cost of revenues .............................. 478,965 604,715 904,284 1,321,712 1,892,731
------------ ------------ ------------ ------------ ------------
Gross profit 741,263 626,595 147,149 555,006 542,938
Operating expenses:
Sales and marketing .......................... 983,756 1,474,497 1,583,320 1,028,940 1,300,636
General and administrative ................... 1,185,545 1,444,037 1,555,818 1,200,060 1,888,876
Product development .......................... 469,309 542,683 521,708 212,045 66,738
Other expenses (1) ........................... -- 123,843 865,256 -- --
Amortization of goodwill (2) ................. 1,250,690 1,473,333 1,473,333 1,473,333 1,698,757
------------ ------------ ------------ ------------ ------------
Total operating expenses .................... 3,889,300 5,058,393 5,999,435 3,914,378 4,955,007
Operating loss ............................... (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Interest (expense) income:
Interest income ............................ 16,070 6,939 3,954 2,449 25,504
Interest expense ........................... (1,928) (8,239) (34,556) (80,294) (204,196)
------------ ------------ ------------ ------------ ------------
Total interest (expense) income .............. 14,142 (1,300) (30,602) (77,845) (178,692)
------------ ------------ ------------ ------------ ------------
Net loss ..................................... (3,133,895) (4,433,098) (5,882,888) (3,437,217) (4,590,761)
Cumulative dividends on mandatorily
redeemable convertible preferred stock ...... (136,500) (136,500) (136,500) (136,500) (136,500)
Net loss attributable to common
stockholders ................................ $ (3,270,395) $ (4,569,598) $ (6,019,388) $ (3,573,717) $ (4,727,261)
============ ============ ============ ============ ============
Pro forma:
Basic net loss
per share (3) ............................... $ (0.86) $ (0.98) $ (1.30) $ (0.76) $ (0.75)
Shares outstanding (3) ...................... 3,786,202 4,652,006 4,652,006 4,681,998 6,342,350
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 1998
---------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................... $ 6,473,103
Working capital ................................. 4,767,597
Goodwill, net ................................... 14,992,403
Total assets .................................... 24,946,615
Long-term debt ................................ .. --
Mandatorily redeemable convertible preferred stock --
Total stockholders' equity ...................... 20,575,805
</TABLE>
- ----------------
(1) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company, and a net write-off of $756,795 of property and equipment.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements and the
related Notes thereto.
(2) Includes acquisition related non-cash charges for amortization of goodwill.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Pro Forma Consolidated Financial
Information and the related Notes thereto.
(3) See Note F to the Company's Pro Forma Consolidated Financial Information
for the determination of shares used in computing pro forma basic net loss
per share.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for each of the years
in the three-year period ended December 31, 1997 have been derived from the
audited consolidated financial statements of the Company, which are included
elsewhere in this Prospectus. The selected financial data for the period from
September 1994 through December 31, 1994 have been derived from financial
statements of Interactive Imaginations not included herein and the Company's
accounting records. The selected consolidated financial data as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 are derived from
unaudited consolidated financial statements appearing herein. In the opinion of
the Company, such unaudited data reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of the financial
data for such period. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of results that may be expected
for the full year. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
September
1994 (inception)
through December 31,
1994 (1) 1995 1996 1997
---------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ -- $ 151,750 $ 1,106,329 $ 1,467,105
Consulting and license fees .................... -- -- 435,834 1,681,464
--------- ------------ ------------ ------------
Total revenues ................................ -- 151,750 1,542,163 3,148,569
Cost of revenues ................................ -- 198,291 1,592,771 1,655,340
--------- ------------ ------------ ------------
Gross profit (loss) ............................ -- (46,541) (50,608) 1,493,229
Operating expenses:
Sales and marketing ............................ -- 114,348 2,240,399 1,672,999
General and administrative ..................... (35,771) 581,068 3,010,009 2,622,743
Product development ............................ -- 426,187 1,460,928 1,417,750
Other expenses (2) ............................. -- -- -- 989,099
Amortization of goodwill (3) ................... -- -- -- --
--------- ------------ ------------ ------------
Total operating expenses ...................... (35,771) 1,121,603 6,711,336 6,702,591
Operating loss .................................. (35,771) (1,168,144) (6,761,944) (5,209,362)
Interest (expense) income, net .................. -- -- (33,731) (96,466)
--------- ------------ ------------ ------------
Net loss ........................................ (35,771) (1,168,144) (6,795,675) (5,305,828)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- --
Net loss attributable to common stockholders .... $ (35,771) $ (1,168,144) $ (6,795,675) $ (5,305,828)
========= ============ ============ ============
Basic net loss per share (4) .................... $ (.14) $ (2.78) $ (6.48) $ (4.88)
Shares outstanding (4) .......................... 250,000 420,908 1,049,432 1,086,614
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1997 1998
------------- ---------------
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ 388,892 $ 1,076,250
Consulting and license fees .................... 805,245 --
---------- ------------
Total revenues ................................ 1,194,137 1,076,250
Cost of revenues ................................ 459,587 930,003
---------- ------------
Gross profit (loss) ............................ 734,550 146,247
Operating expenses:
Sales and marketing ............................ 450,505 653,460
General and administrative ..................... 682,581 1,288,012
Product development ............................ 399,523 --
Other expenses (2) ............................. -- --
Amortization of goodwill (3) ................... -- 335,355
---------- ------------
Total operating expenses ...................... 1,532,609 2,276,827
Operating loss .................................. (798,059) (2,130,580)
Interest (expense) income, net .................. 13,682 (167,258)
---------- ------------
Net loss ........................................ (784,377) (2,297,838)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- (33,500)
Net loss attributable to common stockholders .... $ (784,377) $ (2,331,338)
========== ============
Basic net loss per share (4) .................... $ (.73) $ (.76)
Shares outstanding (4) .......................... 1,079,116 3,055,432
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
1994 1995 1996 1997
---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 10,722 $ -- $1,689,395 $ 93,945
Working capital (deficit) ........................ (9,278) (235,342) (6,493) (1,165,482)
Goodwill, net .................................... -- -- -- --
Total assets ..................................... 29,229 497,165 3,950,790 1,038,941
Long-term debt ................................... -- -- -- 2,316,511
Mandatorily redeemable convertible preferred stock -- -- -- --
Total stockholders' equity (deficit) ............. 9,229 202,573 1,750,202 (2,727,967)
<CAPTION>
As of March 31, 1998
----------------------------------------------
Pro Forma
Actual Pro Forma (5) As Adjusted (6)
------------- --------------- ----------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 7,764,695 $ 6,473,103 $44,565,603
Working capital (deficit) ........................ 6,317,136 4,767,597 42,860,097
Goodwill, net .................................... 7,870,174 14,992,403 14,992,403
Total assets ..................................... 18,201,993 24,946,615 63,039,115
Long-term debt ................................... 479,408 -- --
Mandatorily redeemable convertible preferred stock 10,093,502 -- --
Total stockholders' equity (deficit) ............. 4,264,180 20,575,805 58,668,305
</TABLE>
- ----------------
(1) The Company was incorporated in September 1994 and had insignificant
activities from inception through December 31, 1994.
(2) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company and a net write-off of approximately $756,795 of property
and equipment that was deemed to have no future economic benefit. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and the related
Notes thereto.
(3) Includes acquisition related non-cash charges for amortization of goodwill
in connection with the Petry and Advercomm acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and the related Notes thereto.
(4) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing basic net loss per share.
(5) Pro forma consolidated balance sheet data give effect to (i) the
Acquisitions of Intelligent Interactions and CliqNow!, each of which
occurred after March 31, 1998, as if such Acquisitions occurred on March
31, 1998, (ii) an increase in accumulated deficit in connection with
Intelligent Interactions' write-off of acquired in-process technology of
$5,477,300, (iii) the conversion of all outstanding shares of mandatorily
redeemable convertible preferred stock into 3,825,215 shares of Common
Stock and (iv) the conversion of senior convertible notes payable into
77,450 shares of Common Stock prior to the closing of this Offering.
(6) Adjusted to reflect the sale of 3,250,000 shares of Common Stock, the net
proceeds from which are estimated to be approximately $38,092,500,
assuming an initial offering price of $13.00 per share and after deducting
underwriting discounts and estimated Offering expenses payable by 24/7
Media. The Company intends to use the net proceeds of the Offering for
general corporate purposes, including working capital, and for the
expansion of its operations and sales and marketing capabilities. See "Use
of Proceeds."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the related Notes thereto and the Pro
Forma Consolidated Financial Information and related Notes thereto included
elsewhere in this Prospectus. The following discussion contains forward-looking
statements within the meaning of federal securities law. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. Although management believes that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, certain
factors such as rapid changes in the markets in which the Company competes or
general economic conditions might cause a difference between actual results and
such forward-looking statements. When considering such forward-looking
statements, prospective investors should consider the "Risk Factors" and other
cautionary statements in this Prospectus.
General
The Company enables both advertisers and Web publishers to capitalize on
the many opportunities presented by Internet advertising, direct marketing and
electronic commerce. In particular, 24/7 Media: (i) operates the 24/7 Network,
a network of over 85 high profile Affiliated Websites to which the Company
delivered an aggregate of over 335 million advertisements in May 1998; (ii)
operates the CliqNow! network, a network of over 75 medium to large-sized
Affiliated Websites to which an aggregate of over 45 million advertisements
were delivered in May 1998; (iii) operates the ContentZone, a network of over
2,000 small to medium-sized Affiliated Websites to which the Company delivered
an aggregate of over 40 million advertisements in May 1998; (iv) licenses its
Adfinity[TM] advertising management system to independent Websites to manage
and serve high-volume advertising and direct marketing campaigns; and (v)
markets its dbCommerce[TM] software to e-commerce merchants to enable the
delivery of targeted promotions.
The Company is the result of several recent mergers and acquisitions and
the combination of these predecessor entities has resulted in an integrated
Internet advertising company with both media sales and technology expertise.
See "Prospectus Summary--Formation of the Company." Petry established the
network business model and contributed its network of Websites which became the
foundation for the 24/7 Network. Advercomm folded several high profile Websites
into the 24/7 Network, which increased the breadth of content available on the
24/7 Network and accelerated the Company's ability to organize its Affiliated
Websites into channels. Interactive Imaginations' ContentZone provided the
Company with the ability to offer advertising solutions for small to
medium-sized Websites. The acquisition of CliqNow! added a network of over 75
medium to large-sized Websites to the Company's diverse portfolio of Affiliated
Websites. Intelligent Interactions provided the Company with ad serving and
targeting technology, which is expected to become the technology platform for
the Company's networks. Management believes that the combination of these
predecessor entities has enabled the Company to offer advertisers and Web
publishers comprehensive advertising solutions and to pursue its objective of
becoming the leading Internet advertising and direct marketing firm.
The Company's products and services include (i) its comprehensive
advertising solutions for Internet advertisers, direct marketers and Affiliated
Websites and (ii) the licensing of its Adfinity[TM] ad serving technology and
dbCommerce[TM] software, which are marketed to third parties. For the three
months ended March 31, 1998, pro forma advertising revenue and pro forma
consulting and license fees accounted for 96.4% and 3.6% of total pro forma
revenues, respectively. The Company sells its products and services through its
sales and marketing staff located in New York, Chicago, Dallas, Los Angeles,
San Francisco, Seattle and the Washington, D.C. area. The Company generates
substantially all of its revenues by delivering advertisements and promotions
to Affiliated Websites on its networks. Advertisements delivered by the Company
are typically sold pursuant to purchase order agreements with advertisers which
are short-term in nature or subject to cancellation.
The pricing of ads is based on a variety of factors, including the gross
dollar amount spent on the advertising campaign and whether the campaign is
delivered on a specific Website basis, a channel basis or a run of network
basis. The Company strives to sell 100% of its inventory through the
combination of advertisements sold on a "CPM" basis (the cost to the advertiser
to run 1,000 ads) and a "cost-per-action" basis (whereby revenues are generated
if the user responds to the ad with an action, such as an inquiry or a purchase
of the product advertised). The Company has recently started to sell
sponsorship advertising, which involves a greater degree of coordination
19
<PAGE>
among the Company, the advertiser and Affiliated Websites. These sponsorships
are generally priced based on the length of time that the sponsorship runs,
rather than on a CPM basis.
Advertising revenues are recognized in the period that the advertisement
is delivered, provided that no significant obligations remain. In nearly all
cases, the Company recognizes revenues generated from advertising sales, net of
any commissions paid to advertising agencies on behalf of their clients. The
Company pays its Affiliated Websites a service fee calculated as a percentage
of revenues generated by advertisements run on the Website, which amount is
included in cost of revenues. In addition, the Company is generally responsible
for billing and collecting for advertisements delivered to its networks.
Revenues relating to sponsorship advertising are recognized ratably over the
sponsorship period. In addition, the Company generates revenue from licensing
its Adfinity[TM] technology to third party Web publishers. To date, revenue
from licensing Adfinity[TM] to third parties has not comprised a significant
percentage of the Company's total revenues.
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Affiliated Websites on the 24/7
Network. The Company's strategy is to aggressively recruit Websites of all
sizes for its networks in order to extend the Company's reach and to provide
advertisers with a broad base of page views and online content. For the three
months ended March 31, 1998 and for the year ended December 31, 1997, no
Affiliated Website accounted for over 10% of the Company's total advertising
revenue. For the three months ended March 31, 1998 and for the year ended
December 31, 1997, the top ten Websites on the 24/7 Network accounted for
approximately 66% and 68%, respectively, of the 24/7 Network's pro forma
advertising revenue. The top ten Websites for the year ended December 31, 1997
included AT&T WorldNet Service, Reuters, USA.NET, Columbia House, Comedy
Central, Reuters-Moneynet, Maps on Us, Universal Media, FlashNet Communications
and FoxNews Internet. For the three months ended March 31, 1998, the top ten
Websites included AT&T WorldNet Service, Netscape Communications, Reuters,
Comedy Central, Maps on Us, Reuters-Moneynet, Universal Media, Encompass, Inc.,
Columbia House and Fortune City Ltd. The Company has lost, and may from time to
time lose, one or more significant Affiliated Websites. If such Websites
experienced a significant reduction in traffic, the Company's results of
operations and financial condition could be materially and adversely affected.
See "Risk Factors--Reliance on a Limited Number of Web Publishers; Dependence
on the 24/7 Network."
In addition, for the year ended December 31, 1997 and the three months
ended March 31, 1998, the Company's top ten advertisers and ad agencies
accounted for an aggregate of approximately 48% and 51%, respectively, of the
24/7 Network's pro forma advertising revenues, and for the five months ended
May 31, 1998, CardSecure accounted for 12.9% of the Company's revenues.
Recently, CardSecure has substantially reduced its advertising with the
Company, and has accounted for less than 5% of the Company's revenues since
June 30, 1998. The Company believes that such reduction will not have a
material effect on the financial condition of the Company. See "Risk
Factors--Reliance on a Limited Number of Advertisers and Ad Agencies."
The Company believes that, due to the Merger and the Acquisitions, the
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as indicative of future performance.
The Company's prospects should be considered in light of the risks, expenses
and difficulties encountered by companies in the early stages of development,
particularly companies in the rapidly evolving Internet market. Although the
Company has experienced revenue growth in recent periods, it anticipates that
it will incur operating losses for the foreseeable future due to a high level
of planned operating and capital expenditures. In particular, the Company
expects to increase its operating expenses in order to expand its sales and
marketing organization and to enhance its Adfinity[TM] technology. See "Risk
Factors--Extremely Limited Operating History; History of Losses; Integration of
Acquired Entities" and "--Potential Fluctuations in Quarterly Operating
Results; Seasonality."
Pro Forma Results of Operations
The following tables present the Company's unaudited results of operations
on a pro forma basis, both in dollar amounts and expressed as a percentage of
the Company's total revenues for the periods indicated, as if the Merger and
Acquisitions had been consummated as of January 1, 1997 (or inception, if
later). As a result, amortization of goodwill has been recognized beginning in
the first quarter of pro forma 1997. For reporting purposes (i) amortization of
goodwill will be recognized over a two year period from the respective dates of
the Merger and the Acquisitions, and (ii) a write-off of approximately $5.5
million related to the Intelligent Interactions acquisition will be recognized
in the second quarter of 1998, the date of acquisition. The Company believes
that all necessary adjustments, consisting of normal recurring adjustments,
have been included in the amounts stated below. The operating results for any
period are not necessarily indicative of results for any subsequent period.
Because the Company has a limited operating history, the Company has
20
<PAGE>
included its results of operations on a pro forma basis in order to better
understand the Company's business as a result of the combination of the
businesses of Petry, Advercomm, Interactive Imaginations, Intelligent
Interactions and CliqNow!. See Pro Forma Consolidated Financial Information and
the related Notes thereto and "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Seasonality."
<TABLE>
<CAPTION>
Pro Forma
Year
Ended
Dec. 31,
1997
----------------
<S> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................... $ 3,632,793
Consulting and license fees 1,746,896
------------
Total revenues ................ 5,379,689
Cost of revenues ................ 3,309,676
------------
Gross profit 2,070,013
Operating expenses:
Sales and marketing ............ 5,070,513
General and administrative ..... 5,385,460
Product development ............ 1,745,745
Other expenses ................. 989,099
Amortization of goodwill ....... 5,670,689
------------
Total operating
expenses .................... 18,861,506
Operating loss .................. (16,791,493)
Interest (expense) income ....... (95,605)
------------
Net loss ........................ ($ 16,887,098)
============
<CAPTION>
Pro Forma
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................... $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees 805,245 639,588 244,890 57,173 88,362
----------- ----------- ----------- ----------- -----------
Total revenues ................ 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Cost of revenues ................ 478,965 604,715 904,284 1,321,712 1,892,731
----------- ----------- ----------- ----------- -----------
Gross profit 741,263 626,595 147,149 555,006 542,938
Operating expenses:
Sales and marketing ............ 983,756 1,474,497 1,583,320 1,028,940 1,300,636
General and administrative ..... 1,185,545 1,444,037 1,555,818 1,200,060 1,888,876
Product development ............ 469,309 542,683 521,708 212,045 66,738
Other expenses ................. -- 123,843 865,256 -- --
Amortization of goodwill ....... 1,250,690 1,473,333 1,473,333 1,473,333 1,698,757
----------- ----------- ----------- ----------- -----------
Total operating
expenses .................... 3,889,300 5,058,393 5,999,435 3,914,378 4,955,007
Operating loss .................. (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Interest (expense) income ....... 14,142 (1,300) (30,602) (77,845) (178,692)
----------- ----------- ----------- ----------- -----------
Net loss ........................ ($ 3,133,895) ($ 4,433,098) ($ 5,882,888) ($ 3,437,217) ($ 4,590,761)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Three Months Ended
Year ---------------------------------------------------------------------
Ended
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................... 67.5% 34.0% 48.1% 76.7% 97.0% 96.4%
Consulting and license fees 32.5 66.0 51.9 23.3 3.0 3.6
------ ------ ------ ------ ------ ------
Total revenues ................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues ................ 61.5 39.3 49.1 86.0 70.4 77.7
------ ------ ------ ------ ------ ------
Gross profit .................. 38.5 60.7 50.9 14.0 29.6 22.3
Operating expenses:
Sales and marketing ............ 94.3 80.6 119.8 150.6 54.8 53.4
General and administrative...... 100.1 97.2 117.3 148.0 63.9 77.6
Product development ............ 32.5 38.5 44.1 49.6 11.3 2.7
Other expenses ................. 18.4 -- 10.1 82.3 -- --
Amortization of goodwill ....... 105.4 102.5 119.7 140.1 78.5 69.7
------ ------ ------ ------ ------ ------
Total operating expenses 350.6 318.7 410.8 570.6 208.6 203.4
Operating loss .................. (312.1) (258.0) (359.9) (556.6) (179.0) (181.1)
Interest (expense) income ....... ( 1.8) 1.2 ( 0.1) ( 2.9) ( 4.1) ( 7.3)
------ ------ ------ ------ ------ ------
Net loss ........................ (313.9)% (256.8)% (360.0)% (559.5)% (183.2)% (188.5)%
====== ====== ====== ====== ====== ======
</TABLE>
21
<PAGE>
Revenues
Advertising Revenue. Advertising revenue primarily consists of cash
advertising revenue and also includes barter and prize revenue. The Company's
pro forma cash advertising revenue increased each quarter primarily due to an
increase in the number of Websites on the 24/7 Network and the CliqNow!
network, the number of advertisers utilizing the Company's advertising
solutions and the number of advertisements delivered to the 24/7 Network and
the CliqNow! network. Such increase was partially offset by a decline in pro
forma cash advertising revenue generated by the ContentZone through the first
three quarters of 1997. The Company expects the 24/7 Network and the CliqNow!
network to continue to account for a significant portion of the Company's total
advertising revenue. Historically, the Company utilized barter transactions and
prizes to drive traffic to its Affiliated Websites on the ContentZone and
Riddler.com. Pro forma barter and prize revenue decreased sequentially from
approximately 15.4% of total pro forma advertising revenue for the first
quarter of 1997 to 0.0% in the first quarter of 1998. The Company believes that
barter and prize revenue will continue to comprise an insignificant portion of
the Company's total revenues in the future.
Consulting and License Fees. Through the first three quarters of 1997, the
Company derived pro forma consulting and license fees primarily from an
agreement with SegaSoft, whereby SegaSoft licensed certain software from
Interactive Imaginations. The Company does not expect to realize meaningful
revenues from the SegaSoft license agreement in the future. Pro forma
consulting and license fees in the fourth quarter of 1997 and the first quarter
of 1998 consisted primarily of fees generated from licensing the Adfinity[TM]
system to third parties. The Company expects to derive consulting and licensing
fees in the future from the licensing of Adfinity[TM] and dbCommerce[TM] to
third parties, but does not expect such revenues to comprise a significant
portion of the Company's total revenues.
Cost of Revenues and Gross Profit (Loss). Cost of revenues consists
primarily of fees paid to Affiliated Websites, which are calculated as a
percentage of revenues resulting from ads delivered on the Company's networks.
Cost of revenues also includes third party ad serving costs, depreciation of
the Company's ad serving system and Internet access costs. The general decline
in pro forma gross profit over the five quarter period was caused by (i) the
significant quarter-to-quarter decline in high margin consulting and license
fees generated by the SegaSoft agreement; (ii) the significant growth in
advertising revenue generated by the 24/7 Network and the CliqNow! network,
which typically pay higher fees to Affiliated Websites, at the same time that
advertising revenue generated by the ContentZone declined; (iii) an increase in
third party ad serving costs related to the growth of the 24/7 Network and the
CliqNow! network, as well as increased costs relating to ad serving capacity
for the ContentZone for the first three quarters of 1997; and (iv) the
temporary increase, which began late in the first quarter of 1998, in third
party ad serving costs incurred by the Company in connection with the
transition to Adfinity[TM]. Until the Company completes the transition to
Adfinity[TM], it expects to incur ad serving costs that are significantly
higher than historical levels. Thereafter, the Company expects gross margins to
increase because third party ad serving fees will no longer be paid.
Operating Expenses
Each of pro forma sales and marketing expenses, general and administrative
expenses and product development expenses increased over the first three
quarters of 1997 as Petry, CliqNow! and Interactive Imaginations incurred
expenses in connection with the growth of their respective businesses. All of
such expense categories decreased in the fourth quarter of 1997 because (i)
Petry's pro forma fourth quarter results no longer included expenses of its
then-parent and (ii) Interactive Imaginations reduced its expense levels as it
consolidated its operations in the third quarter of 1997. Beginning in the
first quarter of 1998, all of such expense categories increased in anticipation
of the Merger and the Acquisitions and expected future growth.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of sales force salaries and commissions, advertising expenditures and
costs of trade shows, conventions and marketing materials. The Company expects
sales and marketing expenses to increase as it continues to invest in sales and
marketing personnel, expand into new markets and broaden the visibility of the
Company.
General and Administrative Expenses. General and administrative expenses
consist primarily of compensation, facilities expenses and other overhead
expenses incurred to support the growth of the business. Beginning in the
second quarter of 1998, the Company expects general and administrative expenses
to increase due to the additional ad serving personnel required to support
Adfinity[TM]. In addition, the Company expects general and administrative
expenses to increase as it incurs increased levels of expenses to support
future growth.
22
<PAGE>
Product Development Expenses. Product development expenses consist
primarily of compensation and related costs incurred to further develop the
Company's ad serving capabilities. Product development expenses declined in the
fourth quarter of 1997 due to the consolidation of the operations of
Interactive Imaginations, and such expenses were suspended in the first quarter
of 1998 as the Company sought a more dynamic ad serving platform. The Company
believes that continued investment in product development, particularly for its
Adfinity[TM] system, is critical to its strategy of providing excellent
service, and it expects to increase the future amounts spent on product
development.
Other Expenses. Pro forma other expenses in 1997 included an aggregate of
$232,304 in legal costs incurred during the second and third quarters in
defending a class-action lawsuit filed by certain Affiliated Websites on the
ContentZone. The Company's defense of such lawsuit resulted in a grant of
summary judgment in favor of the Company, but such lawsuit resulted in a
diversion of management resources during such periods. During September 1997,
as part of the Company's consolidation and downsizing, it conducted a
book-to-physical inventory of its property and equipment primarily with the
intent to identify any property or equipment that no longer existed as a result
of the Company's rapid expansion of its operations and employee headcount in
1996 and the first half of 1997 combined with the significant downsizing in the
Company's headcount in the third quarter of 1997. As a result of this
book-to-physical observation, the Company identified and wrote-off $756,795 of
equipment purchases, net of accumulated depreciation, that could no longer be
located. As a result, management has instituted specific internal controls over
its current fixed assets in order to properly inventory and safeguard the
Company's assets into the future. The Company recorded pro forma goodwill
amortization expense beginning in the first quarter of 1997, which represents
the excess purchase price over the fair value of net liabilities of the
acquired businesses of Petry, Advercomm, CliqNow! and Intelligent Interactions.
Historical Results of Operations
Years Ended December 31, 1997, 1996 and 1995
Interactive Imaginations (24/7 Media's then parent) was merged with and
into the Company on April 9, 1998 in a manner similar to a
pooling-of-interests. See "Prospectus Summary--Formation of the Company." As a
result, 24/7 Media's historical results of operations for the fiscal years
ended December 31, 1997, 1996 and 1995 represent the results of Interactive
Imaginations and do not reflect any of the operating results of Petry,
Advercomm, CliqNow! or Intelligent Interactions, or the pro forma adjusting
entries resulting from the merger of these entities with and into the Company
in 1998.
During 1997, the historical results of operations of Interactive
Imaginations, the stability and morale of its workforce and overall value of
the common stock of Interactive Imaginations were negatively impacted by
certain significant factors. Such events included a class action lawsuit in the
second and third quarters of 1997, which resulted in extraordinary expenses of
$232,304 in legal costs, unfavorable publicity to Interactive Imaginations, a
significant diversion of management resources, and difficulty in obtaining
financing to continue its operations.
The Company does not believe that the historical revenues or expenses as
presented below are reliable or accurate indicators of the future performance
of the combined Company. See "Selected Consolidated Financial Data" and the
Company's Consolidated Financial Statements and related Notes thereto.
Revenues. Total revenues were $3,148,569, $1,542,163 and $151,750 for the
years ended December 31, 1997, 1996 and 1995, respectively. Year-to-year growth
resulted from increases in (i) advertising revenue generated by the ContentZone
and Riddler.com and (ii) consulting and license fees derived from the SegaSoft
agreement, under which SegaSoft licensed certain software from Interactive
Imaginations. The Company does not expect to realize meaningful revenues from
the SegaSoft agreement in the future. Two customers (SegaSoft and Microsoft
Corporation) accounted for $326,707 and $157,019 of Interactive Imaginations'
total cash advertising revenues (excluding barter), respectively, during 1997,
two customers (SegaSoft and Microsoft Corporation) accounted for $211,936 and
$178,191 of total cash advertising revenues (excluding barter), respectively,
during 1996, and four customers (Marion Foundation, AT&T, Coors and 20th
Century) accounted for $50,000, $32,000, $30,000 and $20,000 of total cash
advertising revenues (excluding barter), respectively, during 1995.
Cost of Revenues and Gross Profit (Loss). Cost of revenues was $1,655,340,
$1,592,771 and $198,291 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cost of revenues in all years was due to the
related growth in advertising revenue, and the smaller percentage increase from
1996 to 1997 was due to a significant increase in the percentage of total
advertising revenue generated by Riddler.com, which does not
23
<PAGE>
entail payment of fees to Affiliated Websites. Gross profit increased from 1996
to 1997 primarily due to a significant increase in high margin revenues
generated by the SegaSoft agreement.
Operating Expenses. Total operating expenses were $6,702,591, $6,711,336
and $1,121,603 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase from 1995 to 1996 was caused by increased
expenditures incurred in anticipation of continued growth of the Company. The
decrease from 1996 to 1997 was primarily due to the consolidation of the
Interactive Imaginations business, offset by $989,099 in other expenses
recorded in 1997. Other expenses included $232,304 of legal costs associated
with the successful defense of a class-action lawsuit filed by certain
Affiliated Websites on the ContentZone, as well as a net write-off of $756,795
of property and equipment that was deemed to have no future economic value.
Three Months Ended March 31, 1998 and 1997
For the three months ended March 31, 1998, 24/7 Media's historical results
of operations reflect the Merger as of February 25, 1998. For the three months
ended March 31, 1997, 24/7 Media's historical results of operations only
include the results of Interactive Imaginations. The Company does not believe
that the historical revenues or expenses as presented below are reliable or
accurate indicators of the future performance of the combined Company. See the
Company's Consolidated Financial Statements and related Notes thereto.
Revenues. Total revenues were $1,076,250 for the three months ended March
31, 1998, as compared to $1,194,137 for the three months ended March 31, 1997.
Such decrease was caused primarily by a decline in revenues generated by the
SegaSoft agreement, offset by a significant increase in advertising revenue.
Cost of Revenues. Cost of revenues was $930,003 for the three months ended
March 31, 1998 as compared to $459,587 for the three months ended March 31,
1997. Such increase primarily related to increases in third party ad serving
costs which were caused by growth in advertising revenue and the temporary
increase in costs in connection with the transition to Adfinity[TM]. Such
increase was offset by reduced ContentZone ad serving costs.
Operating Expenses. Total operating expenses were $2,276,827 for the three
months ended March 31, 1998 as compared to $1,532,609 for the three months
ended March 31, 1997. This increase was caused by higher sales and marketing
and general and administrative expenses in anticipation of the Merger and
future growth, as well as amortization of goodwill resulting from the
acquisition of Petry and Advercomm. Such increase was offset by the significant
reduction of product development expense prior to the acquisition of
Intelligent Interactions.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily from
private placements of equity and convertible debt securities. Concurrently with
the merger of Petry and Advercomm with and into 24/7 Media, the Company
completed a private placement of preferred stock and warrants which resulted in
net proceeds of $9,830,897. As of March 31, 1998, the Company had cash and cash
equivalents of $7,764,695.
In addition to funding on-going operations, the Company's principal
commitments consist of various obligations under operating and capital leases.
On June 1, 1996, the Company entered into an operating lease for the use of
computer equipment with a fair market value of approximately $852,000. The
operating lease, as amended, requires quarterly payments of $46,000 and expires
on November 30, 1998. Rent expense relating to this operating lease was
$42,641, $162,862, $611,637 and $381,313 for the three months ended March 31,
1998 and 1997 and the years ended 1997 and 1996, respectively. On May 14, 1998
and July 7, 1998, the Company entered into two operating leases for computer
equipment and software related to its Adfinity[TM] system, with a combined fair
market value of $849,488. The operating lease, as amended, requires monthly
payments and expires in November, 2000. Total rent expense for currently
outstanding leases is expected to be approximately $90,500 per quarter.
Furthermore, the Company expects to incur approximately $1 million in leasehold
improvements prior to moving into the additional leased office space at the
Company's headquarters in New York City, and in the aggregate, the Company's
annual lease expense for this office space will be approximately $1.2 million
through 2003. The Company believes that the expenses associated with such
additional office space will not have a material effect on the Company's
financial position. See "Business--Facilities and Systems."
Net cash used in operating activities was $2,309,598, $1,384,894,
$4,465,640, $4,933,106 and $995,194 for the three months ended March 31, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in operating activities resulted from the Company's
net operating losses, adjusted for certain non-cash items, including: (i) a
significant advance by SegaSoft in late 1996 for revenues that were primarily
24
<PAGE>
recognized during 1997; (ii) the write-off of property and equipment in 1997;
and (iii) the amortization of goodwill in the first quarter of 1998 related to
the Merger. Net cash used in operating activities also resulted from a high
level of accounts receivables and related accrued liabilities due to the time
lag between revenue recognition and receipt of payments from advertisers.
Historically, the Company relied on a third-party ad serving company to provide
reports to the Company in order for the Company to provide accurate and timely
invoices to its clients. During the first quarter of 1998, the delivery of the
reports from such ad serving company was significantly delayed and, as a
result, the Company's unbilled receivables increased as of March 31, 1998. The
Company has recently taken steps to improve the timeliness of its billing
procedures such as working with the ad serving company to ensure the timely
receipt of reports and improving the Company's internal billing and collection
procedures and systems. The Company anticipates that it will be able to further
improve the timeliness of its billing and collections processes as it completes
the transition to Adfinity[TM], which will enable the Company to produce
required reports internally, thereby enhancing net working capital as a
percentage of total revenues.
Net cash provided by (used in) investing activities was $71,175, $0,
($19,219), ($1,578,276) and ($464,016) for the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in investing activities resulted primarily from
capital expenditures relating to computer equipment. To the extent that the
Company acquires significant ad serving hardware in the future, net cash used
in investing activities will increase.
Net cash provided by financing activities was $9,909,173, $500,011,
$2,889,409, $8,200,777 and $1,448,488 for the three months ended March 31, 1998
and 1997 and the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash provided by financing activities for the three years ended December
31, 1997 included issuances of convertible notes, convertible preferred stock,
common stock and warrants. Prior to March 31, 1998, all of the previously
issued convertible notes, convertible preferred stock and warrants were
converted or exercised into common stock, except for approximately $500,000
principal amount of convertible debt and warrants to purchase approximately
36,000 shares of Common Stock with an average exercise price of $2.81 per
share. On February 25, 1998, the Company issued Series A Preferred Stock with
detachable warrants at an average exercise price of $9.52.
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At December
31, 1997, the Company had approximately $13,394,000 of federal net operating
loss carryforwards available to offset future taxable income; such
carryforwards expire in various years through 2012. As a result of various
equity transactions during 1996, 1997 and 1998, management believes the Company
has undergone an "ownership change" as defined by section 382 of the Internal
Revenue Code. See Note 3 to the Company's Consolidated Financial Statements.
Accordingly, the utilization of a portion of the net operating loss
carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforward, no
tax benefit for losses has been recorded by the Company and a valuation
allowance has been recorded for the entire amount of the net deferred tax
asset. In addition, certain events, including any sales by the Company of
shares of its stock, including sales pursuant to this Offering, and/or
transfers of a substantial number of shares of Common Stock by the current
stockholders, may partially restrict the ability of the Company to utilize its
net operating loss carryforwards.
The Company believes that the net proceeds from this Offering, combined
with current cash and cash equivalent balances, will be sufficient to fund its
requirements for working capital and capital expenditures for at least the next
12 months. To the extent that the Company encounters unanticipated
opportunities, the Company may need to raise additional funds sooner, in which
case the Company may sell additional equity or debt securities or borrow funds
from banks. Sales of additional equity or convertible debt securities would
result in additional dilution of the Company's stockholders.
Beginning in the year 2000, the date fields coded in certain software
products and computer systems will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. The Company is working with its
external suppliers and service providers to ensure that they and their systems
will be able to support the Company's needs and, where necessary, interoperate
with the Company's hardware and software infrastructure in preparation for the
year 2000. Management does not anticipate that the Company will incur material
expenses to make its computer software programs and operating systems Year 2000
compliant. However, there can be no assurance that unanticipated costs
associated with any Year 2000 compliance will not exceed the Company's present
expectations and have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the
25
<PAGE>
Company's ad servers and certain of its customers may also be impacted by Year
2000 complications. Any failure by the Company or its ad servers or its
customers to make their products Year 2000 compliant could result in a decrease
in sales of the Company's products, an increase in the allocation of resources
to address Year 2000 problems of the Company's customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by the Company's customers due to
such Year 2000 problems. The occurrence of any such event could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Year 2000 Compliance."
Recently Issued Accounting Principles
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in its
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between
the Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
26
<PAGE>
BUSINESS
Overview
24/7 Media, an Internet advertising and direct marketing firm, enables
both advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and electronic commerce.
The Company generates revenue by selling advertisements and promotions for its
Affiliated Websites. In particular, 24/7 Media: (i) operates the 24/7 Network,
a network of over 85 high profile Affiliated Websites to which the Company
delivered an aggregate of over 335 million advertisements in May 1998; (ii)
operates the CliqNow! network of over 75 medium to large-sized Affiliated
Websites to which an aggregate of over 45 million advertisements were delivered
in May 1998; (iii) operates the ContentZone, a network of over 2,000 small to
medium-sized Affiliated Websites to which the Company delivered an aggregate of
over 40 million advertisements in May 1998; (iv) licenses its Adfinity[TM]
advertising management system to independent Websites to manage and serve
high-volume Internet advertising and direct marketing campaigns; and (v)
markets its dbCommerce[TM] software to e-commerce merchants to enable the
delivery of targeted promotions.
The Company operates in the rapidly growing Internet advertising industry.
IDC estimates that at the end of 1997 there were over 38 million Web users in
the United States and over 68 million Web users worldwide and that by the end
of 2002 the number of Web users will increase to over 135 million in the United
States and to over 319 million worldwide. There can be no assurance that such
rapid industry growth rates will be achieved or that the Company will
experience similar rates of growth. Jupiter Communications projects that the
dollar value of Internet advertising in the United States will increase from
$940 million in 1997 to $7.7 billion in 2002.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated reach. The Company delivered an aggregate of 420
million impressions in May 1998 and, according to a study prepared for the
Company by Media Metrix, the Company's networks reached 35.7%, or more than one
third, of all Internet users. The Company believes that this reach figure is
among the highest in the Internet advertising industry. The Company plans to
aggressively recruit Websites for its networks in order to (i) further extend
the Company's reach, (ii) provide advertisers with a broad and diverse base of
online content and page views and (iii) improve the Company's brand awareness
and visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
deliver highly targeted messages efficiently. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns to reach
desired audiences, while reducing costs, easing time pressures and alleviating
the need to purchase a series of ad campaigns from numerous Web publishers.
Advertisers and direct marketers can achieve their objectives by buying ad
space on a specific Website, within a particular content channel or across an
entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience provides Web publishers access to media buyers at large ad
agencies and enables them to sell advertisement space without incurring the
costs and challenges associated with building and maintaining an ad sales
force. Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
The addition of the Adfinity[TM] and dbCommerce[TM] technologies in
connection with the acquisition of Intelligent Interactions in April 1998
allows 24/7 Media to provide comprehensive advertising solutions for
advertisers, direct marketers and Web publishers. Adfinity is designed to
target, deliver, and track advertisements and direct marketing messages across
the Company's networks. Adfinity can create a profile of an individual Internet
user by integrating such user's online behavior with third party demographic
and lifestyle data. These profiles can allow Adfinity to deliver targeted
advertisements to "the right person at the right time." dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver promotions and messages
to targeted customer audiences by integrating database marketing techniques
with customer transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to seek to
maximize the value of ad campaigns for both advertisers and Affiliated
Websites.
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<PAGE>
Formation of the Company
The Company is the result of several recent mergers and acquisitions, and
the combination of these predecessor entities has resulted in an integrated
Internet advertising company with both media sales and technology expertise.
The Company was incorporated in Delaware on January 23, 1998 to consolidate
three Internet advertising companies: (i) Petry, a Delaware corporation that
sold advertising for Websites organized in a network, (ii) Advercomm, a
newly-formed Delaware corporation that brought a number of high profile
Websites to the 24/7 Network, and (iii) Interactive Imaginations, a New York
corporation that operated the ContentZone and Riddler.com. Subsequently, the
Company acquired both Intelligent Interactions, a Delaware corporation that
develops and licenses ad serving technology and e-commerce software, and
CliqNow!, a network of over 75 medium to large-sized Websites.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 25, 1998, the Company simultaneously consummated the
merger of each of Petry and Advercomm with and into the Company (together with
the concurrent investment of approximately $10 million by certain third party
investors including an existing investor of Interactive Imaginations, the
"Initial Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's
then parent) was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. On April 13,
1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company, and as of June 1, 1998, the Company acquired
CliqNow! (collectively, the "Acquisitions"). See "Prospectus Summary--Formation
of the Company."
Industry Background
Growth of the Internet and the Web
The Internet and the Web are experiencing dramatic growth in terms of both
the number of Web users and the number of Websites. IDC estimates that at the
end of 1997 there were over 38 million Web users in the United States and over
68 million Web users worldwide, and that by the end of 2002 the number of Web
users will increase to over 135 million in the United States and to over 319
million worldwide. In addition, Web users are spending an increasing amount of
time on the Web; a 1997 U.S. Department of Commerce study estimated that
overall traffic on the Internet is doubling every 100 days. According to
Network Solutions, the number of paid active Internet domains (.com, .net and
.org) had grown to over 2 million in May 1998. The growth in the number of Web
users, the amount of time users spend on the Web and the number of Websites is
being driven by the increasing importance of the Internet as a sales and
distribution channel, a communications medium and an information resource.
Growth of Online Commerce
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers with a broad selection, increased pricing power and
unparalleled convenience. As a result, a growing number of consumers are
transacting business on the Web, including trading securities, buying consumer
goods, paying bills and purchasing airline tickets. Jupiter Communications
estimates that over 25% of adult Web users purchased goods or services over the
Web in 1997 and that 50% of adult Web users will make online purchases in 2000.
Jupiter Communications also estimates that retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The Company believes that as electronic commerce expands,
advertisers and direct marketers will increasingly use the Web to advertise
products, drive traffic to their Websites, attract customers and facilitate
transactions.
Growth of Internet Advertising
The Web is evolving into an important medium for advertisers due to its
interactive nature, global reach, rapidly growing audience and the expected
increase in online commerce. Unlike more traditional advertising methods, the
Web gives advertisers the potential to target advertisements to broad audiences
or to selected groups of users with specific interests and characteristics. The
Web also allows advertisers and direct marketers to measure the effectiveness
and response rates of advertisements and to track the demographic
characteristics of Web users. The interactive nature of Web advertising enables
advertisers to better understand potential customers, and to change
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messages rapidly and cost effectively in response to customer behavior and
product availability. Additionally, the Web allows advertisers and direct
marketers to reach users with attractive demographic profiles. A 1997 U.S.
Department of Commerce study estimated that 48% of Web users have a college
degree, 34% have a household income greater than $60,000, and their average age
is approximately 35 years.
The unique capabilities of online advertising, the growth in traffic on
the Web and the favorable characteristics of Web users have led to a
significant increase in online advertising. According to Jupiter
Communications, the dollar value of online advertising in the United States is
expected to increase from $940 million in 1997 to $7.7 billion in 2002,
representing a 52% compounded annual growth rate. By comparison, in 1997 IDC
estimated that $173 billion was spent on traditional media advertising
(television, radio, cable and print) in the United States. Until recently, the
leading Internet advertisers have been technology companies, search engines and
Web publishers. However, many of the largest advertisers utilizing traditional
media, including consumer products companies and automobile manufacturers, are
expanding their use of online advertising. The Company believes that online
advertising will continue to capture an increasing share of available
advertising dollars and that this trend will drive demand for online ad
inventory and for sophisticated Internet advertising solutions.
Opportunities for Direct Marketing
The Web also represents an attractive medium for direct marketing, which
has traditionally been conducted through direct mail, telemarketing and
televison infomercials. The interactive nature of the Web enables direct
marketers to deliver targeted promotions to consumers at the point-of-sale. The
success of a direct marketing campaign is measured by the response rate of
consumers (e.g., number of leads, number of sales or transactions as a
percentage of promotions viewed). The Internet has the potential to enable
direct marketers to increase consumer response rates and decrease
costs-per-transaction by targeting and delivering direct marketing campaigns to
particular consumers based on their demographic profile, self-selected
interests and online behavioral characteristics. By providing a more
cost-effective method to reach target customers, online advertising is expected
to improve the direct marketer's return on investment. The Direct Marketing
Association estimates that $153 billion was spent in 1997 on all forms of
direct marketing in the United States, and Jupiter Communications estimates
that expenditures on direct marketing over the Internet will exceed $1.3
billion in 2002.
Challenges Facing Advertisers, Direct Marketers and Web Publishers
While the Web offers numerous opportunities, most online advertisers,
direct marketers and Web publishers face a number of significant challenges to
realizing the potential of Internet advertising. As online advertisers, direct
marketers and Web publishers increase their use of the Internet, they seek
solutions and technologies which will allow them to deliver highly targeted
messages, receive real-time feedback, benefit from business efficiencies and
capitalize on other potential advantages of online advertising and direct
marketing.
Advertisers and Direct Marketers. For advertisers and direct marketers,
large advertising campaigns can be time-consuming, expensive and difficult to
manage and can require the use of media purchasers at advertising agencies to
place advertisements. Given the breadth of content available on the Web, it is
difficult for advertisers and direct marketers to justify the costs of
transacting individually with a number of smaller, but desirable, sites in
order to reach a large online audience. In addition, many advertisers and
direct marketers lack the analytical tools to evaluate and optimize the
effectiveness of advertising campaigns, target appropriate users, efficiently
place advertisements and deliver content. Advertisers and direct marketers also
find that individual Websites typically lack the technology to serve a variety
of advertisements to a broad reach of Internet users.
Web Publishers. Web publishers who seek to sell ad space on their Websites
face an array of challenges. Most Web publishers have difficulty attracting and
maintaining experienced personnel to sell ad space on their Websites and
justifying the costs of establishing such a sales force. In addition, most Web
publishers cannot afford, or lack the ability, to operate and maintain
sophisticated ad servers and databases to provide effective ad serving,
targeting and reporting to advertisers. Furthermore, for sales personnel at all
but the largest Websites, it can be difficult to gain access to media buyers at
large advertising agencies. As a result, online advertising spending is highly
concentrated on large Websites. Industry sources estimate that, during August
1997, the top nine portals (which represented 15% of total page views)
accounted for 59% of all dollars spent on Internet advertising. The Company
believes all but the largest Websites will continue to face challenges in
capturing a share of the total advertising dollars spent on the Internet.
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The 24/7 Media Solution
The Company operates the 24/7 Network, the CliqNow! network and the
ContentZone, which are networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and electronic commerce. The 24/7 Network is
comprised of over 85 high profile Websites; the CliqNow! network is comprised
of over 75 medium to large-sized Websites; and the ContentZone is comprised of
over 2,000 small to medium-sized Websites. The Company offers comprehensive
advertising sales solutions for both emerging and mature Web publishers and
provides advertisers and direct marketers with targeted ad delivery across the
Company's networks. The Company delivered an aggregate of 420 million
impressions during May 1998 and, according to a study prepared for the Company
by Media Metrix, the Company's networks reached 35.7%, or more than one third,
of all Internet users. The Company believes that this reach figure is among the
highest in the Internet advertising industry. The Company's ability to deliver
targeted advertisements has recently been enhanced by the addition of the
Adfinity[TM] ad serving technology.
Benefits to Advertisers and Direct Marketers
24/7 Media reduces costs and eases time pressures for advertisers and
direct marketers by alleviating the need to purchase a series of ad campaigns
from numerous Web publishers. The Company's networks provide advertisers and
direct marketers with access to a wide variety of online content and a broad
reach of Internet users. Advertisers and direct marketers can enhance the
effectiveness of advertising and direct marketing campaigns by customizing
their ad delivery on the Company's networks and buying ad space either on
selected Affiliated Websites, within a particular content channel or across an
entire network. The Company believes that its Adfinity[TM] technology will
enable advertisers to optimize ad performance by reaching highly targeted
audiences based on demographic profiles and user behavior. In addition, the
Company provides advertisers and direct marketers with comprehensive reporting
services in order to monitor the effectiveness of ad delivery.
Benefits to Web Publishers
Membership on the Company's networks enables Web publishers to immediately
generate advertising revenues by gaining access to advertisers and direct
marketers without the costs and challenges associated with building and
maintaining their own ad sales force and ad serving technology. Websites
included on the Company's networks benefit from 24/7 Media's experienced
management team, its extensive sales and marketing organization and its direct
access to advertisers and agencies. The organization of the Company's networks
into channels of Web publishers' content enhances the value of inventory on
small to medium-sized Websites and enables such Websites to generate revenues
by selling ad space within a channel that is attractive to advertisers.
Furthermore, the Company believes that the targeting capabilities of the
Company's Adfinity[TM] ad management system will increase the value of Web
publishers' inventory. The Company also provides sophisticated tracking and
reporting functions for its Affiliated Websites. For Web publishers with their
own in-house ad sales forces, the Company licenses its Adfinity[TM] ad
management system to serve advertisements and provide enhanced targeting and
reporting capabilities.
Strategy
24/7 Media's objective is to provide superior turnkey advertising
solutions for Web publishers and maximize the effectiveness of advertisers'
Internet advertising campaigns. The Company intends to reach its objective by
implementing the following interconnected strategies:
Expand the Company's Networks of Websites. The Company plans to recruit
Websites aggressively for its networks in order to extend the Company's reach
and to provide a broad base of page views and online content to advertisers.
The Company believes that its approach to expansion is unique in that it
recruits Websites of all sizes, including high-profile or larger to
medium-sized Websites on the 24/7 Network and the CliqNow! network, as well as
medium to smaller-sized Websites on the ContentZone. Such a collection of
Websites of diverse sizes and content allows advertisers to target Internet
users by interest and enhances the value of each Affiliated Website's
inventory. An increased number of Affiliated Websites and an expanded breadth
of available content will further enable advertisers to consolidate their ad
purchases and will improve the Company's brand awareness and visibility with
media buyers.
Maximize Sales and Marketing Effectiveness. The Company believes that its
sales and marketing organization is among the largest in the Internet
advertising industry, providing the Company with a competitive advantage. The
Company intends to leverage the substantial media sales experience of its
management team in
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order to maximize the value of ad campaigns to benefit both advertisers and its
Affiliated Websites. 24/7 Media believes that advertiser awareness of the
Company is critical to its success. Accordingly, the Company continually
expands its services for advertisers and advertising agencies in order to
establish and expand the recognition of its corporate identity. The Company
also promotes its service offerings through its Website, trade publication
advertisements, direct mail and promotional activities, trade shows and other
media events.
Enhance Capabilities of Ad Targeting Technology. The Company believes that
its Adfinity[TM] ad management technology creates significant value for
advertisers, direct marketers and its Affiliated Websites. Adfinity[TM] can
create a profile of an individual Internet user by integrating such user's
online behavior with third party demographic and lifestyle data. These profiles
can enable Adfinity[TM] to deliver targeted advertisements to the right person
at the right time. The Company intends to continue to enhance its targeting
capabilities and technology through investment in research and development
activities.
Increase Value of Ad Inventory. The Company seeks to increase click-thru
rates as its Adfinity[TM] technology delivers advertisements to a more highly
targeted audience, resulting in more effective advertising campaigns and
enabling the Company to charge higher CPM rates. Furthermore, the Company
believes that as it increases the breadth and depth of its content channels,
the sale of ads targeted to specific channels will increase, displacing lower
CPM run of network campaigns, in which ads are delivered across the Websites in
a network, and cost-per-action campaigns that generate revenues only if the
user responds to the ad with an action, such as an inquiry or a purchase of the
product advertised. The Company intends to further increase the value of its
Affiliated Websites' ad inventory by seeking to sell 100% of inventory through
the sale of a combination of advertisements sold on a CPM basis and a
cost-per-action basis, by selling sponsorships on Affiliated Websites and by
refining its management of ad space inventory.
Provide Highest Level of Customer Service. The Company emphasizes high
quality service for its Affiliated Websites and advertisers. For example, the
Company employs techniques of benchmarking, statistical analysis and continuous
process improvement to provide its Affiliated Websites and advertisers with
"best of class" service. The Company continually surveys its Affiliated
Websites and advertisers to monitor service levels and identify and resolve
problems. In addition, the Company expects that Adfinity[TM] will offer
enhanced reporting capabilities that allow Web publishers and advertisers to
better assess the efficiency and performance of ad campaigns.
24/7 Media Products and Services
The Company's products and services include (i) its comprehensive Internet
advertising solutions for Internet advertisers, direct marketers and Affiliated
Websites and (ii) the licensing of its Adfinity[TM] ad serving technology and
its dbCommerce[TM] software. For the three months ended March 31, 1998, pro
forma advertising revenue and pro forma consulting and license fees accounted
for 96.4% and 3.6% of total pro forma revenues, respectively.
Internet Advertising Networks
The Company operates the 24/7 Network, the CliqNow! network and the
ContentZone, each of which is a collection of Websites with diverse online
content organized into topical channels.
The 24/7 Network. Through the 24/7 Network, the Company provides
advertisement sales and delivery services and related functions to over 85
Affiliated Websites. The 24/7 Network aggregates large and medium-sized
Websites that are attractive to advertisers, generate a high number of ad
impressions and contribute a variety of online content to the network. The ten
largest sites in the 24/7 Network produced approximately 68% and 66% of the
24/7 Network's pro forma advertising revenue in such periods, respectively.
During the month of May 1998, the Company delivered over 335 million
advertisements to the 24/7 Network. The Websites on the 24/7 Network include,
among others, the following Websites:
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<TABLE>
<S> <C>
[bullet] FreeEdgar
[bullet] AT&T Worldnet
[bullet] Accuweather [bullet] Ladies' Home Journal
[bullet] All Apartments [bullet] MapQuest
[bullet] Better Homes & Gardens [bullet] Match.com
[bullet] Blizzard [bullet] New York Magazine
[bullet] Channel One [bullet] Readers' Digest
[bullet] Comedy Central [bullet] Reuters' MoneyNet
[bullet] Currency Site [bullet] Reuters' Newswire
[bullet] Delphi [bullet] Soap Opera Digest
[bullet] Doonesbury [bullet] Spinner.com
[bullet] Earthlink [bullet] Talk City
[bullet] Encompass [bullet] Yacht World
</TABLE>
CliqNow! Network. The recent acquisition of CliqNow! furnished the Company
with a network of over 75 medium to large-sized Websites. Through the CliqNow!
network, the Company provides advertisement sales and delivery services and
related functions to the Affiliated Websites on the CliqNow! network. Over 45
million ad impressions were delivered to Affiliated Websites on the CliqNow!
network in May 1998. The Websites on the CliqNow! network include, among
others, the following Websites:
<TABLE>
<S> <C>
[bullet] The Associated Press--The Wire [bullet] Wall Street Sports
[bullet] fastWeb [bullet] Web Site Garage
[bullet] Horticulture Magazine [bullet] The Womens' Forum
[bullet] Thomson Financial Services
</TABLE>
ContentZone. The ContentZone is a network of over 2,000 small to
medium-sized Websites to which the Company provides advertisement sales and
delivery services and related functions. Such Websites encompass a broad and
diverse range of content that reflects the eclectic, grass-roots nature of the
Web. The ContentZone provides one of the few advertising revenue opportunities
for such small and emerging Websites. During the month of May 1998, the Company
delivered over 40 million advertisements to the Affiliated Websites on the
ContentZone. The Company created and operates the ContentZone Website
(www.contentzone.com) to promote and generate traffic on its Affiliated
Websites on the ContentZone.
Channels on the Networks.
The 24/7 Network's and the ContentZone's Affiliated Websites are currently
organized into the following topical channels:
<TABLE>
<S> <C>
[bullet] Automotive [bullet] Music
[bullet] Business/Financial [bullet] News/Information
[bullet] Community/Directory [bullet] Real Estate
[bullet] Entertainment [bullet] Sports
[bullet] Games [bullet] Technology
[bullet] Health [bullet] Teen/College
[bullet] International [bullet] Travel/Dining
[bullet] ISP/Portal [bullet] Women/Family
</TABLE>
The CliqNow! network is organized into the following topical channels:
<TABLE>
<S> <C>
[bullet] College [bullet] Kids
[bullet] Financial [bullet] Sports
[bullet] Golf [bullet] Tech
[bullet] Home [bullet] Travel
</TABLE>
The Company is presently developing several new channels for its networks
prompted by user and advertiser interests. The Company expects to expand into
additional channels to respond to advertisers' needs. For example, the Company
is working with RealNetworks to create a channel of Websites from its portfolio
that will accept rich media advertising (audio-enhanced banners and streaming
audio-visual ads) in areas where online content utilizes rich media technology.
24/7 Media intends to promote rich media ad placement utilizing RealNetworks
streaming technology on 24/7 Media's networks of Websites, and RealNetworks
intends to promote 24/7 Media's rich media channel to its customers and
advertising agency affiliates.
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The Games channel of the 24/7 Network includes the Company's Riddler.com
Website (www.riddler.com), a Website that offers a diverse number of
single-player and multi-player games to over 700,000 registered subscribers, as
well as to a number of unregistered users. Riddler.com offers free games and
prizes as an incentive to consumers to supply the Riddler.com database with
personal demographic and psychographic data. The Company delivers
advertisements and sponsorship messages on Riddler.com that do not interrupt
the game being played, but require the user to scroll through the advertisement
in order to begin playing the game.
Service Levels on the Networks.
The Company offers different levels of service to the Affiliated Websites
on its networks.
The Company offers full service to certain Affiliated Websites on the 24/7
Network and the CliqNow! network. For such Websites, the Company appoints an
account manager to oversee the relationship with the Website, sells the Website
ad inventory directly to advertisers, solicits sponsorships specifically for
such Website and integrates sales efforts with the Website. The Company
recognizes revenues generated from advertising sales net of any ad agency
commissions.
For all other Websites on the 24/7 Network and the CliqNow! network, the
Company bundles advertisements as part of a channel or run of network package,
pursuant to which the advertisement is delivered across Websites in one of the
channels listed above or across the entire network. For example, an advertiser
who buys an advertisement on the Automotive channel on the 24/7 Network is
guaranteed that such advertisement will run only on the Websites on the 24/7
Network's Automotive channel. The Company typically receives a minimum
available inventory on such Websites, receives commissions only on the
advertisements the Company sells and believes that it is generally the only
third party that sells ads on such Websites.
All Websites on the ContentZone receive service similar to the channel or
run of network service on the 24/7 Network except that advertisement delivery
is highly automated and ads are delivered across Websites included in specific
channels on the ContentZone or across the entire ContentZone.
Advertisers on the Networks.
The Company maintains relationships with, and focuses its sales and
marketing efforts on, the leading Internet and traditional advertisers and
advertising agencies, many of which have utilized the Company's solutions.
Advertisers and advertising agencies employ the Company in various ways.
Advertisers and ad agencies typically purchase advertising pursuant to written
purchase order agreements that run for a limited time. Based on its breadth of
online content and its extensive reach, the Company has the ability to package
personalized advertising solutions for advertisers and ad agencies. The
Company's sales force works closely with advertisers to enhance the
effectiveness of advertising campaigns by customizing ad delivery either on a
specific Website, within a particular content channel, or across an entire
network. Set forth below is a representative list of advertising agencies and
advertisers that have delivered advertisements on the Company's networks during
the five months ended May 31, 1998:
Advertising Agencies
<TABLE>
<S> <C>
[bullet] Agency.com [bullet] i-traffic
[bullet] Anderson & Lembke [bullet] J. Walter Thompson
[bullet] BBDO Interactive [bullet] Kirshenbaum Bond & Partners
[bullet] Black Dog Design [bullet] Left Field
[bullet] Catalina Marketing [bullet] McCann-Erikson
[bullet] CKS/Sitespecific [bullet] Media.com
[bullet] Dahlin Smith White [bullet] Mercury 7
[bullet] DMB&B [bullet] Modem Media
[bullet] Eagle River Interactive [bullet] Ogilvy & Mather
[bullet] Freeman [bullet] Planet U
[bullet] Giant Step [bullet] Rives Carlberg
[bullet] Grey Interactive [bullet] Thunderhouse
[bullet] Hal Riney [bullet] US Interactive
[bullet] iballs [bullet] Wolverine
[bullet] ifrontier [bullet] Y&R Wunderman
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
Advertisers
[bullet] Amazon.com [bullet] Internet Shopping Network
[bullet] American Express [bullet] Mastercard
[bullet] AT&T [bullet] Metromail
[bullet] Bell Atlantic [bullet] Microsoft
[bullet] Cardsecure [bullet] The Mining Company
[bullet] CDNow [bullet] News Corp.
[bullet] Cendant [bullet] N2K
[bullet] Charles Schwab [bullet] Pointcast
[bullet] Citibank [bullet] Procter & Gamble
[bullet] Columbia House [bullet] Sony
[bullet] Compaq [bullet] Sandals Resorts
[bullet] Disney [bullet] Sprint
[bullet] eBay [bullet] Standard & Poor's
[bullet] Encyclopedia Britannica [bullet] Think New Ideas
[bullet] Ford [bullet] Tower Records
[bullet] General Motors [bullet] US Web
[bullet] Hewlett Packard [bullet] US West
[bullet] IBM [bullet] Visa
[bullet] Intel [bullet] Web Genesis
</TABLE>
Certain of the above advertising agencies and advertisers represented less
than one percent of 24/7 Media's total revenues in the five months ended May
1998. CardSecure represented 12.9% of the total revenues for such period.
CardSecure has recently substantially reduced its advertising with the Company,
and has accounted for less than 5% of the Company's revenues since June 30,
1998. The Company believes that such reduction will not have a material effect
on the financial condition of the Company. See "Risk Factors--Reliance on a
Limited Number of Advertisers and Ad Agencies."
Admission to the Networks. Web publishers seeking to join the 24/7 Network
or the CliqNow! network must meet specified standards, such as quality content
and brand name recognition, specified levels of existing and projected page
views, attractive user demographics, and sponsorship opportunities. Any Web
publisher possessing non-objectionable content on its Website can qualify for
admission to the ContentZone, and the Company expects to "graduate" ContentZone
members to the 24/7 Network or the CliqNow! network if they generate a
sufficient number of ad impressions per month and satisfy the requisite
standards.
Adfinity[TM] Ad Serving Technology
Adfinity[TM] ad serving technology is designed to allow Websites to
target, deliver, and track a high volume of advertisements to Internet viewers
without causing a slow down in the performance of the Website or a delay in ad
delivery. 24/7 Media acquired Adfinity[TM] as part of its acquisition of
Intelligent Interactions in April 1998, and is currently integrating the
Adfinity[TM] ad serving technology into the Company's networks. The Company
expects Adfinity[TM] to serve as the Company's technology platform, delivering
all of the advertisements to its networks. In addition, the Company currently
licenses Adfinity[TM] to eight Websites, including The Motley Fool,
MecklerMedia and RealNetworks.
Adfinity[TM]'s targeting engine is designed to enable advertisers and
direct marketers to target advertisements and Internet content to individuals
or audience segments using flexible, advertiser-defined demographic profiles.
Advertisers can control the advertisement delivered, the user targeted, and the
frequency of ad delivery. Adfinity[TM] integrates information, such as a user's
online response rate to advertisements, name, address, age, or e-mail address,
with third-party databases to generate a comprehensive demographic profile of
the Internet user. Using such user profile, the Company can serve
advertisements and promotions specifically targeted to such user. Adfinity[TM]
also utilizes database overlays from marketing firms or other third parties in
order to create a comprehensive direct marketing model for the Company.
Through Adfinity[TM], the Company provides Internet advertisers, direct
marketers and Web publishers with comprehensive timely reports regarding the
demographics of users receiving and responding to advertisements. If a selected
audience does not respond well to an advertising message, then Adfinity[TM]
allows Internet advertisers,
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<PAGE>
direct marketers and Web publishers to promptly change advertising messages or
images, refine the targeted demographics and rebroadcast messages.
dbCommerce[TM] Software
24/7 Media acquired dbCommerce[TM] software in connection with the
acquisition of Intelligent Interactions in April 1998. dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver targeted promotions and
messages to distinct customer segments or specific customers by integrating
database marketing techniques with customer transaction information and third
party databases. dbCommerce[TM] is designed to track the effectiveness of
promotional efforts by source code, page view, products shown and Internet
response rates and to provide reports of this information to e-commerce
merchants to improve the targeting of future promotions and messages.
The Company's Intelligent Interactions subsidiary recently entered into an
agreement pursuant to which IBM bundles the dbCommerce[TM] software with IBM's
I-commerce server for database and Web marketing purposes. Furthermore,
Intelligent Interactions and Open Market Inc. recently entered into an
agreement to jointly market ad targeting services and products that result from
the imntegration of the dbCommerce[TM] software with Open Market's Transact
commerce server, LiveCommerce's industrial cataloging software and SecureLink's
development environment. To date, the Company has not realized any revenues
from its dbCommerce[TM] software.
Privacy Protection
In utilizing its targeting technology and software, the Company adheres to
the principles of the Direct Marketing Association regarding privacy concerns.
To address privacy concerns, users are permitted, at their request, to
"opt-out" of demographic profile targeting. When a subscriber objects to
profile targeting, Adfinity[TM] and dbCommerce[TM] automatically deliver ads
based only on site-defined page, location, or context. Although Adfinity
enables the use of "cookies" in addition to other mechanisms to deliver
targeted advertising, the Company generally does not, and will not in the
future, depend on the use of "cookies", which are bits of information keyed to
a specific server, file or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software. The
use of cookies on the Web has met with some resistance by Internet users. Ad
serving systems can manage targeted advertising and control the frequency of
ads delivered to users without using cookies through the use of a user login at
each session, or with the user's permission, such systems can use a cookie to
identify the user for future visits. See "Risk Factors--Privacy Concerns."
Sales and Marketing
The Company believes it maintains one of the largest Internet advertising
sales organizations. The Company sells its services in the United States
through a sales and marketing organization which included 44 salespeople as of
June 30, 1998. These employees are located at the Company's headquarters in New
York, and in the Company's offices in Chicago, Dallas, Los Angeles, San
Francisco, Seattle and the Washington, D.C. area.
Advertisers typically purchase advertising pursuant to written purchase
order agreements that run for a limited time. The Company believes that the
terms of its purchase order agreements, which provide for indemnification of
the Company by the advertiser for breach of representations and warranties
included therein and limit the right of the advertiser to cancel or modify a
campaign once commenced, are consistent with industry practice. In addition to
purchase order sales, the Company has recently started to sell sponsorship
advertising whereby an advertiser enters into a long-term agreement with a
single Website, typically with some exclusivity and renewal privileges and
restrictions on the advertisers' ability to cancel the agreement. Such
sponsorship advertising involves a greater degree of integration among the
Company, the advertiser and the Affiliated Websites.
The Company believes that it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities. The Company continuously leverages the
substantial media experience of its management team to maximize the value of ad
campaigns for both advertisers and Affiliated Websites. The Company also
employs a Website relationship department that surveys Affiliated Websites and
monitors qualitative indicators of service levels in order to continuously
improve its customer service.
24/7 Media believes that advertiser awareness of the Company and its
services is critical to its success. As a result, the Company seeks to
continually communicate with its advertisers and advertising agencies through
its Website, trade publication advertisements, public relations, direct mail,
ongoing customer communications programs, promotional activities, trade shows
and online advertisements over the Company's networks and on third party
Websites.
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<PAGE>
International
The Company's international strategy consists of entering into strategic
alliances with foreign Internet advertising networks. The Company has an
agreement with ClickThrough Interactive ("ClickThrough") whereby ClickThrough
has the exclusive third party right to sell page views on the 24/7 Network when
such pages are accessed by Canadian Internet users, and the Company has the
exclusive third party right to sell page views on the ClickThrough network when
accessed by U.S. Internet users. The Company is not obligated to sell such
pages to ClickThrough below a certain CPM floor. The Company has entered into a
similar agreement with China Internet Company, which operates the China.com
Website and is developing an Asian Internet advertising network. The Company is
currently negotiating additional alliances in Europe. The Company does not
expect to realize materially significant revenues from these alliances for at
least the next 6 months.
Intellectual Property
The Company regards its intellectual property as critical to its success,
and relies upon patent, trademark, copyright and trade secret laws in the
United States and other jurisdictions to protect its proprietary rights and
intellectual property. Although the Company does not currently have any
patents, it has filed applications with the United States Patent and Trademark
Office to protect certain aspects of its Adfinity[TM] and dbCommerce[TM]
technologies. The Company has pursued the protection of its trademarks by
applying to register its trademarks, including the trademarks of Adfinity and
dbCommerce, in the United States and (based upon anticipated use)
internationally, and is the owner of a registration for the 24/7 Media
trademark in the United States. There can be no assurance that all of the
Company's trademark registrations or patent applications will be approved or
granted and, if they are granted, that they will not be successfully challenged
by others or invalidated through administrative process or litigation. Further,
if the Company's trademark registrations are not approved or granted due to the
prior issuance of trademarks to third parties or for other reasons, there can
be no assurance that the Company would be able to enter into arrangements with
such third parties on commercially reasonable terms to allow the Company to
continue to use such trademarks. Patent, trademark, copyright and trade secret
protection may not be available in every country in which the Company's
services are distributed or made available. In addition, the Company protects
its proprietary rights through the use of confidentiality agreements with
employees, consultants and affiliates. The Company also licenses certain
proprietary rights to third parties. There can be no assurance that such
agreements and licenses will provide adequate protection for the Company's
proprietary rights in the event of any unauthorized use or disclosure, that
employees of the Company, consultants or affiliates will maintain the
confidentiality of such proprietary information, or that such proprietary
information will not otherwise become known, or be independently developed, by
competitors.
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the Company's networks and of the Websites of Web
publishers using the Company's services. This data is used for advertisement
targeting and for predicting advertisement performance. Although the Company
believes that it has the right to use such data, there can be no assurance that
any trade secret, copyright or other protection will be available for such
information or that others will not claim rights to such information. Further,
pursuant to its contracts with Web publishers using the Company's services, the
Company is obligated to keep certain information regarding the Web publisher
confidential.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and currently evolving. The future viability or value of any
proprietary rights of 24/7 Media is unknown. Steps taken by 24/7 Media to
protect its proprietary rights may not be adequate and third parties may
infringe or misappropriate the Company's proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operations and financial
condition. Furthermore, there can be no assurance that the Company's business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against the Company.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to continue to increase.
The Company believes that its ability to compete depends upon many factors
within and beyond its control, including the timing and market acceptance of
new services and enhancements to existing services developed by the Company and
its competitors, customer service and support, sales and marketing efforts, and
the ease of use, performance, price and reliability of the Company's products
and
36
<PAGE>
services. The Company believes it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
GeoCities, Infoseek, Lycos and Yahoo!. Further, the Company's networks of
Websites compete with a variety of Internet advertising networks, including
DoubleClick and Link Exchange. In marketing the Company's networks and its
Adfinity[TM] system to Web publishers, the Company also competes with providers
of advertisement servers and related services, including NetGravity and
Accipiter, a division of CMG Information Services, Inc. In marketing
dbCommerce[TM], the Company competes with BroadVision. The Company also
encounters competition from a number of other sources, including content
aggregators, companies engaged in advertising sales networks, advertising
agencies, and other entities which facilitate Internet advertising. Many of the
Company's existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. See "Risk Factors--Competition."
Employees
As of June 30, 1998, the Company employed 117 persons, including 76 in
sales, marketing and customer support, 22 in product development, and 19 in
accounting, human resources and administration. The Company is not subject to
any collective bargaining agreements and believes that it enjoys a good
relationship with its employees.
Facilities and Systems
The Company's principal executive offices are located at 1250 Broadway,
New York, New York and consist of approximately 13,000 square feet under a
lease that expires in 2003; the Company has exercised an option to lease an
additional 26,000 square feet on two adjacent floors.
The lease with respect to the Company's headquarters runs through 2003 and
provides for total annual rent of approximately $1,200,000 (subject to increase
annually to reflect increases in operating expenses), and covers approximately
39,000 square feet on three floors. The Company also temporarily leases office
space at 30 Broad Street, New York, New York from K2 Design, Inc. for certain
employees associated with the CliqNow! network.
In addition, the Company leases office space for its sales, marketing and
product development staff in Chicago, Dallas, Los Angeles, San Francisco and
the Washington, D.C. area. The Company believes that its existing facilities,
including the additional space in the executive offices, will be sufficient for
its purposes for the next 12 months.
The Company's Adfinity[TM] ad serving software and hardware are housed at
GlobalCenter in Herndon, Virginia. GlobalCenter provides the Company with a
secure area to store and operate its computer systems, capacity for
communications links and Internet connectivity systems, and contractual
protection against service interruptions. The Master Services Agreement with
GlobalCenter, Inc. provides for Internet connectivity services, the lease of
certain hardware, the licensing of certain software, and the lease of secure
space to store and operate such equipment. Services and equipment are delivered
by GlobalCenter pursuant to Service Orders submitted from time to time by the
Company. Service orders currently in place, which expire in May 1999, require
monthly payments of $27,000. GlobalCenter may not increase prices or terminate
services during the pendency of any service order. The Master Services
Agreement includes a "99% Uptime Guarantee" with respect to the services
provided. Downtime results in certain returns of payment and gives rise to a
right of termination by the Company. In the future, the Company may opt to
utilize other GlobalCenter locations in New York and California.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position and Offices
- --------------------------- ----- ------------------------------------------------------
<S> <C> <C>
David J. Moore 46 President and Chief Executive Officer and a Director
R. Theodore Ammon 48 Chairman of the Board
Yale R. Brown 43 Executive Vice President--Technology and Operations
and a Director
Jacob I. Friesel 48 Executive Vice President--Sales and Marketing and a
Director
C. Andrew Johns 38 Executive Vice President, Treasurer & Chief Financial
Officer
John F. Barry III 46 Director
Michael P. Paolucci 27 Director
Jack L. Rivkin 57 Director
Arnie Semsky 52 Director
Charles W. Stryker, Ph.D. 51 Director
</TABLE>
David J. Moore has been President and Chief Executive Officer and a
Director of the Company since February 1998. Mr. Moore was Chief Executive
Officer of Petry Interactive from December 1995 to February 1998. From 1993 to
1994, Mr. Moore was President of Geomedica, an online service for physicians,
which he sold to Reuters. From 1982 to 1992, Mr. Moore was a Group Vice
President at Hearst/ABC-Viacom Entertainment Services, where he participated in
the launch of Cable Health Network, Lifetime Television, Lifetime Medical
Television, a service targeted to physicians, and HealthLink Television, a
physician waiting room television service. From 1979 to 1982, Mr. Moore had a
television advertising sales position with Turner Broadcasting. Mr. Moore
received a B.A. degree in Communications from Northern Illinois University.
R. Theodore Ammon, Chairman of the Board of the Company, has been Chairman
of the Board of Big Flower Holdings, Inc. and its predecessor company, Big
Flower Press Holdings, Inc. since 1993. From 1990 to 1992, Mr. Ammon was a
General Partner of Kohlberg Kravis Roberts & Co., a New York and San
Francisco-based investment firm, and an executive of such firm prior to 1990.
Mr. Ammon also serves on the board of directors of each of Host Marriott
Corporation, Culligan Water Technologies, Inc. and Samsonite Corporation. Mr.
Ammon received a B.A. degree in Economics from Bucknell University.
Yale R. Brown has been Executive Vice President--Technology and Operations
and a Director since April 1998. Mr. Brown was Chief Executive Officer of
Intelligent Interactions Corporation since February 1995. Mr. Brown held
various positions with Oracle Corporation from 1990 through 1995, including
Vice President of Emerging Technologies, Vice President of the Advanced
Technologies Group of Oracle Consulting, and Vice President of Strategic
Consulting Services for Oracle Complex Systems Corporation, Oracle's systems
integration subsidiary. Mr. Brown was the Director of the Information Resources
Management Practice of Coopers & Lybrand from 1987 to 1990. From 1981 to 1987,
Mr. Brown was a consultant with Booz, Allen & Hamilton Inc. From 1978 to 1980,
Mr. Brown was a Federal Reserve Examiner for the Board of Governors of the
Federal Reserve System. Mr. Brown received a M.B.A. degree in Applied Economics
and a B.A. degree in Political Science from The George Washington University.
Jacob I. Friesel has been Executive Vice President--Sales and Marketing
and a Director of the Company since February 1998. From 1997 to 1998, Mr.
Friesel was President of Katz Millennium Marketing, the Internet media sales
division of Katz Media Group, Inc. He was Vice President, Strategic Planning
for the Katz Television Group from 1994 to 1997. From 1993 to 1994, he was a
Vice President and General Sales Manager of Katz American Television, a leading
advertising representative of major market television stations. He was Vice
President, General Sales Manager of Katz Continental Television from 1991
through 1993, and was employed in various media advertising sales and
management positions with the Katz Agency from 1976 to 1991. Mr. Friesel
received a B.A. degree in Mass Communications from the City University of New
York.
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<PAGE>
C. Andrew Johns has been Executive Vice President, Treasurer and Chief
Financial Officer since April 1998. From 1996 to 1998, he was co-founder and
Managing Director of Manufacturers Renaissance Network, Inc., which provides
strategic consulting and investment banking services to small and medium-sized
businesses. From 1990 to 1996, Mr. Johns was President and owner of Strathmore
Hill Associates, Inc., an investment banking and strategic consulting firm. Mr.
Johns received a M.B.A. degree from Stanford University Graduate School of
Business and a B.S. degree in Commerce from The University of Virginia. Mr.
Johns is a Chartered Financial Analyst.
John F. Barry III, Director of the Company, is presently the Managing
General Partner of Prospect Street Ventures, a private equity and venture
capital firm, which he joined in 1990. From 1988 to 1989, he was the head of
investment banking at L.F. Rothschild & Co. From 1983 to 1988, he was a
corporate finance specialist at Merrill Lynch and from 1979 to 1983, he was a
securities attorney with Davis Polk & Wardwell. Mr. Barry serves on the boards
of directors of nine information technology companies, including Skyline
Multimedia, Inc. Mr. Barry is also the chairman of Bondnet Trading Systems,
Inc. Mr. Barry received a J.D. degree from Harvard Law School and a B.A. degree
in History from Princeton University.
Michael P. Paolucci, Director of the Company, has been a consultant to the
Company in connection with mergers, acquisitions and other strategic
initiatives since February 1998. Mr. Paolucci is a co-founder of Interactive
Imaginations and was Chief Executive Officer of Interactive Imaginations from
its incorporation in 1994 to February 1998. From 1992 to 1994, Mr. Paolucci was
involved in communications, marketing and public relations for various small
companies. Mr. Paolucci received a B.A. degree in Economics from Cornell
University.
Jack L. Rivkin, Director of the Company, has been a Senior Vice President
of Travelers Investment Group Inc. since January 1997, where he is responsible
for the management of venture capital and private equity partnerships for
various Travelers insurance companies. He is also a director and member of the
investment committee of Greenwich Street Capital Partners, L.P., a $460 million
merchant banking fund affiliated with Travelers, and an adjunct professor at
Columbia University Business School. From October 1995 to December 1996, he was
a Senior Vice President of the Investment Group of Travelers Group Inc. From
March 1993 to October 1995, Mr. Rivkin was vice chairman and director of Global
Research at Smith Barney. From 1987 to 1992, Mr. Rivkin was director of the
Equities Division and Director of Research of Lehman Brothers. From 1984 to
1987, Mr. Rivkin was President of PaineWebber Capital, Inc., the merchant
banking arm of PaineWebber Group, and Chairman of Mitchell Hutchins Asset
Management. Mr. Rivkin is also a director of HumaScan Inc., a medical device
company, and PRT Group, Inc., an information technology company. Mr. Rivkin
received a M.B.A. degree from Harvard Business School and a B.A. degree in
Metallurgical Engineering from the Colorado School of Mines.
Arnie Semsky, Director of the Company, has been the Executive Vice
President, Worldwide Media Director of the BBDO Worldwide unit of Omnicom
Group. Mr. Semsky joined BBDO Worldwide in 1979 as Vice President and Associate
Director of Network Programming and he has served as a member of the board of
directors of BBDO Worldwide since 1991.
Charles W. Stryker, Ph.D., Director of the Company, has been President of
IntelliQuest Marketing Information Solutions, Inc. and President of
Zona/Research since 1998. Dr. Stryker served as a Director of IntelliQuest
Information Group Inc. from October 1997 to March 1998. From 1991 to 1997, he
was President of each of MkIS User Forum and Information Technology Forum,
companies providing marketing information, consulting and service products to
executives and technology companies. Dr. Stryker received a B.S. degree and a
M.S. degree in Electrical Engineering and a Ph.D. in Computer Science from New
York University.
Key Employees
Joseph T. Apprendi has been Senior Vice President--Sponsorships and
Promotions of the Company since June 1998. From March 1998 to June 1998, Mr.
Apprendi was Executive Vice President of the CliqNow! Sales Group of K2 Design,
Inc. From February 1996 to March 1998, Mr. Apprendi was Senior Vice President
of Media and Promotion for K2 Design, Inc., from September 1995 to February
1996, Mr. Apprendi was an Account Executive with Harrington, Righter, and
Parson, Inc. and from June 1992 to September 1995, Mr. Apprendi was an Account
Executive with MMT Sales, Inc., a national broadcast advertising sales rep
firm. Mr. Apprendi received a B.A. degree in Economics from Oberlin College.
Mark A. Burchill has been Senior Vice President of Business Development
and Marketing since February 1998 and was Senior Vice President and co-founder
of Petry Interactive, Inc. from December 1995 to February 1998. In 1994, Mr.
Burchill was Director of International Sales & Development for Petry Media
Corp, a television rep
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<PAGE>
firm. From 1992 to 1994, Mr. Burchill was a market consultant for the Los
Angeles Rams and MTV Networks while also pursuing a graduate degree. From 1989
to 1992, Mr. Burchill was a Senior Media Planner in the media department of
Young & Rubicam Advertising. Mr. Burchill received a M.B.A. degree from
Anderson School of Management at the University of California at Los Angeles
and a B.A. degree from Hobart College.
Garrett P. Cecchini has been Senior Vice President of National Sales since
February 1998. From February 1997 to February 1998, he was Vice President,
General Manager of Katz Millennium Marketing. From December 1994 to February
1997, Mr. Cecchini was co-founder of Goodman Cecchini Media Design, a Website
development concern, and US Cybersites, a commercial bandwidth reseller. From
1992 to 1994, Mr. Cecchini was Vice President, Director of Sales for Sony
Pictures Entertainment's Columbia TriStar Television Division, a syndicator of
television programming. From January 1991 to December 1992, Mr. Cecchini was
Senior Vice President, Director of Sales for Telemundo Group, Inc., a Spanish
language television network. From 1989 to 1991, Mr. Cecchini was Vice President
of Sales for WHDH-TV, then a CBS Network affiliate in the Boston television
market. From 1982 to 1989, Mr. Cecchini was Vice President and General Sales
Manager for TeleRep Inc., a division of Cox Communications. Prior to 1982, Mr.
Cecchini was a Senior Account Executive with Petry Television Inc., a TV
advertisement company. Mr. Cecchini received a B.S. degree in Accounting and
Marketing from Manhattan College.
Scott E. Cohen has been Senior Vice President--Direct Marketing, and
General Manager of the ContentZone and Riddler.com since February 1998. Mr.
Cohen was Senior Vice President of Sales for Petry Interactive from August 1997
to February 1998, and Vice President of Business Development at Petry
Interactive from November 1996 to August 1997. From 1994 to 1996, Mr. Cohen was
Manager, Business Development and Account Executive, Syndicated Television
Sales for New World Communications and from 1992 to 1994, Mr. Cohen was
Director of Real Estate at Revlon. From 1983 to 1992, Mr. Cohen was Chief
Executive Officer and owner of SEC Enterprises, Inc., a real estate brokerage
and investment company. From 1989 to 1990, Mr. Cohen was Manager of the Real
Estate Consulting Services Group at Coopers & Lybrand. Mr. Cohen received a
M.B.A. degree from the William E. Simon School of Business Administration at
the University of Rochester.
Geoff Judge has been Senior Vice President of Affiliate Relations since
February 1998. Mr. Judge was President of Interactive Imaginations from
September 1997 to February 1998 and was Executive Vice President, Marketing and
Sales from May 1997 to September 1997. From 1995 to 1997, Mr. Judge was Vice
President, Marketing for iMarket Inc., a software company. From 1994 to 1995,
Mr. Judge was Vice President--Marketing at Doubleday Direct, where he managed
the membership base of the company's nine book clubs. From 1985 to 1994, Mr.
Judge was at American Express in numerous roles including Vice President and
General Manager, Travel & Corporate Insurance Group, where he managed an
operating group of over 70 people, and a $90 million portfolio of products that
were direct marketed to cardmembers. Mr. Judge received a M.B.A. degree from
the Columbia University Graduate School of Business and a B.A. degree in
Economics from Northwestern University.
Mark E. Moran has been Senior Vice President and General Counsel since
April 1998. From June 1993 to April 1998, Mr. Moran was an associate attorney
at Proskauer Rose LLP. From April 1986 to May 1993, Mr. Moran was a financial
analyst in the Securities Processing Division of The Bank of New York. Mr.
Moran received a J.D. degree from Fordham Law School, a M.B.A. degree in
Finance from Fordham Graduate School of Business, and a B.A. degree in
Economics from The University of Virginia.
Scott Paternoster has been Senior Vice President and President of the
CliqNow! division of the Company since June 1998. From February 1996 to June
1998, Mr. Paternoster was Founder and President of the CliqNow! Sales Group of
K2 Design, Inc. and from 1989 to February 1996, Mr. Paternoster was the New
York Sales Manager and an Account Executive at MMT Sales, Inc., a national
broadcast advertising sales rep firm. Mr. Paternoster received a B.S. degree in
Economics and Management from Ithaca College.
Stuart D. Shaw has been Senior Vice President of Finance & Administration
since February 1998. He was Vice President and Chief Financial Officer of Petry
Interactive, Inc. from October 1997 to February 1998. From 1991 to 1997, Mr.
Shaw was Director of Financial Reporting, then Vice President of Customer
Resources for Penguin Books, a trade publisher. From 1989 to 1991, Mr. Shaw was
Controller for Warren, Gorham & Lamont, a publisher of professional resource
literature. From 1983 to 1989, Mr. Shaw was an auditor with Arthur Andersen. Mr
Shaw received a B.B.A. degree in Public Accounting from Pace University. Mr.
Shaw is a Certified Public Accountant.
Matthew B. Walker has been Senior Vice President and Chief Technology
Officer since April 1998. Mr. Walker was co-founder and Senior Vice President
of Intelligent Interactions Corporation from February 1995 to April 1998.
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From August 1990 to February 1995, Mr. Walker worked in a series of positions
at Oracle Corporation including director of the Emerging Technologies Group,
Manager of Design and Development of the interactive television trial system
for Bell Atlantic Video Services, Inc., and director of Advanced Technologies.
Mr. Walker received a M.B.A. degree from George Mason University and a B.S.
degree in Systems Engineering and Economics from The University of Virginia.
Committees of the Board of Directors
Audit Committee. The Audit Committee, composed of Messrs. Ammon, Rivkin
and Barry, who are not employees of the Company ("Independent Directors"),
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
Compensation Committee. The Compensation Committee, composed of Messrs.
Moore, Rivkin and Stryker, approves the salaries and other benefits of the
executive officers of the Company and administers any non-stock based bonus or
incentive compensation plans of the Company (excluding any cash awards intended
to qualify for the exception for performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code")). In
addition, the Compensation Committee consults with the Company's management
regarding pension and other benefit plans, and compensation policies and
practices of the Company.
Stock Option Committee. The Stock Option Committee, composed of Messrs.
Ammon, Rivkin and Barry, directors who qualify as outside directors under
Section 162(m) of the Code and as non-employee directors under Rule 16b-3(c) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
administers any stock-based incentive plans of the Company, including the 1998
Stock Incentive Plan. In addition, the Stock Option Committee is responsible
for granting any cash awards intended to qualify for the exception for
performance-based compensation under Section 162(m) of the Code.
Election of Directors
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class. See "Description of Capital Stock--Delaware Anti-Takeover
Law and Certain Charter Provisions."
Compensation of Directors
Directors do not receive salaries or cash fees for serving as directors
nor do they receive any cash compensation for serving on committees; however,
all members of the Board of Directors who are not employees of or consultants
to the Company ("Non-Employee Directors") are reimbursed for their expenses for
each meeting attended and are eligible to receive stock options pursuant to the
Incentive Plan. Under the Incentive Plan, each existing Non-Employee Director
has been granted a non-qualified option to purchase 18,750 shares of Common
Stock at the fair market value on the date of grant, and each new Non-Employee
Director upon the date of his or her election or appointment will be granted a
non-qualified option to purchase 18,750 shares of Common Stock at the fair
market value on the date of grant. Upon the date of each Annual Meeting of
Stockholders, each existing Non-Employee Director shall be granted a
non-qualified option to purchase 4,688 shares of Common Stock (or a pro rata
portion thereof if the director did not serve the entire year since the date of
the last annual meeting). All options granted to Non-Employee Directors will
vest at the rate of 25% on each of the first four anniversaries of the date of
grant, assuming the Non-Employee Director is a director on those dates, and all
such options generally will be exercisable for a period of ten years from the
date of grant. Upon a Change of Control (as defined in the Incentive Plan), all
unvested options (which have not yet expired) will automatically become 100%
vested. Directors who are employees of or consultants to the Company will not
be compensated for services as a director. See "Management--1998 Stock
Incentive Plan."
Executive Compensation and Employment Agreements
The Company has entered into employment agreements with its executive
officers and each of its key employees named herein providing for annual
compensation in excess of $100,000. The material terms of such employment
agreements generally are as follows: (i) the employment term runs through
December 31, 1998 or
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December 31, 1999 (except as set forth below) and is automatically renewable
for successive one-year terms unless either party gives written notice to the
other at least six months prior to the expiration of the then employment term;
(ii) during the employment term and thereafter, the Company will indemnify the
executive to the fullest extent permitted by law, in connection with any claim
against such executive as a result of such executive serving as an officer or
director of the Company or in any capacity at the request of the Company in or
with regard to any other entity, employee benefit plan or enterprise; (iii) any
dispute or controversy arising under or in connection with the employment
agreement (other than injunctive relief) shall be settled exclusively by
arbitration; (iv) the agreement may be terminated at any time by the Company
with or without cause (as defined in the agreement) and, if an executive is
terminated without cause (including the Company giving notice of non-renewal),
he will receive severance pay in an amount generally equal to six months' base
salary and bonus, plus continued medical benefits for a period equal to the
severance period; and (v) if termination is the result of the executive's death
or disability, the Company will pay to the executive or his estate an amount
equal to six months' base salary at his then current rate of pay (reduced in
the case of disability by his long-term disability policy payments).
The agreement of David J. Moore extends through January 1, 2001. Mr.
Moore's agreement provides for an annual base salary of $225,000 and a target
bonus of $275,000, $300,000 and $325,000 for 1998, 1999, and 2000,
respectively. Mr. Moore was also awarded 56,250 shares of restricted stock that
vest over three years. In connection with this issuance, the Company is
recognizing compensation expense of $90,000 ratably over the three-year vesting
period. Upon termination by the Company without cause, Mr. Moore is entitled to
receive severance pay in an amount equal to two times base salary, plus the
maximum bonus for which he is eligible during the fiscal year of termination.
The agreements of the other executive officers and named key employees of
the Company provide for base salaries between $100,000 and $180,000 and
incentives, based on attainment of corporate goals, between $35,000 and
$180,000. The agreement of Yale R. Brown permits the executive to terminate the
agreement and receive six months' salary and bonus if the executive is asked to
increase his one way commute more than 25 miles.
1998 Stock Incentive Plan
Background; Purpose; Eligibility. On February 13, 1998, the Board of
Directors and the stockholders of the Company approved the 1998 Stock Incentive
Plan (the "Incentive Plan"). The Incentive Plan was subsequently amended and
restated, effective as of July 20, 1998, to reflect certain changes. The
following description of the Incentive Plan is intended only as a summary and
is qualified in its entirety by reference to the Incentive Plan. The purpose of
the Incentive Plan is to enhance the profitability and value of the Company and
its affiliates for the benefit of their stockholders by enabling the Company
(i) to offer employees of and consultants to the Company stock-based incentives
and other equity interests in the Company, thereby creating a means to raise
the level of stock ownership by employees in order to attract, retain and
reward such employees and strengthen the mutuality of interests between
employees and the Company's stockholders, and (ii) to make stock-based awards
to non-employee directors thereby attracting, retaining and rewarding such
non-employee directors and strengthening the mutuality of interests between
non-employee directors and the stockholders. All employees of and consultants
to the Company and its subsidiaries that satisfy certain requirements are
eligible to be granted awards under the Incentive Plan. In addition,
non-employee directors of the Company will receive awards of non-qualified
stock options under the Incentive Plan, but are not eligible for other awards
thereunder.
As of August 5, 1998, the Company has issued and outstanding pursuant to
the Plan stock options to purchase a total of 1,258,755 shares of common stock
at a weighted average price of $4.72. The number of options issued includes
certain options assumed from the 1995 stock option plan of Interactive
Imaginations, Inc., as well as 212,804 options assumed in connection with the
acquisition of Intelligent Interactions. David J. Moore, Chief Executive
Officer, has been granted 56,250 restricted shares under the Plan. C. Andrew
Johns, Chief Financial Officer, has been granted options to purchase 62,500
shares at $4.00 per share under the Plan. Michael A. Paolucci, director, has
been granted options to purchase 13,000 shares at $1.72 per share under the
Plan. Each of R. Theodore Ammon, John F. Barry III, Jack L. Rivkin and Arnie
Semsky has been granted options to purchase 18,750 shares at $6.00 per share
under the Plan and Charles W. Stryker has been granted options to purchase
18,750 shares at $4.00 per share under the Plan.
Administration. The Incentive Plan will be administered by the Stock
Option Committee of the Board of Directors of the Company which, to the extent
legally required, will be comprised solely of two or more directors
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qualifying as outside directors under Section 162(m) of the Code and satisfying
any requirements of Rule 16b-3 of the Exchange Act. The Stock Option Committee
will have full authority and discretion, subject to the terms of the Incentive
Plan, to determine those individuals eligible to receive awards and the amount
and type of awards. Terms and conditions of awards will be set forth in written
grant agreements, the terms of which will be consistent with the terms of the
Incentive Plan. Awards under the Incentive Plan may not be made on or after the
tenth anniversary of the date of its adoption, but awards granted prior to such
date may extend beyond that date. All options granted under the Plan expire no
more than ten years from the date of grant.
Available Shares and Other Units. A maximum of 3,000,000 shares of Common
Stock may be issued or used for reference purposes pursuant to the Incentive
Plan. The maximum number of shares of Common Stock subject to each issue of
stock options or stock appreciation rights that may be granted to any
individual under the Incentive Plan is 187,500 for each fiscal year of the
Company during the term of the Incentive Plan. If a stock appreciation right is
granted in tandem with a stock option, it shall apply against the individual
limits for both stock options and stock appreciation rights, but only once
against the maximum number of shares available under the Incentive Plan.
In general, upon the cancellation or expiration of an award, the unissued
shares of Common Stock subject to such awards will again be available for
awards under the Incentive Plan, but will still count against the individual
specified limits.
The Stock Option Committee may make appropriate adjustments to the number
of shares available for awards and the terms of outstanding awards under the
Incentive Plan to reflect any change in the Company's capital stock, split-up,
stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, merger or sale of all or substantially all of the assets of the
Company.
Amendments. The Incentive Plan provides that it may be amended by the
Board of Directors, except that no such amendment, without stockholder approval
(to the extent such approval is required by Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, under Section 422 of
the Code), may increase the aggregate number of shares of Common Stock reserved
for awards or the maximum individual limits for any fiscal year, change the
classification of employees and non-employee directors eligible to receive
awards, decrease the minimum option price of any option, extend the maximum
option period under the Incentive Plan, change any rights with respect to
non-employee directors or make any other change that requires stockholder
approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, Section 422 of the
Code. The Incentive Plan may not be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to (i) increase the aggregate number of shares of Common Stock
that may be issued under the Incentive Plan, (ii) decrease the minimum option
price of any option, or (iii) make any other amendment that would require
stockholder approval under the rules of any exchange or system on which the
Company's securities are listed or traded at the request of the Company.
Types of Awards. The Incentive Plan provides for the grant of any or all
of the following types of awards to eligible employees: (i) stock options,
including incentive stock options and non-qualified stock options; (ii) stock
appreciation rights, in tandem with stock options or freestanding; and (iii)
restricted stock. In addition, the Incentive Plan provides for
non-discretionary award of stock options to non-employee directors of the
Company. Each of these types of awards is discussed in more detail below.
Awards may be granted singly, in combination, or in tandem, as determined by
the Stock Option Committee.
Stock Options. Under the Incentive Plan, the Stock Option Committee may
grant awards in the form of options to purchase shares of Common Stock. Options
may be in the form of incentive stock options or non-qualified stock options.
The Stock Option Committee will, with regard to each stock option, determine
the number of shares subject to the option, the term of the option (which shall
not exceed ten years, provided, however, that the term of an incentive stock
option granted to a ten percent stockholder of the Company shall not exceed
five years), the exercise price per share of stock subject to the option, the
vesting schedule (if any), and the other material terms of the option. No
option may have an exercise price less than the fair market value of the Common
Stock at the time of grant (or, in the case of an incentive stock option
granted to a ten percent stockholder of the Company,
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110% of fair market value), except that, in the case of certain modifications
of the stock options that are deemed to be new issuances under the Code, the
exercise price may continue to be the original exercise price.
The option price upon exercise may, to the extent determined by the Stock
Option Committee at or after the time of grant, be paid by a participant in
cash, in shares of Common Stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at fair market
value on the payment date as determined by the Stock Option Committee (without
regard to any forfeiture restrictions applicable to restricted stock), by a
reduction in the number of shares of Common Stock issuable upon exercise of the
option or by such other method as is approved by the Stock Option Committee. If
an option is exercised by delivery of shares of restricted stock, the shares of
Common Stock acquired pursuant to the exercise of the option will generally be
subject to the same restrictions as were applicable to such restricted stock.
All options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Stock Option Committee. The Stock Option
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Stock Option Committee shall establish. The Stock
Option Committee may in its discretion reprice options or substitute options
with lower exercise prices in exchange for outstanding options that are not
incentive stock options, provided that the exercise price of substitute options
or repriced options shall not be less than the fair market value at the time of
such repricing or substitution. Options may also, at the discretion of the
Stock Option Committee, provide for "reloads," whereby a new option is granted
for the same number of shares as the number of shares of Common Stock or
restricted stock used by the participant to pay the option price upon exercise.
Restricted Stock. The Incentive Plan authorizes the Stock Option Committee
to award shares of restricted stock. Upon the award of restricted stock, the
recipient has all rights of a stockholder with respect to the shares, unless so
specified by the Stock Option Committee at the time of grant, subject to the
conditions and restrictions generally applicable to restricted stock or
specifically set forth in the recipient's restricted stock award agreement.
Unless otherwise determined by the Committee at grant, payment of dividends, if
any, shall be deferred until the date that the relevant share of restricted
stock vests.
Recipients of restricted stock are required to enter into a restricted
stock award agreement with the Company which states the restrictions to which
the shares are subject and the date or dates or criteria on which such
restrictions will lapse. Within the limits of the Incentive Plan, the Stock
Option Committee may provide for the lapse of such restrictions in installments
in whole or in part or may accelerate or waive such restrictions at any time.
Stock Appreciation Rights ("SARs"). The Incentive Plan authorizes the
Stock Option Committee to grant SARs either with a stock option ("Tandem SARs")
or independent of a stock option ("Non-Tandem SARs"). A SAR is a right to
receive a payment either in cash or Common Stock as the Stock Option Committee
may determine, equal in value to the excess of the fair market value of a share
of Common Stock on the date of exercise over the reference price per share of
Common Stock established in connection with the grant of the SAR. The reference
price per share covered by an SAR will be the per share exercise price of the
related option in the case of a Tandem SAR and will be not less than the per
share fair market value of the Common Stock on the date of grant (or any other
date chosen by the Stock Option Committee) in the case of a Non-Tandem SAR
subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised only at the times and to the extent the related stock option is
exercisable. A Tandem SAR is exercised by surrendering the same portion of the
related option. A Tandem SAR expires upon the termination of the related stock
option.
A Non-Tandem SAR will be exerciseable as provided by the Stock Option
Committee and will have such other terms and conditions as the Stock Option
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination upon termination of employment in certain
circumstances.
The Stock Option Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change in Control (as defined in the Incentive
Plan) or such other event as the Stock Option Committee may designate at the
time of grant or thereafter.
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Change of Control. In the event of a merger of the Company, the sale of
substantially all of its assets or securities representing 40% or more of the
total combined voting power of the Company's then outstanding securities or
upon certain changes in membership of the Board of Directors during any
two-year period, then (i) each option and related SARs will be fully vested and
immediately exerciseable, or each option may be repurchased by the Company for
an amount of cash equal to the excess of the Change of Control Price (as
defined in the Incentive Plan) over the exercise price, and (ii) the
restrictions on shares of restricted stock shall lapse as if the applicable
restriction period had ended.
Awards to Non-employee Directors
The Incentive Plan provides for an initial nondiscretionary award of
18,750 options to purchase Common Stock to each non-employee director and
subsequent nondiscretionary awards of 4,688 options to purchase Common Stock on
the date of each Annual Meeting of Stockholders. See "Management--Compensation
of Directors."
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CERTAIN TRANSACTIONS
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998. The Company
was formed as a wholly owned subsidiary of Interactive Imaginations. On
February 25, 1998, the Company simultaneously consummated the merger of each of
Petry and Advercomm with and into the Company (together with the concurrent
investment of approximately $10 million by certain third party investors
including an existing investor of Interactive Imaginations, the "Initial
Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's then parent)
was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. On April 13,
1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company, and as of June 1, 1998, the Company acquired
CliqNow! (collectively, the "Acquisitions"). See "Prospectus Summary--Formation
of the Company."
For clarity of presentation, share numbers and per share prices for the
transactions described below reflect the Preferred Stock Conversion to be
effected at the closing of the Offering and have been adjusted to give effect
to the Stock Split effected on July 20, 1998. In addition, the Company intends
to file a restated certificate of incorporation immediately prior to the
consummation of the Offering to decrease the number of authorized shares of
common stock and preferred stock.
Each of the transactions set forth below was effected on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
Investments by the The Travelers Insurance Company prior to the Merger
In November 1996, the Company entered into a Securities Purchase Agreement
with certain investors, including The Travelers Insurance Company, for the sale
and issuance of convertible preferred shares with an initial conversion price
of $11.48, subject to anti-dilution adjustment. Travelers' investment was
approximately $1,000,000 and was converted into 119,613 shares of Common Stock
in the Merger. In addition, in 1997 and January 1998, the Company issued to The
Travelers Insurance Company senior convertible notes in an aggregate principal
amount of $1,400,000 with initial conversion prices ranging from $1.60 per
share to $11.48 per share and also issued warrants in connection therewith. In
connection with the Merger, these securities were converted into approximately
642,401 shares of Common Stock. Jack L. Rivkin, a director of the Company, is
the Senior Vice President of the Investment Group of Travelers Group Inc.
Merger of Petry, Advercomm and Interactive Imaginations into the Company
Pursuant to an Agreement and Plan of Merger, dated February 2, 1998, among
Interactive Imaginations, 24/7 Acquisitions Corp. (a wholly-owned subsidiary of
Interactive Imaginations), Petry and Advercomm, each of Petry and Advercomm
were merged with and into 24/7 Acquisition Corp., and 24/7 Acquisition Corp.
changed its name to 24/7 Media, Inc. Upon consummation of the Initial Merger,
each share of common stock of Petry was converted into 20,988.74 shares of
Common Stock of the Company, and each share of common stock of Advercomm was
converted into 262.36 shares of Common Stock of the Company.
In connection with the Initial Merger, Interactive Imaginations entered
into a Securities Purchase Agreement, dated February 25, 1998, with certain
investors (including David J. Moore, the President and Chief Executive Officer
of the Company) (the "Securities Purchase Agreement"), for the sale and
issuance of preferred shares and warrants in a private placement for total
proceeds of $10,060,002. For each $10,000 invested, the investors received
10,000 shares of Series A Preferred Stock, which is automatically convertible
into common stock at a conversion price of $3.81 upon consummation of the
Offering, and approximately 1,313 Class A Warrants, exercisable into Common
Stock at an exercise price of $7.62 per share, and approximately 1,313 Class B
Warrants, exercisable into Common Stock at an exercise price of $11.42 per
share. The Securities Purchase Agreement also contained other standard terms
and conditions, including covenants, representations and warranties, and mutual
indemnification. Also in connection with the Initial Merger, Interactive
Imaginations entered into a Shareholders' Agreement, dated February 25, 1998,
among The Travelers Insurance Company (an existing investor in Interactive
Imaginations), Prospect Street NYC Discovery Fund, L.P., Big Flower Digital
Services, Inc. and certain individual investors (the "Shareholders'
Agreement"), which included standard terms and conditions and provided these
shareholders with
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a right to elect three members of the board of directors of the Company and a
right of first refusal with respect to transfers of Company securities. The
Shareholders' Agreement will be terminated in its entirety upon the
consummation of this Offering. In connection with the Initial Merger, certain
shareholders of the Company were granted registration rights with respect to
their shares of Common Stock. See "Description of Capital Stock--Registration
Rights."
Petry Interactive entered into an oral consulting agreement with
Manufacturers Renaissance Network, Inc. ("MRN"), a corporation of which C.
Andrew Johns, the Executive Vice President, Treasurer and Chief Financial
Officer of the Company, was an officer and a 50% stockholder, pursuant to which
MRN was paid $75,000 and Class C Warrants to purchase 18,750 shares of Common
Stock at an exercise price of $3.81 per share for consulting services rendered
in connection with the Merger. The Company recorded $13,500 of acquisition
costs in connection with these warrants. 24/7 Media also paid MRN a consulting
fee of approximately $33,000 for services rendered in connection with the
acquisition of Intelligent Interactions.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci, a
director of the Company, entered into a Confidential Separation Agreement and
General Release ("Separation Agreement") pursuant to which Mr. Paolucci's
employment as an executive, but not as a director, of Interactive Imaginations
was terminated as of February 24, 1998. The terms of the Separation Agreement
generally provide that each of Mr. Paolucci and Interactive Imaginations agreed
to release and discharge the other party (and its successors and assigns) from
all causes of action, claims, judgments, obligations, damages or liabilities.
Interactive Imaginations agreed to issue to Mr. Paolucci Class C Warrants to
purchase up to 625,000 shares of Common Stock at an exercise price of $3.81 per
share. In addition, Interactive Imaginations agreed to extend the term from
January 31, 2000 to January 31, 2005 in respect of a fully vested option held
by Mr. Paolucci to purchase 13,000 shares of Interactive Imaginations common
stock at $1.72 per share. Accordingly, the Company recorded compensation
expense of $450,000 during the three month period ended March 31, 1998 in
connection with this transaction.
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
Intelligent Interactions Acquisition
Pursuant to an Agreement and Plan of Merger, dated as of April 9, 1998,
among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent
Interactions Corporation, Interactions Acquisition Corp., a wholly-owned
subsidiary of the Company, was merged with and into Intelligent Interactions.
Shareholders of Intelligent Interactions, including Yale R. Brown, Executive
Vice President-Technology and Operations of the Company, and Trinity Ventures,
received shares of capital stock of the Company. In connection with the
acquisition of Intelligent Interactions, certain shareholders (i) entered into
an amended and restated version of the Shareholders' Agreement and (ii) were
granted registration rights with respect to their shares of Common Stock. See
"Description of Capital Stock--Registration Rights."
During 1995 and 1996, Intelligent Interactions borrowed $56,000 and
$55,000, respectively, from Yale R. Brown, who was the founder and principal
stockholder of Intelligent Interactions. All amounts outstanding at September
6, 1996 under these notes, plus accrued interest on those amounts, were
converted into one instrument in the amount of $113,856. During 1997, the full
outstanding balance was paid on this obligation.
Future Transactions
The Board of Directors of the Company has adopted a policy that future
transactions between the Company and its officers, directors, principal
stockholders and their affiliates will be subject to approval of a majority of
the Independent Directors, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
Other
For information regarding the grant of stock options to executive officers
and directors, see "Management--
Awards to Non-employee Directors," "--Executive Compensation and Employment
Agreements," "--1998 Stock Incentive Plan" and "Security Ownership of Certain
Beneficial Owners and Management."
47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Common Stock as of August 5, 1998, by: (i) each person who the Company
knows to own beneficially more than 5% of the Common Stock; (ii) each of 24/7
Media's directors and executive officers; and (iii) 24/7 Media's current
directors and executive officers as a group.
<TABLE>
<CAPTION>
Ownership Prior to Ownership After Ownership After Offering
Offering (1) Offering (2) and Over-Allotment Option (3)
-------------------------- ----------------- ------------------------------
Number
Beneficial Owner of Shares Percentage Percentage Percentage
- ------------------------------ ----------- ------------ ----------------- ------------------------------
<S> <C> <C> <C> <C>
David J. Moore (4) (5) 995,743 8.4% 6.6% 6.4%
R. Theodore Ammon (6) 1,750,703 13.8 11.0 10.6
Yale R. Brown (4) (7) 856,759 7.1 5.6 5.4
Jacob I. Friesel (4) (8) 787,078 6.6 5.2 5.0
C. Andrew Johns (4) (9) 9,375 * * *
Garrett P. Cecchini (4) (10) 787,078 6.6 5.2 5.0
Scott E. Cohen (4) (11) 629,662 5.3 4.2 4.0
John F. Barry III (12) 1,750,703 13.8 11.0 10.6
Michael P. Paolucci (13) 886,111 7.1 5.6 5.5
Jack L. Rivkin (14) 2,576,540 20.2 16.1 15.6
Arnie Semsky (15) -- -- -- --
Charles W. Stryker (16) -- -- -- --
Trinity Ventures (17) 720,590 6.0 4.7 4.6
All directors and
executive officers as
a group (10 persons) 9,613,012 62.7% 51.7% 50.4%
</TABLE>
- ----------------
* Represents less than 1% of the outstanding Common Stock.
(1) Applicable percentage ownership is based on 11,858,297 shares of Common
Stock outstanding as of August 5, 1998 (giving effect to full conversion
of the Series A Preferred Stock and Series B Preferred Stock). Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to community property laws, where
applicable. Shares of Common Stock subject to options or warrants that are
presently exercisable within 60 days of August 5, 1998 and beneficially
owned by the person holding such options and warrants are treated as
outstanding for the purpose of computing the percentage ownership for such
person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
487,500 shares is not exercised.
(3) Assumes that the Underwriters' over-allotment option to purchase 487,500
shares is exercised in full.
(4) The address of Messrs. Moore, Brown, Friesel, Johns, Cecchini and Cohen is
c/o 24/7 Media, Inc., 1250 Broadway, New York, New York 10001.
(5) Includes 56,250 unvested shares of Common Stock issued pursuant to the
Stock Incentive Plan and subject to forfeiture pursuant thereto. Includes
259,000 shares held by a family trust and certain other trusts held for
the benefit of family members, beneficial ownership of which is disclaimed
by Mr. Moore. Mr. Moore's wife is the trustee of each such trust.
(6) Represents 875,351 shares, Class A warrants to purchase 437,676 shares and
Class B warrants to purchase 437,676 shares held by Big Flower Digital
Services, Inc., an indirect subsidiary of Big Flower Holdings, Inc. Mr.
Ammon is the Chairman of the Board of Directors of the Company and of Big
Flower Holdings, Inc. Mr. Ammon does not own any shares of Common Stock of
the Company in his individual capacity and expressly disclaims beneficial
ownership of the shares held by Big Flower Digital Services, Inc. The
address of each of these entities is c/o Big Flower Holdings, Inc., 3 East
54th Street, New York, New York 10022.
(7) Represents 636,611 shares, Class A warrants to purchase 87,534 shares,
Class B warrants to purchase 87,534 shares and Class C warrants to
purchase 45,080 shares.
(8) Includes 262,360 shares held by a family trust, beneficial ownership of
which is disclaimed by Mr. Friesel.
(9) Represents Class C warrants to purchase 9,375 shares.
48
<PAGE>
(10) Includes 175,000 shares held by a family trust, beneficial ownership of
which is disclaimed by Mr. Cecchini.
(11) Includes 156,250 shares held by a family trust, 25,000 shares held by a
wholly owned corporation and 100,000 shares held by Mr. Cohen's wife,
beneficial ownership of such shares is disclaimed by Mr. Cohen.
(12) Represents 656,513 shares, Class A warrants to purchase 328,257 shares and
Class B warrants to purchase 328,257 shares held by Prospect Street NYC
Discovery Fund, L.P. and 218,838 shares, Class A warrants to purchase
109,419 shares and Class B warrants to purchase 109,419 shares held by
Prospect Street NYC Co-Investment Fund, L.P. Mr. Barry is a director of the
Company and is the Managing General Partner of Prospect Street NYC
Discovery Fund, L.P. Mr. Barry does not own any shares of Common Stock of
the Company in his individual capacity and expressly disclaims beneficial
ownership of the shares held by Prospect Street NYC Discovery Fund, L.P.
and Prospect Street NYC Co-Investment Fund, L.P. The address of each of
these entities is c/o Prospect Street NYC Discovery Fund, L.P., 250 Park
Avenue, 17th floor, New York, New York 10177.
(13) Represents 248,111 shares, Class C warrants to purchase 625,000 shares and
stock options to acquire 13,000 shares. Includes 7,000 shares and Class C
warrants to purchase 125,000 shares held by a family trust, beneficial
ownership of which is disclaimed by Mr. Paolucci. Mr. Paolucci is a
director of the Company and his address is c/o 24/7 Media, Inc., 1250
Broadway, New York, New York 10001.
(14) Represents 1,666,829 shares, Class A warrants to purchase 437,676 shares
and Class B warrants to purchase 437,676 shares held by The Travelers
Insurance Company, and 34,359 shares held by The Travelers Indemnity
Company. Mr. Rivkin is a director of the Company and is Senior Vice
President of Travelers Investment Group Inc., an affiliate of The
Travelers Insurance Company and The Travelers Indemnity Company. Mr.
Rivkin does not own any shares of Common Stock of the Company in his
individual capacity and expressly disclaims beneficial ownership of the
shares held by The Travelers Insurance Company and The Travelers Indemnity
Company. The address of each of these entities is c/o Travelers Group
Inc., 388 Greenwich Street, 36th floor, New York, New York 10013. None of
Travelers Group Inc., The Travelers Insurance Company, The Travelers
Indemnity Company or their respective affiliates has assumed or has any
responsibility for the management, business or operations of the Company,
or for the statements contained in this Prospectus or the registration
statement of which this Prospectus forms a part, other than the limited
information regarding securities ownership contained in this table.
(15) The address of Mr. Semsky is c/o BBDO Worldwide, 1285 Avenue of the
Americas, New York, New York 10019.
(16) The address of Mr. Stryker is c/o Intelliquest Information Systems, Inc.,
380 Interstate North Parkway, Suite 310, Atlanta, Georgia 30339.
(17) Represents 505,872 shares, Class A warrants to purchase 69,557 shares,
Class B warrants to purchase 69,557 shares and Class C warrants to
purchase 35,822 shares held by Trinity Ventures V, L.P., and 29,559
shares, Class A warrants to purchase 4,064 shares, Class B warrants to
purchase 4,064 shares and Class C warrants to purchase 2,093 shares held
by Trinity V Side-by-Side Fund, L.P. Trinity Ventures, L.P. is the general
partner of each of these funds. The address of these entities is c/o
Trinity Ventures, 3000 Sand Hill Road, Building 1, Suite 240, Menlo Park,
California 94025.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of 24/7 Media's capital stock is not complete
and should be read in conjunction with (i) applicable provisions of Delaware
law and (ii) the provisions of the Company's certificate of incorporation and
by-laws, copies of which have been filed as exhibits to the registration
statement of which this Prospectus is a part.
The Company intends to file an amended and restated certificate of
incorporation ("Certificate of Incorporation") simultaneously with the
consummation of the Offering. Prior to such filing, the authorized capital
stock of 24/7 Media consists of 100,000,000 shares of Common Stock, par value
$.01 per share, and 30,000,000 shares of Preferred Stock, par value $.01 per
share, which may be issued in one or more classes and series, and following
such filing, the authorized capital stock will consist of 70,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock, which may be issued in
one or more classes and series. Upon consummation of this offering, there will
be 15,108,297 shares of Common Stock and no shares of Preferred Stock issued
and outstanding. The following description of the Company's capital stock is
based upon the amended and restated Certificate of Incorporation.
Common Stock
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the stockholders. Holders do not have
cumulative voting rights. Stockholders casting a plurality of the votes of
stockholders entitled to vote in an election of directors may elect all of the
directors. Subject to the preferential rights of any Preferred Stock that may
at the time be outstanding, each share of Common Stock will have an equal and
ratable right to receive dividends when, if, and as declared from time to time
by the board of directors. 24/7 Media may be subject to certain future
agreements which restrict the payment of dividends. 24/7 Media does not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
If 24/7 Media is liquidated, dissolved or subject to winding up, then
holders of Common Stock are entitled to an equal share of all assets remaining
after payments to creditors and after satisfaction of any liquidation
preference of shares of Preferred Stock that may at the time be outstanding.
Holders of Common Stock have no preemptive, subscription, conversion or
redemption rights and are not subject to further calls or assessments by 24/7
Media. The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. The shares of Common Stock offered by 24/7 Media in this
offering will also be, when issued and paid for, validly issued, fully paid and
nonassessable.
Preferred Stock
The Company's Certificate of Incorporation authorizes the board of
directors, without any vote or action by the stockholders (subject to
applicable law, regulations and stock exchange rules) to issue up to 10,000,000
shares of Preferred Stock in one or more classes and series and to fix the
designations, preferences, rights, qualifications, limitations and restrictions
thereof, including the voting rights, dividend rights, dividend rate,
conversion rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and number of shares
constituting any series. Although it presently has no intention to do so, the
board of directors could issue Preferred Stock with voting and conversion
rights that could adversely affect the voting powers of the holders of the
Common Stock and the market price of the Common Stock. The issuance of
Preferred Stock may also have the effect of delaying, deferring or preventing a
change in control of 24/7 Media without further action by the stockholders.
Such issuance may also discourage bids for the Common Stock at a premium over
the market price.
Registration Rights
Pursuant to the terms of the registration rights agreement, dated as of
April 9, 1998, among the Company and the investors named therein, after the
closing of the Offering, the beneficial holders of 7,550,428 shares of Common
Stock will be entitled to certain registration rights with respect to the
registration of such shares under the Securities Act. In addition, pursuant to
certain stock purchase agreements, certain former shareholders of Interactive
Imaginations holding approximately 1,862,953 shares of Common Stock have
registration rights with respect to the registration of such shares under the
Securities Act. Pursuant to such registration rights agreements, the holders of
such shares are entitled to demand that the Company register their shares under
the Securities Act, subject to certain limitations. Subject to limited
exceptions, the Company is not required to effect more than two such
registrations for such investors except that The Travelers Insurance Company
may demand three such registrations
50
<PAGE>
pursuant to such demand registration rights. In addition, the holders of such
shares of Common Stock will be entitled to certain "piggyback" registration
rights with respect to the registration of such shares of Common Stock under
the Securities Act. In the event that the Company proposes to register any
shares of Common Stock under the Securities Act, either for its account or for
the account of other security holders, the holders of shares having piggyback
registration rights are entitled to receive notice of such registration and are
entitled to include their shares therein, subject to certain limitations.
Further, at any time after the Company becomes eligible to file a registration
statement on Form S-3, such holders may require the Company to file
registration statements under the Securities Act on Form S-3 with respect to
their shares of Common Stock. These registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares of Common Stock held by security holders
with registration rights to be included in such registration. The Company is
generally required to bear all of the expenses of all such registrations,
except underwriting discounts and commissions. Registration of any of the
shares of Common Stock held by security holders with registration rights would
result in such shares becoming freely tradable without restriction under the
Securities Act immediately upon effectiveness of such registration. See "Risk
Factors--Sales Eligible for Future Sale; Registration Rights."
Delaware Anti-Takeover Law and Certain Charter Provisions
24/7 Media is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which generally prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. Section 203 applies unless: (i) prior to the date such
stockholder became an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (the number of shares outstanding excludes those shares owned (A) by
persons who are both directors and officers, and (B) by employee stock plans in
which participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or after such date the stockholder became an interested
stockholder, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders (not by written
consent) by the affirmative vote of at least 662/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) certain
transactions that result in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (iv) any transaction
involving the corporation that increases the proportionate share of the stock
of any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of any loans,
advances, guarantees, pledges or other financial benefits provided through the
corporation. In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may delay, defer or prevent a change in control of the Company and
may adversely affect the voting and other rights of holders of Common Stock. In
particular, the ability of the board of directors to issue Preferred Stock
without stockholder approval may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of other
holders of Common Stock. In addition, the Company's Certificate of
Incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.
Limitation on Directors' Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by Delaware law, the Company's directors shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as directors of the Company. Under Delaware law,
the directors have a fiduciary duty to the Company which is not eliminated by
this provision of the certificate of incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be
51
<PAGE>
not in good faith or which involve intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by Delaware law. This provision also does not
affect the directors' responsibilities under any other laws, such as the
Federal securities laws or state or Federal environmental laws. Insofar as the
indemnification for liabilities arising under the Securities Act may be
permitted to directors or officers of the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
The Company has obtained liability insurance for its senior officers and
directors and has entered into indemnity agreements to indemnify its executive
officers and directors in addition to the indemnification provided for in the
Company's Certificate of Incorporation and bylaws. These agreements, among
other things, indemnify the Company's directors and executive officers for
certain expenses (including attorneys' fees and associated legal expenses),
judgments and fines and amounts paid in settlement, actually and reasonably
incurred by any such person in any action, suit or proceeding arising out of
such person's services as a director or executive officer on behalf of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
Certain Effects of Authorized but Unissued Stock
Upon consummation of this Offering, there will be 47,905,836 shares of
Common Stock (not including shares reserved for issuance upon the exercise of
outstanding warrants or reserved under the Incentive Plan) and 10,000,000
shares of Preferred Stock available for issuance without stockholder approval,
except as may be required by the Company's Certificate of Incorporation, by
applicable law or regulatory agencies or by the rules of the Nasdaq National
Market or any stock exchange on which the Common Stock may then be listed. The
Company does not currently have plans to issue additional shares of capital
stock. See "Shares Eligible for Future Sale; Registration Rights."
Stock Transfer Agent and Registrar
The Stock Transfer Agent and Registrar for the Common Stock is The Bank of
New York, located at 101 Barclay Street, 11E, New York, New York and its
telephone number at such location is (800) 524-4458.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
Offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company
in the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future. See "Risk Factors--Shares Eligible for Future Sale; Registration
Rights."
Upon completion of this Offering, the Company will have outstanding an
aggregate of 15,108,297 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the 3,250,000 shares sold in this Offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 11,858,297 shares of Common
Stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. Holders of
11,655,790 shares of Common Stock, including all of the Company's directors and
officers, have agreed that they will not sell, directly or indirectly, any
Common Stock without the prior consent of the representatives of the
Underwriters for a period of 180 days from the date of this Prospectus. As a
result of these contractual restrictions and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) 64,585 shares will be eligible for immediate sale on the
date of this Prospectus, (ii) 11,655,790 shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus
and (iii) 137,922 shares will be eligible for sale upon the later of 90 days
after the date of this Prospectus or the expiration of their respective
one-year holding periods. In addition, there are outstanding options to
purchase 1,258,755 shares of Common Stock, 62,400 of which will, upon exercise,
be eligible for sale in the public market between 90 days and 180 days after
the date of this Prospectus and an additional 115,594 of which will, upon
exercise, be eligible for sale in the public market 180 days after the date of
this Prospectus. There are also outstanding warrants to purchase 3,988,144
shares of Common Stock, none of which will, upon exercise, be eligible for sale
in the public market until expiration of lock-up agreements 180 days after the
date of this Prospectus.
Upon completion of this Offering, certain holders of shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 151,062 shares immediately after
this Offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about the Company. Under
Rule 144(k), a person who is deemed not to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the Restricted Shares for at least two years (including the
holding period of any prior owner except an Affiliate), is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144; therefore, unless otherwise
restricted, such "144(k) shares" may be sold immediately upon the completion of
this Offering. In general, under Rule 701 of the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchased shares
from the Company in connection with a compensatory stock or option plan or
other written agreement is eligible to resell such shares 90 days after the
effective date of this Offering in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period, contained in Rule 144.
53
<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's 1998 Stock Incentive Plan. Such registration statement is expected to
be filed and become effective as soon as practicable after the effective date
of this Offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described herein.
54
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), J.P.
Morgan Securities Inc. and Allen & Company Incorporated are acting as
representatives (the "Representatives") of each of the underwriters named below
(the "Underwriters"). Subject to the terms and conditions set forth in the
Purchase Agreement (the "Purchase Agreement") among the Company and the
Underwriters, the Company has agreed to sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, has agreed to purchase
from the Company the number of shares of Common Stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..........................
J.P. Morgan Securities Inc. ..........
Allen & Company Incorporated .........
Total .................................
==========
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to the Purchase Agreement if any shares of
Common Stock are purchased. Under certain circumstances, under the terms of the
Purchase Agreement, the commitments of the non-defaulting Underwriters may be
increased or the Purchase Agreement may be terminated.
The Representatives have advised the Company that they propose initially
to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of Common Stock on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of an
additional 487,500 shares of Common Stock at the initial public offering price
set forth on the cover of this Prospectus, less the underwriting discount. The
Underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of the Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of Common
Stock proportionate to such Underwriter's initial amount reflected in the
foregoing table.
At the request of the Company, the Underwriters have reserved
approximately 325,000 shares of Common Stock for sale at the initial public
offering price to the Company's employees, directors and other persons with
relationships with the Company. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.
The Company has agreed, for a period of 180 days after the date of this
Prospectus, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person executing the agreement
or with respect to which the person executing the agreement thereafter acquires
the power of disposition, or file any registration statement under the 1933 Act
with respect to any of the foregoing or (ii) enter into any swap or other
agreement or any other agreement that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the Underwriters; provided that the
Company may at any time and from time to time (a) grant options to purchase
shares of Common Stock under the Company's 1998 Stock Incentive Plan and (b)
issue shares of Common Stock upon the exercise of outstanding warrants. See
"Shares Eligible for Future Sale."
55
<PAGE>
Prior to this Offering, there has been no market for the Common Stock of
the Company. The initial public offering price was determined through
negotiations among the Company and the Representatives. Among the factors
considered by the Company and the Representatives in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, are the trading multiples of publicly traded companies that the
Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, an assessment of the Company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
the percentage interest of the Company being sold as compared to the valuation
for the entire Company and the above factors in relation to market values and
various valuation measures of other companies engaged in activities similar to
the Company. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering
price.
The Company has been approved for a listing of the Common Stock on the
Nasdaq National Market under the symbol "TFSM."
The Underwriters have advised the Company that they do not expect sales to
accounts over which the Underwriters exercise discretionary authority to exceed
five percent of the total number of shares of Common Stock offered by them.
The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, it may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that
it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
56
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon by
Proskauer Rose LLP, New York, New York. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of 24/7 Media, Inc. as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
and the financial statements of Interactive Holdings, LLC as of December 31,
1997 and for the period from February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor), have been included in this Prospectus and elsewhere in the
Registration Statement in reliance on the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in auditing and accounting.
The financial statements of (i) Intelligent Interactions Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996
and the period from inception (February 28, 1995) to December 31, 1995 and (ii)
CliqNow!, a division of K2 Design, Inc., as of December 31, 1997 and for the
fiscal year ended December 31, 1997 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving their reports.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 ("Registration
Statement") relating to the Common Stock offered hereby with the Commission
through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
This Prospectus is part of the Registration Statement and does not contain all
of the information in the Registration Statement and its exhibits and
schedules. For further information about the Company and the Common Stock, a
copy of the Registration Statement and its exhibits and schedules may be
inspected without charge and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may also access registration statements
filed through EDGAR at the Commission's Website at http://www.sec.gov. The
Company has been approved for a listing of the Common Stock on the Nasdaq
National Market.
After this Offering, the Company will have to file reports, proxy
statements and other information with the Commission via EDGAR as required by
the Exchange Act. The Company will furnish common stockholders with annual
reports containing audited financial statements and quarterly reports
containing unaudited financial statements. The Company will also furnish other
reports as it determines or are required by law. Copies of such material may be
inspected and copied at the Commission's offices and viewed electronically at
the Commission's Website.
----------------
24/7 Media, Intelligent Interactions, ContentZone, Riddler.com, CliqNow!,
Adfinity and dbCommerce are trademarks of the Company or its subsidiary,
Intelligent Interactions Corporation. This Prospectus contains other product
names, tradenames and trademarks of the Company and of other entities, all of
which are the property of their respective owners.
57
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.)
Independent Auditors' Report ................................................... F-2
Consolidated Balance Sheet ..................................................... F-3
Consolidated Statements of Operations .......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) ...................... F-5
Consolidated Statements of Cash Flows .......................................... F-6
Notes to Financial Statements .................................................. F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview ....................................................................... F-28
Pro Forma Consolidated Statements of Operations ................................ F-30
Pro Forma Consolidated Balance Sheet ........................................... F-32
Notes to Pro Forma Consolidated Financial Information .......................... F-33
INTERACTIVE HOLDINGS, LLC (Successor to Petry Interactive, Inc.)
Independent Auditors' Report ................................................... F-35
Balance Sheet .................................................................. F-36
Statements of Operations ....................................................... F-37
Statements of Cash Flows ....................................................... F-38
Notes to Financial Statements .................................................. F-39
INTELLIGENT INTERACTIONS CORPORATION
Report of Independent Public Accountants ....................................... F-43
Balance Sheets ................................................................. F-44
Statements of Operations ....................................................... F-45
Statements of Stockholders' Equity ............................................. F-46
Statements of Cash Flows ....................................................... F-47
Notes to Financial Statements .................................................. F-48
CLIQNOW!
Report of Independent Public Accountants ....................................... F-55
Balance Sheet .................................................................. F-56
Statement of Operations and Changes in Parent Company's Investment and Advances F-57
Statement of Cash Flows ........................................................ F-58
Notes to Financial Statements .................................................. F-59
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
24/7 Media, Inc.
We have audited the accompanying balance sheets of 24/7 Media, Inc.
(successor company to Interactive Imaginations, Inc.) as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 24/7 Media, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998, except for note 13,
which is as of July 20, 1998
F-2
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------- March 31,
1996 1997 1998
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 1,689,395 $ 93,945 $ 7,764,695
Accounts receivable, net of allowance for doubtful
accounts of $66,000, $63,723 and $269,968,
respectively ..................................................... 267,173 176,034 1,818,899
Prepaid expenses and other current assets ......................... 237,527 14,936 52,296
------------ ------------- -------------
Total current assets .......................................... 2,194,095 284,915 9,635,890
------------ ------------- -------------
Property and equipment, net .......................................... 1,677,936 591,337 630,652
Goodwill, net ........................................................ -- -- 7,870,174
Deferred offering costs .............................................. -- 110,602 13,148
Intangible assets, net ............................................... 17,287 2,711 2,503
Deposits ............................................................. 61,472 49,376 49,626
------------ ------------- -------------
Total assets .................................................. $ 3,950,790 $ 1,038,941 $ 18,201,993
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................. 136,523 882,696 813,518
Accrued liabilities ............................................... 514,355 471,205 2,180,969
Loans payable--related party ...................................... -- -- 283,267
Deferred revenue .................................................. 1,549,710 96,496 41,000
------------ ------------- -------------
Total current liabilities ..................................... 2,200,588 1,450,397 3,318,754
------------ ------------- -------------
Senior convertible notes payable--related parties, net of debt
discount of $158,348 and $20,592, respectively....................... -- 2,316,511 479,408
Other liabilities .................................................... -- -- 46,149
Mandatorily redeemable convertible preferred stock,
10,060,002 shares authorized; 10,060,002 shares issued and
outstanding entitled to a liquidation preference of $1 per share plus
unpaid dividends of 4% per annum ($10,093,502 in the aggregate at
March 31, 1998) ..................................................... -- -- 10,093,502
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par value; 500,000 shares
authorized; 140,722, 158,144 and no shares issued and
outstanding, respectively; with aggregate liquidation
preference of $4,038,722 and $4,538,733 at December 31,
1996 and 1997, respectively ...................................... 1,407 1,581 --
Common stock, $.01 par value; 100,000,000 shares
authorized; 1,079,116, 1,148,762 and 6,926,550 shares
issued and outstanding, respectively ............................. 10,791 11,488 69,267
Additional paid-in capital ........................................ 9,737,594 10,564,382 19,919,169
Deferred stock compensation ....................................... -- -- (87,500)
Accumulated deficit ............................................... (7,999,590) (13,305,418) (15,636,756)
------------ ------------- -------------
Total stockholders' equity (deficit) .......................... 1,750,202 (2,727,967) 4,264,180
------------ ------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity
(deficit) .................................................... $ 3,950,790 1,038,941 18,201,993
============ ============= =============
</TABLE>
F-3
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
ended
Years ended December 31, March 31,
----------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues: (unaudited)
Advertising ................................... $ 151,750 $ 1,106,329 $ 1,467,105 $ 388,892 $ 1,076,250
Consulting and license fees ................... -- 435,834 1,681,464 805,245 --
------------ ------------ ------------ ----------- ------------
Total revenues ............................ 151,750 1,542,163 3,148,569 1,194,137 1,076,250
Cost of revenues .............................. 198,291 1,592,771 1,655,340 459,587 930,003
------------ ------------ ------------ ----------- ------------
Gross profit (loss) ....................... (46,541) (50,608) 1,493,229 734,550 146,247
------------ ------------ ------------ ----------- ------------
Operating expenses:
Sales and marketing ........................ 114,348 2,240,399 1,672,999 450,505 653,460
General and administrative ................. 581,068 3,010,009 2,622,743 682,581 1,288,012
Product development ........................ 426,187 1,460,928 1,417,750 399,523 --
Write-off of property and equipment ........ -- -- 756,795 -- --
Legal costs in connection with claim ....... -- -- 232,304 -- --
Amortization of goodwill ................... -- -- -- -- 335,355
------------ ------------ ------------ ----------- ------------
Total operating expenses ............... 1,121,603 6,711,336 6,702,591 1,532,609 2,276,827
------------ ------------ ------------ ----------- ------------
Loss from operations ................... (1,168,144) (6,761,944) (5,209,362) (798,059) (2,130,580)
Interest income ............................... -- 11,704 17,597 13,682 25,504
Interest expense, including amortization of
debt discount of $17,900, $42,652 and
$149,903 in 1996, 1997 and 1998,
respectively ................................. -- (45,435) (114,063) -- (192,762)
------------ ------------ ------------ ----------- ------------
Net loss ............................... (1,168,144) (6,795,675) (5,305,828) (784,377) (2,297,838)
Cumulative dividends on mandatorily
convertible preferred stock .................. -- -- -- -- (33,500)
------------ ------------ ------------ ----------- ------------
Net loss attributable to common
stockholders ................................. $ (1,168,144) $ (6,795,675) $ (5,305,828) $ (784,377) $ (2,331,338)
============ ============ ============ =========== ============
Net loss per share--basic ..................... $ (2.78) $ (6.48) $ (4.88) $ (0.73) $ (0.76)
Weighted average shares outstanding ........... 420,908 1,049,432 1,086,614 1,079,116 3,055,432
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
---------------------------------------------------------------
Convertible Common stock Common stock
preferred stock voting Class A
------------------------- ----------------------- -------------
Shares Amount Shares Amount Shares
------------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 ...................... -- $ -- -- $ -- 25,000
Issuance of Class B common stock subsequently
converted to Class A ................................ -- -- -- -- 15,677
Issuance of Class A common stock, net of $20,512
issuance costs ...................................... -- -- -- -- 32,656
Net loss ............................................. -- -- -- -- --
-- --------- -- ------- ------
Balance as of December 31, 1995 ...................... -- -- -- -- 73,333
Issuance of Class A common stock, net of $39,125
issuance costs ...................................... -- -- -- -- 34,371
Common stock Class A converted ....................... -- -- 1,077,033 10,770 (107,704)
Issuance of common stock to officer .................. -- -- 2,083 21 --
Issuance of warrants in connection
with mandatory conversion subordinated notes......... -- -- -- -- --
Notes converted to preferred stock ................... 52,262 523 -- -- --
Issuance of preferred stock, net of $236,820
issuance costs ...................................... 88,460 884 -- -- --
Net loss ............................................. -- -- -- -- --
------ --------- --------- ------- --------
Balance as of December 31, 1996 ...................... 140,722 1,407 1,079,116 10,791 --
Issuance of preferred stock .......................... 17,422 174 -- -- --
Issuance of common stock to officer .................. -- -- 10,462 105 --
Issuance of warrants in connection
with senior convertible notes--related parties ...... -- -- -- -- --
Senior convertible notes payable--related parties
converted into common stock ......................... -- -- 59,184 592 --
Net loss ............................................. -- -- -- -- --
------- --------- --------- ------- --------
Balance as of December 31, 1997 ...................... 158,144 1,581 1,148,762 11,488 --
Issuance of warrants in connection with senior
convertible notes--related parties .................. -- -- -- -- --
Issuance of warrants to former officer ............... -- -- -- -- --
Issuance of warrants to consultant ................... -- -- -- -- --
Issuance of common stock for acquired businesses...... -- -- 4,328,925 43,289 --
Issuance of common stock to officer .................. -- -- 56,250 563 --
Offering costs in connection with mandatorily
redeemable convertible preferred stock .............. -- -- -- -- --
Senior convertible notes payable--related parties
converted into common stock ......................... -- -- 750,586 7,505 --
Convertible preferred stock converted into
common stock ........................................ (158,144) (1,581) 542,908 5,429 --
Conversion of warrants into common stock ............. -- -- 99,119 993 --
Imputed interest on loans payable--related parties -- -- -- -- --
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock .............. -- -- -- -- --
Net loss for the period .............................. -- -- -- -- --
-------- --------- --------- ------- --------
Balance as of March 31, 1998 (unaudited) ............. -- $ -- 6,926,550 $69,267 --
======== ========= ========= ======= ========
<CAPTION>
Stockholders' Equity (Deficit)
----------------------------------------------------------
Additional Deferred Total
paid-in Accumulated stock stockholders'
Amount capital deficit compensation equity (deficit)
----------- -------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 ...................... $ 250 $ 44,750 $ (35,771) $ -- $ 9,229
Issuance of Class B common stock subsequently
converted to Class A ................................ 157 92,843 -- -- 93,000
Issuance of Class A common stock, net of $20,512
issuance costs ...................................... 327 1,268,161 -- -- 1,268,488
Net loss ............................................. -- -- (1,168,144) -- (1,168,144)
--------- ----------- ------------- --------- -------------
Balance as of December 31, 1995 ...................... 734 1,405,754 (1,203,915) -- 202,573
Issuance of Class A common stock, net of $39,125
issuance costs ...................................... 343 4,485,532 -- -- 4,485,875
Common stock Class A converted ....................... (1,077) (9,693) -- -- --
Issuance of common stock to officer .................. -- 37,606 -- -- 37,627
Issuance of warrants in connection
with mandatory conversion subordinated notes......... -- 17,900 -- -- 17,900
Notes converted to preferred stock ................... -- 1,499,477 -- -- 1,500,000
Issuance of preferred stock, net of $236,820
issuance costs ...................................... -- 2,301,018 -- -- 2,301,902
Net loss ............................................. -- -- (6,795,675) -- (6,795,675)
--------- ----------- ------------- --------- -------------
Balance as of December 31, 1996 ...................... -- 9,737,594 (7,999,590) -- 1,750,202
Issuance of preferred stock .......................... -- 499,837 -- -- 500,011
Issuance of common stock to officer .................. -- 31,786 -- -- 31,891
Issuance of warrants in connection
with senior convertible notes--related parties ...... -- 201,000 -- -- 201,000
Senior convertible notes payable--related parties
converted into common stock ......................... -- 94,165 -- -- 94,757
Net loss ............................................. -- -- (5,305,828) -- (5,305,828)
--------- ----------- ------------- --------- -------------
Balance as of December 31, 1997 ...................... -- 10,564,382 (13,305,418) -- (2,727,967)
Issuance of warrants in connection with senior
convertible notes--related parties .................. -- 12,156 -- -- 12,156
Issuance of warrants to former officer ............... -- 450,000 -- -- 450,000
Issuance of warrants to consultant ................... -- 20,240 -- -- 20,240
Issuance of common stock for acquired businesses...... -- 6,882,991 -- -- 6,926,280
Issuance of common stock to officer .................. -- 89,437 -- (87,500) 2,500
Offering costs in connection with mandatorily
redeemable convertible preferred stock .............. -- (229,105) -- -- (229,105)
Senior convertible notes payable--related parties
converted into common stock ......................... -- 2,124,909 -- -- 2,132,414
Convertible preferred stock converted into
common stock ........................................ -- (3,848) -- -- --
Conversion of warrants into common stock ............. -- (993) -- -- --
Imputed interest on loans payable--related parties -- 9,000 -- -- 9,000
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock .............. -- -- (33,500) -- (33,500)
Net loss for the period .............................. -- -- (2,297,838) -- (2,297,838)
--------- ----------- ------------- --------- -------------
Balance as of March 31, 1998 (unaudited) ............. $ -- $19,919,169 $ (15,636,756) $ (87,500) $ 4,264,180
========= =========== ============= ========= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (1,168,144) $ (6,795,675) $ (5,305,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 59,196 305,050 364,607
Amortization of debt discount ........................... -- 17,900 42,652
Write-off of property and equipment ..................... -- -- 756,795
Accrued interest on senior convertible notes--related
parties ................................................ -- -- 68,609
Imputed interest on note payable--related party ......... -- -- --
Provision for doubtful accounts ......................... 10,000 66,000 --
Amortization of intangible assets ....................... -- -- --
Non-cash compensation ................................... -- 37,627 31,891
Changes in operating assets and liabilities:
Accounts receivable .................................... (69,250) (273,923) 91,139
Prepaid assets and other current assets ................ -- (237,527) 222,591
Deposits ............................................... (14,588) (45,554) 12,096
Accounts payable ....................................... 136,231 292 746,172
Accrued liabilities .................................... 51,361 442,994 (43,150)
Deferred revenue ....................................... -- 1,549,710 (1,453,214)
------------ ------------ ------------
Net cash used in operating activities ................ (995,194) (4,933,106) (4,465,640)
------------ ------------ ------------
Cash flows from investing activities:
Increase in intangible assets ............................ -- (41,205) --
Cash received from acquisitions .......................... -- -- --
Proceeds from sale of property and equipment ............. -- -- 22,850
Purchase of property and equipment ....................... (464,016) (1,537,071) (42,069)
------------ ------------ ------------
Net cash used in investing activities ................ (464,016) (1,578,276) (19,219)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- -- --
Deferred offering costs .................................. -- -- (110,602)
Proceeds from senior convertible notes payable--
related parties ......................................... -- -- 2,500,000
Proceeds from notes payable--related parties ............. 122,000 -- --
Repayment of notes payable--related parties .............. (35,000) (87,000) --
Proceeds from mandatory conversion subordinated
notes payable ........................................... -- 1,500,000 --
Proceeds from issuance of common stock, net .............. 1,361,488 4,485,875 --
Proceeds from issuance of convertible preferred stock,
net ..................................................... -- 2,301,902 500,011
------------ ------------ ------------
Net cash provided by financing activities ............ 1,448,488 8,200,777 2,889,409
------------ ------------ ------------
Net change in cash and cash equivalents .............. (10,722) 1,689,395 (1,595,450)
Cash and cash equivalents at beginning of period ............ 10,722 -- 1,689,395
------------ ------------ ------------
Cash and cash equivalents at end of period .................. $ -- $ 1,689,395 $ 93,945
============ ============ ============
<CAPTION>
Three Months
Ended
March 31,
--------------------------------
1997 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (784,377) $ (2,297,838)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 104,220 58,349
Amortization of debt discount ........................... -- 149,903
Write-off of property and equipment ..................... -- --
Accrued interest on senior convertible notes--related
parties ................................................ -- 7,555
Imputed interest on note payable--related party ......... -- 9,000
Provision for doubtful accounts ......................... 15,000 27,430
Amortization of intangible assets ....................... -- 335,355
Non-cash compensation ................................... 8,041 472,740
Changes in operating assets and liabilities:
Accounts receivable .................................... 147,695 (579,518)
Prepaid assets and other current assets ................ 131,463 (31,885)
Deposits ............................................... -- (250)
Accounts payable ....................................... 148,227 (82,075)
Accrued liabilities .................................... (193,174) (322,868)
Deferred revenue ....................................... (961,989) (55,496)
------------- ------------
Net cash used in operating activities ................ (1,384,894) (2,309,598)
------------- ------------
Cash flows from investing activities:
Increase in intangible assets ............................ -- --
Cash received from acquisitions .......................... -- 168,839
Proceeds from sale of property and equipment ............. -- --
Purchase of property and equipment ....................... -- (97,664)
------------- ------------
Net cash used in investing activities ................ -- 71,175
------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- 10,060,002
Deferred offering costs .................................. -- (288,651)
Proceeds from senior convertible notes payable--
related parties ......................................... -- --
Proceeds from notes payable--related parties ............. -- 150,000
Repayment of notes payable--related parties .............. -- (12,178)
Proceeds from mandatory conversion subordinated
notes payable ........................................... -- --
Proceeds from issuance of common stock, net .............. -- --
Proceeds from issuance of convertible preferred stock,
net ..................................................... 500,011 --
------------- ------------
Net cash provided by financing activities ............ 500,011 9,909,173
------------- ------------
Net change in cash and cash equivalents .............. (884,883) 7,670,750
Cash and cash equivalents at beginning of period ............ 1,689,395 93,945
------------- ------------
Cash and cash equivalents at end of period .................. $ 804,512 $ 7,764,695
============= ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.
("Interactive Imaginations")) operates networks of Websites that enable both
advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and commerce. The Company
generates revenues by delivering advertisements and promotions to Websites
affiliated with the Company. Interactive Imaginations's properties include the
ContentZone, which is a network of small to medium-sized Websites to which
advertisements and promotions are served; and Riddler.com, an advertising
supported Website that enables users to play intellectually challenging games
for prizes and cash. Effective February 24, 1998, 24/7 Media commenced
operations of the 24/7 Network, a network of high profile Websites to which
advertisements are served.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
Interactive Imaginations, Inc. was incorporated in the State of New York
in September 1994 and first recognized revenue in June 1995. 24/7 Media, Inc.
(the "Company") was incorporated in Delaware on January 23, 1998 to consolidate
three Internet advertising companies: (i) Petry Interactive, Inc. ("Petry"),
which sold advertising for Websites organized in a network, (ii) Advercomm,
Inc. ("Advercomm"), a newly formed corporation which brought a number of high
profile Websites to the 24/7 Network, and (iii) Interactive Imaginations, Inc.
Subsequently, the Company acquired both Intelligent Interactions Corporation
("Intelligent Interactions"), a corporation that develops and licenses ad
serving technology and e-commerce software, and the CliqNow! network of
Websites ("CliqNow!").
The Company was formed on January 23, 1998 as a wholly owned subsidiary of
Interactive Imaginations. On February 25, 1998, pursuant to an Agreement and
Plan of Merger, dated February 2, 1998, the Company simultaneously consummated
the merger of each of Petry and Advercomm with and into the Company (the
mergers, together with the concurrent investment of approximately $10 million
by certain third party investors concurrent with an existing investor of
Interactive Imaginations, the "Initial Merger"). Upon consummation of the
Initial Merger, each share of common stock of Petry was converted into
20,988.74 shares of Common Stock of the Company, and each share of common stock
of Advercomm was converted into 262.36 shares of Common Stock of the Company.
On April 9, 1998, Interactive Imaginations (24/7 Media's then parent) was
merged with and into the Company in a manner similar to a pooling of interests.
As a result, 24/7 Media's historical results of operations for all periods
prior to the Initial Merger represent those of Interactive Imaginations. In
addition, on April 13, 1998, the Company acquired Intelligent Interactions as a
wholly-owned subsidiary of the Company and as of June 1, 1998, the Company
acquired CliqNow! (see note 11).
Pursuant to the Agreement and Plan of Merger, certain conditions necessary
to cause the merger included the following: the Company was required to cause
(i) the conversion of all of the then outstanding shares of its Convertible
Preferred Stock into common stock, (ii) the conversion of substantially all of
the then outstanding senior convertible notes payable to related parties into
common stock, (iii) substantially all warrants exerciseable for common stock to
be surrendered in exchange for common stock, and (iv) the investment of at
least $10 million in the Company, pursuant to the Securities Purchase
Agreement.
In connection with the Initial Merger, Interactive Imaginations entered
into a Securities Purchase Agreement, dated February 25, 1998, with certain
investors (including David J. Moore, the President and Chief Executive Officer
of the Company), for the sale and issuance of preferred shares and warrants in
a private placement for total proceeds of $10,060,002. For each $10,000
invested, the investors received 10,000 shares of Series A Preferred Stock,
which is automatically convertible into common stock at a conversion price of
$3.81 upon consummation of the Offering
F-7
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
(see note 12), and approximately 1,313 Class A Warrants, exercisable into
Common Stock at an exercise price of $7.62 per share, and approximately 1,313
Class B Warrants, exercisable into Common Stock at an exercise price of $11.42
per share. The Securities Purchase Agreement also contained other standard
terms and conditions, including covenants, representations and warranties, and
mutual indemnification. Also in connection with the Initial Merger, Interactive
Imaginations entered into a Shareholders' Agreement, dated February 25, 1998,
among The Travelers Insurance Company (an existing investor in Interactive
Imaginations), Prospect Street NYC Discovery Fund, L.P., Big Flower Digital
Services, Inc. and certain individual investors (the "Shareholders'
Agreement"), which included standard terms and conditions and provided these
shareholders with a right to elect three members of the seven member board of
directors of the Company and a right of first refusal with respect to transfers
of Company securities. The Shareholders' Agreement will be terminated in its
entirety upon the consummation of an Offering (note 12). In connection with the
Initial Merger, certain shareholders of the Company were granted registration
rights with respect to their shares of Common Stock.
Petry Interactive entered into an oral consulting agreement with
Manufacturers Renaissance Network, Inc. ("MRN"), a corporation of which C.
Andrew Johns, the Executive Vice President, Treasurer and Chief Financial
Officer of the Company, was an officer and a 50% stockholder, pursuant to which
MRN was paid $75,000 and Class C Warrants to purchase 18,750 shares of Common
Stock at an exercise price of $3.81 per share for consulting services rendered
in connection with the Merger. The Company recorded $13,500 of acquisition
costs in connection with these warrants. 24/7 Media also paid MRN a consulting
fee of approximately $33,000 for services rendered in connection with the
acquisition of Intelligent Interactions.
(b) Principles of Consolidation
The Company's audited financial statements as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
include the historical results of Interactive Imaginations and do not reflect
any of the operating results of Petry, Advercomm, Intelligent Interactions or
CliqNow!.
In connection with the Initial Merger, no single former shareholder group
obtained more than 50 percent of the outstanding shares of the Company
following the transaction. However, the Company's former common shareholder
interest group received the largest portion of the voting rights in the
combined entity and, therefore, was deemed to be the accounting acquirer in
connection with the Initial Merger.
The Company's unaudited consolidated financial statements as of March 31,
1998 and for the three months ended March 31, 1998 include the consolidated
accounts of the Company, and Petry and Advercomm from February 25, 1998 (date
of acquisition) through March 31, 1998, giving effect to the Initial Merger as
of February 25, 1998. For the three months ended March 31, 1997, the Company's
historical results of operations only include the results of Interactive
Imaginations. All significant intercompany transactions and balances have been
eliminated in consolidation.
On February 25, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 2,623,591 and
1,705,334 shares of the Company's Common Stock, respectively, for a total
purchase price of $4,197,800 and $2,728,500, respectively, plus acquisition
costs of $157,000. The fair value of the 4,328,925 aggregate shares of Common
Stock issued in connection with the acquisition of Petry and Advercomm was
estimated to be $1.60 per share, determined primarily by reference to the
common stock conversion price of $1.60 per share in connection with the
Company's issuance of approximately $1,000,000 senior convertible notes payable
and detachable warrants during September and November 1997 supported by an
independent valuation of the Company's Common Stock as of February 25, 1998.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
F-8
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
on the basis of their fair values on the acquisition dates. Approximately
($1,122,200) of the aggregate purchase price was allocated to net tangible
liabilities consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and accrued liabilities. The historical carrying
amounts of such net liabilities approximated their fair values. The purchase
price in excess of the fair value of identified tangible and intangible assets
and liabilities assumed in the amount of $8,205,500 was allocated to goodwill
and is being amortized over its estimated useful life of two years.
The Petry and Advercomm acquisitions have been primarily structured as tax
free exchanges of stock; therefore, the differences between the recognized fair
value of the acquired assets, including intangible assets, and their historical
tax bases is not deductible for income tax purposes.
The following unaudited pro forma consolidated amounts give effect to
these acquisitions as if they had occurred at the beginning of the respective
periods, or date of inception, if later, by consolidating the results of
operations of Petry and Advercomm with the results of the Company for the three
months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
------------- ---------------
<S> <C> <C>
Total revenues ....................................... 1,204,933 $ 1,846,748
Net loss ............................................. (1,780,083) (3,291,175)
Net loss attributable to common stockholder .......... (1,880,583) (3,391,675)
Net loss per share--basic ............................ $ (0.66) $ (0.66)
Weighted average shares outstanding .................. 2,836,960 5,114,509
</TABLE>
(c) Use of Estimates
The preparation of financial statements in accordance 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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Company considers all highly liquid securities, with original
maturities of three months or less, to be cash equivalents. Cash equivalents at
December 31, 1996 and 1997 and March 31, 1998 were $1,252,802, $0 and
$6,018,521, respectively, which consisted of certificates of deposit.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the leases, whichever is shorter.
(f) Intangible Assets
Intangible assets including trademarks and licenses are being amortized
using the straight-line method over one to five years.
Goodwill resulting from the acquisition of Internet advertising businesses
is estimated by management to be primarily associated with the acquired
workforce, contracts and technological know how. As a result of the rapid
technological changes occurring in the Internet industry and the intense
competition for qualified Internet professionals and customers, recorded
goodwill is amortized on the straight-line basis over the estimated period of
benefit, which is two years.
F-9
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. To date, the Company has not recorded any provisions for possible
impairment of intangible assets.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that the tax change occurs.
(h) Deferred Revenue
Deferred revenue consists of a prepaid software license fee for use of the
Company's proprietary technology and prepaid advertising fees, although the
majority of the Company's advertising customers generally pay after the
services have been provided. As of December 31, 1996 and 1997 and March 31,
1998, the Company had deferred revenue related to the software license
$1,071,059, $0 and $0 and advertising agreements of $454,064, $96,496 and
$41,000, respectively.
(i) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page advertisements for a fixed fee to third-party Websites comprising the
24/7 Network, the ContentZone and to a lesser extent its Riddler.com Website.
Revenues from advertising are recognized in the period the advertising
impressions are delivered, provided collection of the resulting receivables is
probable. For the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1998, the Company recognized $436,476, $682,853, and $250,164,
respectively, of cash advertising revenue related solely to the ContentZone.
Third party Websites which register web page(s) with the Company's
networks and display advertising banners on those pages are commonly referred
to as "Affiliated Websites." These third party Websites are not "related party"
relationships or transactions as defined in Statement of Financial Accounting
Standards No. 57, "Related Party Disclosures." The Company pays its Affiliated
Websites a service fee for providing advertising space to the Company's
networks. The Company becomes obligated to make payments to such Affiliated
Websites, which have contracted with the Company to be part of the Company's
networks, in the period the advertising impressions are delivered. Such
expenses are classified as cost of revenues in the consolidated statements of
operations.
The Company's licensing revenues are derived principally from a software
licensing fee and fees from maintenance, consulting and support of its
software. Licensing fees are recognized as performance occurs under the terms
of the applicable agreement. Expenses from the Company's Licensing Revenues are
primarily payroll costs to deliver, modify and support the software. These
expenses are classified in cost of revenues in the Consolidated Statements of
Operations and were not material.
At December 31, 1997 and March 31, 1998, accounts receivable include
approximately $56,000 and $1,242,700, respectively, of unbilled receivables,
all of which have been subsequently billed.
(j) Barter Transactions
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
F-10
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Company's Web properties. Barter expense is recognized when the
Company's advertisements are run on other companies' Web sites, which is
typically in the same period when the barter revenue is recognized. Advertising
barter revenues and expenses were approximately $0, $55,000, $83,000 and $0 for
the years ended 1995, 1996, 1997 and the three months ended March 31, 1998,
respectively.
The Company also receives payment for its advertising services in the form
of goods that are used as prizes for the Riddler game site. Prize revenue and
the corresponding prize expense is recorded at the estimated fair market value
of the prizes received. Advertising prize revenues were approximately $0,
$196,000, $86,000 and $0 for the years ended 1995, 1996 and 1997 and the three
months ended March 31, 1998, respectively.
The Company expects that barter revenue will represent a significantly
smaller percentage of total revenues in the future.
(k) Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be capitalized when a product's technological feasibility has been established
by completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
(l) Deferred Offering Costs
At December 31, 1997 and March 31, 1998, specific incremental costs
directly attributable to the issuance of mandatorily redeemable convertible
preferred stock and initial public offering ("IPO") transactions, respectively,
have been deferred. The December 31, 1997 costs have been charged against
additional paid-in capital as a result of the Company's issuance of mandatorily
redeemable convertible preferred stock during the three months ended March 31,
1998. The March 31, 1998 incremental costs incurred in connection with the
Company's IPO will be charged against additional paid-in-capital in connection
with this Offering.
(m) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(n) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
F-11
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
(o) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing on the statements of
operations and totaled $54,123, $514,637, $181,280 and $208,369 for the years
ended December 31, 1995, 1996 and 1997 and the three months ended March 31,
1998, respectively.
(p) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities. At December 31, 1996 and
1997, the fair value of these instruments approximated their financial
statement carrying amount because of the short term maturity of these
instruments. Substantially all of the Company's cash equivalents were invested
in certificates of deposit. The Company has not experienced any significant
credit losses to date.
The fair value of the Senior Convertible Notes Payable was determined
based on an imputed market rate of interest which is equal to its carrying
amount on the balance sheet.
Total cash advertising revenues associated with major advertising
customers (excluding barter) are as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------ ---------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------------- ----------
Customer(1) (unaudited)
<S> <C> <C> <C> <C> <C>
A ............. $50,000 $ -- $ -- $83,019 $ --
B ............. 32,000 -- -- 82,014 --
C ............. 30,000 -- -- -- --
D ............. 20,000 -- -- -- --
E ............. -- 211,936 326,707 -- --
F ............. -- 178,191 157,019 -- --
G ............. -- -- -- -- 161,618
</TABLE>
Accounts receivable regarding significant advertising customers are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1996 1997 1998
---------- --------- ------------
Customer(1) (unaudited)
<S> <C> <C> <C>
H ............. $93,800 $ -- $ --
I ............. 41,000 -- --
J ............. -- 31,000 --
</TABLE>
(1) Each of the customers listed in the revenue and accounts receivable
tables are different.
To date, accounts receivable have been derived from advertising fees
billed to advertisers located in the United States. The Company generally
requires no collateral. The Company maintains reserves for potential credit
losses; historically, such losses have been minor and within management's
expectations.
(q) Interim Results (Unaudited)
The accompanying interim financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1998 and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997 and
1998. The financial data and other information disclosed in these notes to
condensed consolidated financial statements related to these periods
F-12
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
are unaudited. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
(r) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128) and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Only basic EPS is presented as
all common stock equivalents are anti-dilutive for each of the periods
presented. Anti-dilutive potential common shares outstanding were 64,425,
466,635, and 1,636,474 for the years ended December 31, 1995, 1996 and 1997,
respectively, and 458,803 and 6,256,285 for the three-month periods ended March
31, 1997 and 1998, respectively.
Net loss applicable to common stockholders for the three-month period
ended March 31, 1998 has been increased to give effect to $33,500 of cumulative
dividends on Mandatorily Redeemable Convertible Preferred Stock.
(s) Recent Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in its
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between
the Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
F-13
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components
Prepaid Expenses and Other Current Assets
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1996 1997 1998
----------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Prepaid operating lease ......... $108,946 $ -- $ --
Barter receivable ............... 85,358 -- --
Other prepaid ................... 43,223 14,936 52,296
-------- ------- -------
$237,527 $14,936 $52,296
======== ======= =======
</TABLE>
Property and Equipment, Net
<TABLE>
<CAPTION>
December 31,
--------------------------- March 31,
1996 1997 1998
------------- ------------- --------------
(unaudited)
<S> <C> <C> <C>
Computer equipment ..................................... $1,893,217 $972,283 $1,069,950
Furniture and fixtures ................................. 87,922 -- --
Leasehold improvements ................................. 33,517 -- --
---------- -------- ----------
2,014,656 972,283 1,069,950
Less accumulated depreciation and amortization ......... (336,720) (380,946) (439,298)
---------- -------- ----------
$1,677,936 $591,337 $ 630,652
========== ======== ==========
</TABLE>
During September 1997, as part of the Company's consolidation and
downsizing, it conducted a book-to-physical inventory of its property and
equipment. As a result of this book-to-physical observation, the Company
identified and wrote-off $756,795 of equipment purchases, net of accumulated
depreciation, that could no longer be located and has instituted additional
controls to safeguard its fixed assets.
Intangible Assets
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1996 1997 1998
------------ ----------- --------------
(unaudited)
<S> <C> <C> <C>
Licenses .............................. $ 37,040 $ -- $ --
Trademarks ............................ 4,165 4,165 4,165
--------- -------- ----------
41,205 4,165 4,165
Less accumulated amortization ......... (23,918) (1,454) (1,662)
--------- -------- ----------
$ 17,287 $ 2,711 $ 2,503
========= ======== ==========
Goodwill .............................. $ -- $ -- $8,205,529
Less accumulated amortization ......... -- -- (335,355)
--------- -------- ----------
$ -- $ -- $7,870,174
========= ======== ==========
</TABLE>
F-14
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components --Continued
Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1996 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Professional fees ......................... $102,105 $225,691 $ 205,882
Employee commissions and expenses ......... -- -- 423,409
Ad management fees ........................ -- -- 258,435
Barter payable ............................ 85,358 -- --
Affiliate royalties ....................... 43,955 81,384 941,715
Prizes .................................... 68,474 -- --
Other ..................................... 214,463 164,130 351,528
-------- -------- ----------
$514,355 $471,205 $2,180,969
======== ======== ==========
</TABLE>
(3) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented and has no
carryback potential. At December 31, 1997, the Company had approximately
$13,394,000 of federal net operating loss carryforwards available to offset
future taxable income; such carryforwards expire in various years through 2012.
As a result of various equity transactions during 1996 and 1997 as well as
during 1998 (see notes 5 and 11), management believes the Company has undergone
an "ownership change" as defined by section 382 of the Internal Revenue Code.
Accordingly, the utilization of a portion of the net operating loss
carryforwards may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, no
tax benefit for losses has been recorded by the Company in 1995, 1996 and 1997,
and a full valuation allowance has been recorded for the entire amount of the
net deferred tax asset.
The tax effects of temporary differences and tax loss carryforwards that
give rise to significant portions of federal deferred tax assets and deferred
tax liabilities at December 31, 1996 and 1997 are presented below.
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ................................... $ 2,223,000 $ 4,554,000
Deferred revenues .................................................. 527,000 33,000
Accounts receivable principally due to allowance for doubtful
accounts .......................................................... 22,000 22,000
Other .............................................................. 24,000 22,000
------------ ------------
Gross deferred tax assets ............................................. 2,796,000 4,631,000
Less: valuation allowance ............................................. (2,698,000) (4,501,000)
------------ ------------
Net deferred tax assets ........................................ 98,000 130,000
------------ ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation (98,000) (130,000)
------------ ------------
Gross deferred tax liabilities ........................................ (98,000) (130,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-15
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable
Notes Payable--Related Parties
An officer and stockholder of the Company loaned the Company $80,000 in
1995 at an interest rate of 5.76%. The entire principal and accrued interest
totaling $85,618 related to those loans were paid in full in 1996. Affiliates
of this same stockholder loaned the Company $10,000 and $25,000 in 1995 at
interest rates of 6.97% and 6.19%, respectively. The entire principal balance
of $35,000 related to those loans was paid in full in 1995. In addition, an
officer and stockholder of the Company loaned the Company $7,000 in 1995 at an
interest rate of 6.60%. This loan was offset against certain personal expenses
paid by the Company on behalf of this officer and stockholder.
Mandatory Conversion Subordinated Notes
In August, September and October 1996, the Company issued Mandatory
Conversion Subordinated Notes ("Notes") in the aggregate principal amount of
$1,500,000, and bearing an interest rate equal to 8% per annum and convertible
into Series A Preferred Stock at the price per share achieved in the then
proposed private placement of Series A Preferred Stock. Under the terms and
conditions of the Notes, the Notes were converted into 52,262 shares of Series
A Preferred Stock of the Company upon completion of the November 1996 private
placement of Series A Preferred Stock at the purchase price per share ($28.70)
of such sale of Series A Preferred Stock (See Note 5--Convertible Preferred
Shares). All accrued interest on these Notes, aggregating $21,919, was paid to
the holders thereof in connection with the conversion to Convertible Preferred
Shares.
In connection with the issuance of Mandatory Convertible Subordinated
Notes in August 1996, in the principal amount of $500,000, the Company also
issued to the note holder detachable warrants to purchase 6,533 of the
Company's Common shares at a price of $11.48 per share. Such warrants expire no
later than three years from the date of issuance. The value attributed to the
warrants of $17,900 was recorded as debt discount and subsequently charged to
interest expense in connection with the conversion of the aforementioned notes.
The Company determined the value of the warrants based upon its estimate of its
effective borrowing rate of 12% at the date of issuance.
Senior Convertible Notes Payable--Related Parties
During 1997, the Company received $2,500,000 in proceeds from the issuance
of senior convertible notes payable primarily to affiliates of stockholders of
the Company, bearing an interest rate of 8% compounded semi-annually. The
notes, including interest thereon, are due on the earlier of prepayment,
redemption, conversion of the notes into common stock or May 15, 1999, the
maturity date. Each of the notes was issued with detachable warrants allowing
such holders to purchase shares of the Company's common stock at prices ranging
from $1.60 to $11.48 per share. The value attributed to the warrants of
$201,000 has been recorded as debt discount and is being amortized to interest
expense using the imputed interest method over the term of the notes. The
Company determined the value of the warrants based upon its estimate of its
effective borrowing rates at the date of each issuance (which rates were 12%
prior to September 1, 1997 and 15% subsequent to September 1, 1997).
The notes are convertible into common stock at conversion prices, as
defined in the original note agreements, ranging from $1.60 to $11.48 per share
upon occurrence of certain events, subject to anti-dilution provisions. The
original conversion price for the $1.5 million of Notes issued prior to
September 1, 1997 was $11.48 per share and for the $1.0 million of Notes issued
between September 1, 1997 and December 31, 1997 was $1.60 per share. The
conversion prices were determined by negotiations among the parties. On
December 22, 1997, $94,757 of the notes, including interest thereon, were
converted into 59,184 shares of common stock at $1.60 per share. During 1997,
the Company recorded $42,652 of interest expense in connection with the
amortization of the debt discount and conversion of the aforementioned notes.
During January 1998, the Company received $150,000 in proceeds from the
issuance of senior convertible notes payable with terms similar to the notes
issued during 1997. The notes are convertible into 43,321 shares of
F-16
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable--Continued
common stock at $3.48 per share, subject to anti-dilution provisions. The value
attributable to 4,310 warrants, to purchase shares of the Company's common
stock at $3.48 per share, of $12,156 was recorded as debt discount. The Company
determined the value of the warrants based upon its estimate of its effective
borrowing rate of 15% at the date of issuance.
In connection with the Securities Purchase Agreement and the Merger,
$2,056,250 of the Senior Convertible Notes Payable--Related Parties, plus
accrued interest thereon, were converted into 750,586 shares of common stock,
leaving approximately $500,000 of such notes, plus accrued interest thereon,
outstanding as of June 2, 1998. With regard to the $1.5 million of notes issued
prior to September 1, 1997, the original conversion price of $11.48 per share
was adjusted to $8.36 per share under the anti-dilution provisions triggered by
the subsequent financings at lower conversion prices per share.
Additionally, in accordance with the terms and conditions of the
Securities Purchase Agreement (which terms and conditions were determined by
negotiations among the various parties to the agreement), 177,679 warrants
converted into 99,119 shares of Common Stock. Accordingly, the Company charged
the unamortized portion of the applicable debt discount of $146,000 to interest
expense in connection with the conversion of the Notes.
Loan Payable--Related Party
In connection with the Petry acquisition, Petry Media Corporation, a
shareholder of the Company, agreed to lend an aggregate of $300,000 during the
period September 29, 1997 to December 31, 1997. The loan is repaid through the
payment of 5% of the gross commissions or other revenues received by the
Company, after deducting advertising agency commissions and Website royalties.
At March 31, 1998, $283,267 of the loan was outstanding.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%.
Warrants
In connection with the issuance of Mandatory Convertible Subordinated
Notes in August 1996, in the principal amount of $500,000, the Company also
issued to the note holder detachable warrants to purchase 6,533 of the
Company's Common shares at a price of $11.48 per share. Such warrants expire no
later than three years from the date of issuance. The Company recorded an
original issue debt discount on such warrants.
On April 9, 1997, the Company granted warrants to a consultant to purchase
4,375 of the Company's Common shares at an exercise price of $49.72 per share.
The fair value, using a Black Scholes model, of the warrants was deemed
insignificant on the date of grant.
In connection with the issuance of Senior Convertible Notes
Payable--Related Parties, warrants to purchase 169,316 and 35,609 Common shares
at a prices ranging from $1.60 to $11.48, were outstanding as of December 31,
1997 and February 25, 1998, respectively, and such warrants expire no later
than three years from the date of issuance. The Company recorded an original
issue debt discount on such warrants.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci
entered into a Confidential Separation Agreement and General Release
("Separation Agreement") pursuant to which Mr. Paolucci's employment as an
executive, but not as a Director, of Interactive Imaginations was terminated as
of February 24, 1998. The terms of the Separation Agreement generally provide
that Mr. Paolucci and Interactive Imaginations agreed to release and discharge
the other party (and its successors and assigns) from all causes of action,
claims, judgments, obligations, damages or liabilities. Interactive
Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to
625,000 shares of Common Stock at an exercise price of $3.81 per share.
Accordingly, the Company recorded compensation expense of $450,000 during the
three month period ended March 31, 1998 in connection
F-17
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable--Continued
with this transaction based upon an independent valuation of the Class C
Warrants. In addition, Interactive Imaginations agreed to extend the term from
January 31, 2000 to January 31, 2005 in respect of a fully vested option held by
Mr. Paolucci to purchase 13,000 shares of Interactive Imaginations common stock
at $1.72 per share. No compensation expense was recorded in connection with such
extension although the exercise price of $1.72 per share was below the fair
value of the Company's Common Stock on the date the options were extended, at
$3.81 per share, such amount was deemed insignificant on the date of extension.
In February 1998, the Company issued to a consultant 28,750 warrants to
purchase common stock at an exercise price of $3.48 in exchange for services.
Under the terms and conditions of the Securities Purchase Agreement (as
determined by negotiations among the parties to such agreement), such warrants
were converted into 12,650 shares of Common Stock. The Company recorded
compensation expense of $20,240, based upon the fair market value ($1.60 per
common share as determined by an independent valuation of the Company's Common
Stock) of the 12,650 shares of Common Stock into which the warrants were
converted under the terms and conditions of the Securities Purchase Agreement.
Warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Warrants Exercise
Granted Price
------------ -----------
<S> <C> <C>
Outstanding at December 31, 1995 ......... 0
Granted .................................. 6,533 $ 11.48
Exercised ................................ 0
Canceled ................................. 0
---------
Outstanding at December 31, 1996 ......... 6,533 11.48
Granted .................................. 173,695 3.56
Exercised ................................ 0
Canceled ................................. 0
---------
Outstanding at December 31, 1997 ......... 180,228 3.84
Granted .................................. 3,318,618 8.35
Exercised ................................ (177,679) 3.85
Canceled ................................. 0
---------
Outstanding at March 31, 1998 ............ 3,321,167 8.34
=========
</TABLE>
All warrants are exerciseable and have expiration dates generally five
years from the date of grant.
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock
Common Stock
In connection with its formation in September 1994, the Company authorized
1,000,000 Common shares, par value $.01 per share, and immediately thereafter
issued a total of 25,000 Common shares to its founders in exchange for
approximately $30,000 worth of expenses, as well as $15,000 in cash.
In February 1995, the Company amended its capital structure to eliminate
the existing Common shares and create Common Stock Class A and Common Stock
Class B. Accordingly, the Company amended its Certificate of Incorporation to
provide for: (i) conversion of the 1,000,000 authorized Common shares (975,000
authorized but not issued; 25,000 issued and outstanding) into 250,000 Class A
Common shares, par value $.01 per share; and (ii) authorization of 250 Class B
Common shares, par value $.01 per share.
F-18
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
In March 1995, the Company issued a total of 250 Class B Common shares in
exchange for approximately $93,000 in cash, which were subsequently (in June
1995) converted to 15,677 Class A Common shares. During the remainder of 1995,
the Company issued a total of 32,656 additional Class A Common shares in
exchange for $1,289,000 in cash. As of December 31, 1995, the Company had
authorized: (i) 1,000,000 Class A Common shares, of which 73,333 were issued
and outstanding; and (ii) 1,000 Class B Common shares, of which none were
outstanding.
During 1996, the Company issued an additional 34,371 Class A Common shares
in exchange for $4,525,000 in cash. Each Class A common share was converted
into 2.5 shares of Common Stock pursuant to a recapitalization in March 1996
and the Stock Split (See Note 13).
As part of an employment agreement, an officer of the Company was given
approximately 12,500 shares of common stock which were to be issued pro rata on
a monthly basis, over a three year period beginning in July 1996, as additional
compensation. On October 31, 1997, the officer signed a termination agreement
with the Company whereby the officer received the remaining 8,333 of the 12,500
shares. The Company recorded compensation expense at the time of each issuance
of Common Stock based upon the Company's estimate of the fair value using the
conversion rates of the Company's most recent issuance of convertible debt. The
fair market value of the shares issued at the date of each issuance was
approximately $11.48 per share in 1996 and $11.48 per share for issuances prior
to September 1, 1997 and $1.60 per share for issuances between September 1,
1997 and October 31, 1997. As a result, for the years ended December 31, 1996
and 1997, the Company recorded compensation expense of $37,627 and $31,891,
respectively.
In February 1998, the Company awarded to the President 56,250 shares of
restricted common stock which were granted at the fair market value of the
Company's Common Stock of $1.60 per share determined by an independent
appraisal of the Company's Common Stock in connection with the Initial Merger,
and vest over a three year period. In connection with this issuance, the
Company is recognizing compensation expense of $90,000 ratably over a three
year period. For the three month period ended March 31, 1998, the Company
recognized $2,500 in compensation expense.
In March 1996, the Company's shareholders approved a recapitalization plan
which provided for: (i) conversion of the 1,000,000 authorized Class A Common
Shares into 30,000,000 Common Shares, par value $.01 per share; (ii) conversion
of each of the 107,703 issued and outstanding Class A Common shares into 2.5 of
the new Common Shares (any remaining fractional shares could be purchased or
sold by each shareholder in the conversion); and (iii) conversion of the 1,000
authorized Class B Common shares into 2,000,000 Preferred Shares, par value
$.01 per share.
Convertible Preferred Shares
In November 1996, the Company designated 500,000 Convertible Preferred
Shares, par value $.01 per share, out of the 2,000,000 Preferred Shares which
were authorized in March 1996, the rights and preferences of which are
generally senior to the Company's Common Shares and are more fully described in
the Company's Amended Certificate of Incorporation (the "Amended Certificate").
Thereafter, the Company completed a private placement of 140,722 Preferred
Shares for an aggregate price of $4,038,722. Such consideration consisted of
the cancellation of outstanding Notes (described above) in the aggregate
principal amount of $1,500,000 plus $2,538,722 in cash. Each Preferred Share is
convertible into 2.5 Common Shares (subject to anti-dilution adjustment as set
forth in the Amended Certificate) upon the occurrence of certain events in
respect of the Company or the holders of Preferred Shares. The Preferred share
conversion feature is subject to anti-dilution adjustment. In January 1997, the
Company issued 17,422 shares of Preferred Stock for a payment of $500,011 in
cash.
As of December 31, 1996 and 1997, the 140,722 and 158,144 issued and
outstanding Preferred Shares were convertible into 351,805 and 542,908 Common
Shares, however, no Preferred Shares were converted as of those
F-19
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
dates (see note 1(a)). The Company has reserved 5,000,000 authorized but
unissued Common Shares for issuance in connection with the conversion of the
Preferred Shares.
These Preferred Shares, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, as defined, on a pari
passu basis, are entitled to receive an amount equal to $28.70 per share, to be
paid out of the assets of the Company available for distribution before any
such payments shall be made on any shares of the Company's common shares or any
other capital stock of the Company other than the Preferred Shares, plus any
declared and unpaid dividends.
The Preferred Shares are subject to mandatory conversion, and shall be
automatically converted into common shares, as noted above, in the event:
(i) the Company successfully consummates a firm commitment for an
underwritten initial public offering of its equity securities for:
(a) a gross per share price offered to the public of at least 200%
of the then current per share conversion price, as defined; and
(b) a total gross offering amount, as defined, of at least
$20,000,000; or
(ii) the holders of a majority of the Preferred Shares vote in favor of or
consent to such conversion.
For as long as the Preferred Shares are outstanding, the Company shall
not, without the prior written consent or affirmative vote of the holders of at
least 66 2/3% of all of the outstanding Preferred Shares:
(i) authorize or issue any other equity securities of the Company which
rank superior to the Preferred Shares with respect to conversion,
dividends, redemption, liquidation, antidilution or other
preferences, designations, rights or powers;
(ii) authorize or issue any securities of the Company which have voting
rights superior to the Preferred Shares; or
(iii) otherwise amend, alter or repeal the preferences, designations,
rights or powers of the Preferred Shares or enter into any
transaction that shall result in any such amendment, alteration, or
repeal, which would have an adverse effect upon holders of such
shares.
On February 25, 1998, in accordance with the terms and conditions of the
Securities Purchase Agreement, all 158,144 issued and outstanding Preferred
Shares were converted into 542,908 Common Shares, after giving effect to
anti-dilution provisions.
Mandatorily Redeemable Convertible Preferred Stock
On February 25, 1998, the Company entered into a Securities Purchase
Agreement for the Sale and Issuance of 10,060,002 shares of Mandatorily
Redeemable Convertible Preferred Stock--Series A ("Mandatorily Redeemable
Convertible Preferred Stock" or "Series A"), par value $.01 per share,
1,320,904 Class A Warrants and 1,320,904 Class B Warrants in a private
placement for total proceeds of $10,060,002.
After giving effect to the Securities Purchase Agreement, including the
Merger, the capital stock of the Company consists of: (i) 100,000,000 common
shares, of which 6,870,300 shares are issued and outstanding, 2,641,808 shares
are reserved for issuance upon conversion of issued and outstanding Mandatorily
Redeemable Convertible Preferred Stock or "Series A," 1,320,904 shares are
reserved for issuance upon exercise of issued and outstanding Class A Warrants,
1,320,904 shares are reserved for issuance upon exercise of issued and
outstanding Class B Warrants, 643,750 are reserved for issuance upon exercise
of issued and outstanding Class C Warrants, 35,609 are reserved for issuance
upon
F-20
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
exercise of issued and outstanding unclassified warrants, 62,757 (subject to
adjustment) are reserved for issuance upon exercise of outstanding convertible
debentures, and 1,437,500 shares are reserved for issuance to key employees,
officers and directors of, and consultants to, the Company under stock
incentives that have been granted or are available for grant by the Company
pursuant to the 1998 Stock Incentive Plan; and (ii) 30,000,000 preferred
shares, of which 10,060,002 are outstanding, all of which are designated as
Mandatorily Redeemable Convertible Preferred Stock or Series A shares, all of
which are in a private placement.
The Series A shares rank (i) prior to the Common Stock of the Company;
(ii) pari passu with any Securities (as defined in the Securities Purchase
Agreement); and (iii) junior to any Senior Securities, in each case as to
dividends and other distribution of assets and upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary. The Series A
shareholders are entitled to receive, when and as declared by the Board of
Directors out of funds legally available, dividends at a rate of $0.04 per
share per annum. Such dividends shall be cancelled pursuant to the Securities
Purchase Agreement if the Company consummates a qualified initial public
offering (as defined in the Securities Purchase Agreement) prior to January 31,
1999.
Each share of Series A shall be convertible, at the option of the holder,
at any time and without the payment of additional consideration into common
stock determined by the sum of (i) the Payment Price of $1.00 per Series A
share divided by the conversion price of $3.81 per common share (as adjusted),
plus (ii) all accrued and unpaid dividends with respect to such share divided
by the dividend conversion price which is equal to twice the conversion price
of $3.81.
The Company's Mandatorily Redeemable Convertible Preferred Stock is
subject to certain anti-dilution protection, if the Company raises funds in the
future, while the Preferred Stock is still outstanding, at a common
stock-equivalent value which is less than the conversion price of the Preferred
Stock. The Preferred Stock will be converted, by its terms, automatically into
common stock simultaneously with the completion of this public offering.
Accordingly, there will be no adjustment to the conversion ratio.
Each Series A share (and, as applicable, all accrued but unpaid dividends
thereon) shall automatically be converted into common shares at the conversion
price (and dividend conversion price) immediately upon the closing of a
qualified public offering.
In the event the Company has not completed a qualified public offering on
or prior to the fifth anniversary of the original issue date, each shareholder
of record of Series A shares will have the right to cause the Company to redeem
at the option of the shareholder all or part of the shareholder's outstanding
Series A shares by paying cash of $1.00 per share plus any dividends accrued.
Additionally, if the Company fails to maintain at least $10 million of Key-Man
Life Insurance on the President and Chief Executive Officer of the Company,
each shareholder of record of Series A Shares will have the right to cause the
company to redeem at the option of the shareholder all or part of the
shareholder's outstanding Series A Shares by paying cash of $1.00 per share
plus any dividends accrued.
Series A shareholders have one vote for each full common share into which
a Series A share would be convertible.
In conjunction with the Securities Purchase Agreement, the Company issued
both Class A Warrants and Class B Warrants to purchase 1,320,904 shares of the
Company's common stock, par value $.01 per share, at $7.62 and $11.42 per
share, respectively. Such warrants are immediately exerciseable and expire on
February 25, 2003. No value has been attributed to the Class A and Class B
warrants based upon an independent valuation of the securities.
(6) Stock Option Plan
1995 Stock Option Plan--amended
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the board of directors in December 1996. Under
the Amended Plan, the board of directors may issue incentive stock options or
non-qualified stock options to purchase up to 217,500 common shares. Incentive
stock options may be granted
F-21
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
to officers who are employees of the Company, Directors of the Company and
other employees of the Company who are deemed to be "key employees." Incentive
stock options must be issued at the fair market value of the Company's common
stock at the date the option is issued. Non-qualified stock options may be
granted to officers, directors, other employees, consultants and advisors of
the Company. The option price for non-qualified stock options shall be at least
85% of the fair market value of the Company's common stock. The granted options
under the amended plan shall be for periods not to exceed ten years. Options
granted to shareholders who own greater than 10% of the outstanding stock must
be issued at 110% of the fair market value of the stock on the date the options
are granted. Subsequent to December 31, 1997, the Amended Plan was replaced by
the 1998 Stock Incentive Plan (see below).
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $2.56, $9.28 and, $1.60, respectively, on the date of
grant using the Black-Scholes method with the following weighted-average
assumptions: 1995--risk-free interest rate 6.39%, and an expected life of two
years; 1996--risk-free interest rate 6.18%, and an expected life of three
years; and 1997--risk-free interest rate 5.64%, and an expected life of two
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying financial statements.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss:
As reported ......... $ (1,168,144) $ (6,795,675) $ (5,305,828)
Pro forma ........... (1,179,998) (6,838,920) (5,322,570)
Net loss per share:
As reported ......... $ (2.78) $ (6.48) $ (4.88)
Pro forma ........... (2.80) (6.52) (4.90)
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
average
Options exercise
granted price
------------ ---------
<S> <C> <C>
Outstanding at December 31, 1994 ............... -- $ --
Granted ........................................ 64,425 3.08
Exercised ...................................... -- --
Canceled ....................................... -- --
------ ------
Outstanding at December 31, 1995 ............... 64,425 3.08
Granted ........................................ 56,889 11.28
Exercised ...................................... -- --
Canceled ....................................... (13,017) 5.12
------- ------
Outstanding at December 31, 1996 ............... 108,297 7.16
Granted (a) .................................... 207,797 1.60
Exercised ...................................... --
Canceled ....................................... (22,783) 6.44
------- ------
Outstanding at December 31, 1997 ............... 293,311 $ 3.72
======= ======
Vested at December 31, 1997 .................... 132,373
=======
Options available at December 31, 1997 ......... --
=======
</TABLE>
F-22
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
(a) At December 31, 1997, the total number of options outstanding for
purchase of common shares under the Amended Plan exceeded the options
available for issuance. Subsequent to December 31, 1997, the Company
replaced the Amended Plan with the 1998 Stock Incentive Plan (see below)
and increased the number of shares available under the plan to a maximum
of 3,000,000.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ------------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.60-1.72 264,918 7.1 years $ 1.60 105,230 $ 1.60
4.00-5.16 9,464 2.1 years 4.92 8,214 5.04
8.00-11.92 18,929 3.3 years 10.80 18,929 10.80
------- -------
293,311 132,373
======= =======
</TABLE>
1998 Stock Incentive Plan
On February 13, 1998, the board of directors and stockholders of the
Company approved the 1998 Stock Incentive Plan (the Plan). The following is a
summary of the material features of the Plan. This Plan replaces the 1995 Stock
Option Plan--Amended.
All employees of and consultants to the Company are eligible under the
Plan. Eligibility under the Plan shall be determined by the Stock Incentive
Committee. The Plan provides for the grant of any or all of the following types
of awards: (i) stock options, including incentive stock options and
non-qualified stock options; (ii) stock appreciation rights, in tandem with
stock options or free standing; and (iii) restricted stock. In addition, the
Plan provides for the one-time non-discretionary award of stock options to
non-employee directors of the Company.
A maximum of 3,000,000 shares of Common Stock may be issued or used for
reference purposes pursuant to the Plan. The maximum number of shares of Common
Stock subject to each of stock options or stock appreciation rights that may be
granted to any individual under the Plan is 187,500 for each fiscal year during
the term of the Plan. If a stock appreciation right is granted in tandem with a
stock option, it shall be applied against the individual limits for both stock
options and stock appreciation rights, but only once against the maximum number
of shares available under the Plan.
Subsequent to December 31, 1997, the Company granted a total of 833,554
stock options; 440,750 of such were at an exercise price of $4.00 per share,
180,000 of such were granted at an exercise price of $6.00 per share and
212,804 of such were assumed as a result of the acquisition of Intelligent
Interactions at exercise prices ranging from $0.16 to $0.48 per share.
The Company also expects to record a deferred compensation charge of
approximately $314,000 in the second quarter of 1998, in connection with the
grant of certain stock options to employees, representing the difference
between the deemed fair value of the Company's Common Stock for accounting
purposes and the exercise price of such options at the date of grant. Such
amount will be presented as reduction of stockholders' equity (deficit) and
amortized over the vesting period of the applicable options, generally over
four years. The Company granted approximately 300,000 options at a weighted
average exercise price of $5.74 per share. Amortization of deferred stock
compensation will be allocated to general and administrative expense in the
statement of operations.
(7) Major Contracts
In November 1996, the Company entered into an agreement with SegaSoft to
license the rights to its registration-driven ad targeting software. The
contract term was for two years from the earlier of the first commercial use of
SegaSoft's Heat Network or August 1, 1997. The Company accounted for the
SegaSoft agreement in
F-23
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(7) Major Contracts--Continued
accordance with Statement of Position 91-1," Software Revenue Recognition. The
Company received license fees of $1.8 million, of which $1.2 million was
received by December 31, 1996. In addition, the Company received a $300,000
non-refundable consulting retainer fee in November 1996. This fee, plus an
additional $100,000 credit, was applied against consulting service fees for
design modifications to the software for the SegaSoft Heat Network, which were
recognized as revenues as services were performed. The Company accounted for
the majority of the license fee, or $1.3 million, as performance occurred over
the period during which the licensed software was transferred to SegaSoft and
modified to perform to SegaSoft's specifications. The period in which the fees
associated with software license transfer and consulting services both
commenced in November 1996 and concluded in August 1997. For the years ended
December 31, 1996 and 1997 and for the three months ended March 31, 1998, the
Company recorded approximately $429,000, $1,681,000 and $0 in revenue,
respectively, the cost of sales associated with the Segasoft consulting and
license fee were $9,800, and $57,400 and $0, respectively for all periods
presented.
During 1996, the Company entered into an agreement with SegaSoft for
advertising on the Company's ContentZone Websites and/or Riddler.com. The term
of the contract was for one year from the date of signing. The Company received
a prepayment in full for $540,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $212,000 and $326,000 in
revenue, respectively.
During 1996, the Company entered into an agreement with Microsoft
Corporation for advertising on the Company's ContentZone Websites. The term of
the contracts was for one year from the date of signing. The Company received a
prepayment in full for $150,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $75,000 and $75,000 in
revenue, respectively.
(8) Supplemental Cash Flow Information
Supplemental disclosure of cash flow information:
During 1996, 1997 and 1998, the amount of cash paid for interest was
$27,535, $0 and $0, respectively.
Non-cash financing activities:
During 1996, the Company converted $1.5 million of mandatory conversion
subordinated notes into Preferred Shares.
During 1997, the Company converted $94,757 of senior convertible notes
into common stock.
For the three months ended March 31, 1998, the Company converted 158,144
shares of convertible preferred stock into 542,908 shares of common stock,
converted $2,056,250 of senior convertible notes payable--related parties, plus
accrued interest, into 750,586 shares of Common Stock and outstanding warrants
were converted into 99,119 shares of Common Stock. Additionally, for the three
month period ended March 31, 1998, the Company recorded imputed interest
payable on loans payable--related party of $9,000. The Company issued 2,623,591
and 1,705,334 shares of common stock in connection with the Petry and Advercomm
acquisitions respectively.
In February 1998, the Company issued warrants to a former officer for
$450,000 (see Note 4).
(9) Commitments
The Company leases its facilities and certain equipment under operating
lease agreements. During May 1996, the Company converted its New York office
lease agreements to a month-to-month basis for approximately 11,000 square feet
of office space. Rental expense from operating leases amounted to $31,000,
$175,000, $183,000 and $26,000 for the years ended 1995, 1996 and 1997 and for
the three month period ended March 31, 1998, respectively.
F-24
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(9) Commitments --Continued
On June 1, 1996, the Company entered into an eighteen-month operating
lease for the use of computer equipment with a fair market value of
approximately $852,000. The lease requires six quarterly payments of $163,420
beginning on June 1, 1996. In October 1997, the lease agreement was modified
and as a result the quarterly payments were adjusted to $45,935 through the
extended term of the lease, November 30, 1998. Rent expense for the operating
lease was $381,313 and $611,637 for the years ended 1996 and 1997,
respectively.
Future minimum payments under noncancelable operating leases at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Operating
Year ending December 31 leases
- ----------------------- ----------
<S> <C>
1998 ........................................ $271,000
1999 ........................................ 128,000
2000 ........................................ 23,000
2001 ........................................ 1,000
--------
Total minimum payments required ......... $423,000
========
</TABLE>
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
In 1998, the Company entered into a lease agreement for space rental at
its new corporate headquarters for a period of 5 years. The Company's annual
lease expense for this office space will be approximately $1.2 million. The
Company expects to incur approximately $1 million in leasehold improvements in
connection with the new office space.
On May 14, 1998 and July 7, 1998, the Company entered into two operating
leases for computer equipment and software related to its Adfinity[TM] system,
with a combined fair market value of $849,488. The operating lease as, amended,
requires monthly payments and expires in September, 2001. Total rent expense
for currently outstanding leases is expected to be approximately $90,500 per
quarter.
On May 1, 1998 the Company entered into a one year operating lease for
space to house its Adfinity system, including leasing telephone equipment to
transmit data. Monthly rent expense is $27,000.
In connection with the stock purchase agreement to acquire Petry, the
Company is obligated to pay a related party a royalty of 5% of the gross
commissions or other revenues received by the Company, after deducting
advertising agency commissions and web-site royalties. Total royalties to be
paid will not exceed $1,000,000. Payment of the royalty amount commences upon
full repayment of the loan payable--related party (see note 4). As of March 31,
1998, the Company had accrued $46,149 in royalty payments which are included in
other long-term liabilities.
(10) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity. During 1997, the Company
successfully defended claims against the Company; however, legal costs incurred
in connection with such claims amounted to $232,304.
F-25
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(11) Subsequent Events--Unaudited
Intelligent Interactions Acquisition
During April 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger") to acquire all of the outstanding stock of Intelligent
Interactions.
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 16.3 shares of common stock, 2.3
Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of the Company.
Therefore, the Company issued 949,242 shares of common stock, 265,152 of Class
A Warrants, 265,152 of Class B Warrants and 136,553 of Class C Warrants. The
warrants have exercise prices of $7.62, $11.42 and $3.81 per share,
respectively, and expire in five years. The Company's Class A, B, and C
Warrants were determined to have a fair value of $0, $0, and $0.72 per share,
respectively, using the Black-Scholes Option Model and supported by an
independent valuation of the Warrants issued in the transaction. Additionally,
the Company assumed 212,804 stock options for the purchase of Common Stock in
accordance with the Merger. The stock options have an exercise price ranging
from $0.16 to $0.48, as defined in the Merger Agreement, and expire no later
than 10 years.
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7
Class B Warrants and 1.4 Class C Warrants of the Company. Total Mandatorily
Redeemable Convertible Preferred Shares issued were 3,561,505 shares which
convert into 0.2626 shares of the Company's Common Stock, or 935,269 shares of
Common Stock, on an as if converted basis. Each shareholder of record of the
Mandatorily Redeemable Convertible Shares will have the right to cause the
Company to redeem at the option of shareholder or part of the shareholder's
outstanding shares by paying cash of $1.00 per share plus accrued dividends no
later than the fifth anniversary of the original issue date. The convertible
note payable was also converted into Mandatorily Redeemable Convertible
Preferred Stock--Series A and detachable warrants were terminated as a result
of the merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 16 shares
of common stock of the Company under the terms and pursuant to the conditions
of the Company's 1998 Stock Incentive Plan.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the total purchase price of $7,670,500 will be
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the acquisition date.
Approximately $(154,200) of the aggregate purchase price is expected to be
allocated to net tangible liabilities consisting primarily of cash, accounts
receivable, property and equipment, accounts payable and accrued liabilities.
The historical carrying amounts of such net liabilities approximate their fair
values. Based upon an independent appraisal, which takes into account
replacement cost of assets, market multiples and present value of future
after-tax earnings, approximately $5,477,300 is expected to be allocated to
in-process technology and will be immediately charged to operations because
such in-process technology have not reached the stage of technological
feasibility at the acquisition dates and have no alternative future use. The
purchase price in excess of identified tangible and intangible assets and
liabilities assumed in the amount of $2,347,400 is expected to be allocated to
goodwill and will be amortized over its estimated useful life of two years.
The fair value of the Company's equity securities issued as consideration
for the Intelligent Interactions acquisition was determined based upon a number
of factors, including the sale of 10,060,002 shares of Mandatorily Convertible
Redeemable Preferred Stock-Series A on February 25, 1998 (excluding detachable
warrants) for $10,060,002 in cash. The fair value of the Company's Mandatorily
Convertible Redeemable Preferred Stock was estimated to be $1.06 per preferred
share ($4.24 per common share on an as if converted basis) and its Common Stock
at $4.00 per share. The higher fair value attributable to the Mandatorily
Convertible Preferred Shares versus Common Shares is due to the
F-26
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(11) Subsequent Events--Unaudited--Continued
convertible feature of the Preferred Shares. The preliminary fair value of
purchased existing and in-process technologies were determined by management
using a risk-adjusted income valuation approach.
CliqNow! Acquisition
As of June 1, 1998, the Company acquired the CliqNow! division of K2
Design, Inc., an Internet advertising network comprised of medium to large
Websites organized into eight topical channels, for $4,295,000, with $1,295,000
payable in cash and $3,000,000 payable in Series B Convertible Redeemable
Preferred Stock. The Company issued 3,000 shares of Preferred Stock which, by
its terms, automatically convert into Common Stock upon consummation of the
Offering at the IPO price, net of the underwriting discount which was deemed to
be the fair value of the securities.
(12) Initial Public Offering and Related Transactions (Unaudited)
The Company is offering 3,250,000 shares of its common stock, par value
$.01 per share in an initial public offering (the "Offering") at an estimated
offering price of $13.00 per share.
(13) Stock Split (Unaudited)
On July 20, 1998, the Company effected a 1-for-4 reverse stock split.
Accordingly, all references in the financial statements to the number of shares
and to per share amounts have been retroactively restated to reflect these
changes.
F-27
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
During the period from January 1, 1998 through June 1, 1998, the Company
acquired four entities (the "Acquired Entities") in separate transactions in
exchange for securities of the Company. The Acquired Entities are as follows:
<TABLE>
<CAPTION>
PRELIMINARY PURCHASE PRICE ALLOCATION
-----------------------------------------------
NET
TANGIBLE IN-PROCESS
EFFECTIVE ACQUISITION ASSETS RESEARCH AND INTANGIBLES/
ACQUIRED ENTITY DATE COSTS(1) (LIABILITIES)(2) DEVELOPMENT GOODWILL
- -------------------------- ------------------- ------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Petry February 24, 1998 $ 4,292,800 $ (1,050,600) $ -- $ 5,343,400
Advercomm February 24, 1998 2,790,500 85,400 -- 2,705,100
Intelligent Interactions April 13, 1998 7,670,500 (537,900) 5,477,300 2,731,100
CliqNow! June 1, 1998 4,390,800 (300) -- 4,391,100
----------- ------------ ---------- -----------
$19,144,600 $ (1,503,400) $5,477,300 $15,170,700
=========== ============ ========== ===========
</TABLE>
- ------------
(1) Includes acquisition costs of $253,000
(2) As of March 31, 1998 for Intelligent Interactions and CliqNow! Net tangible
assets (liabilities) as of the actual acquisition dates will vary based upon
operations of the acquired companies between March 31, 1998 and the
effective date of acquisition.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, each purchase price has been or will be allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates. The
preliminary allocation of the purchase price of the Acquired Entities may be
subject to change depending upon the final outcome of valuations and
appraisals. For pro forma purposes, the Company has assumed that the historical
carrying amounts of such assets and liabilities approximated their fair values.
The remaining purchase price of each of the Acquired Entities in excess of
identified tangible and intangible assets as noted above is expected to be
allocated to goodwill and is being amortized on an entity by entity basis over
its estimated useful life of two years.
On February 25, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 2,623,591 and
1,705,334 shares of the Company's Common Stock, respectively, for a total
purchase price of $4,197,800 and $2,728,500, respectively, plus acquisition
costs of $157,000. The fair value of the 4,328,925 aggregate shares of Common
Stock issued in connection with the acquisition of Petry and Advercomm was
estimated to be $1.60 per share, determined primarily by reference to the
common stock conversion price of $1.60 per share in connection with the
Company's issuance of approximately $1,000,000 senior convertible notes payable
and detachable warrants during September and November 1997 and supported by an
independent valuation of the Company's Common Stock as of February 25, 1998.
During April 1998, the Company entered into an Agreement and Plan of
Merger to acquire all of the outstanding stock of Intelligent Interactions.
Upon consummation of the merger, Intelligent Interactions outstanding Common
Stock was converted into approximately 949,242 shares of the Company's Common
Stock, 3,561,505 shares of Mandatorily Redeemable Convertible Preferred Shares
which convert into 0.2626 shares of the Company's Common Stock, or 935,269
shares of Common Stock on an as if converted basis, and 265,212, 265,212 and
136,553 of Class A, B and C Warrants, to purchase Common Stock at exercise
prices of $7.62, $11.42 and $3.81, respectively, for a total purchase price of
$7,670,500.
The fair value of the Company's equity securities issued as consideration
for the Intelligent Interactions acquisition was determined based upon a number
of factors, including the sale of 10,060,002 shares of Mandatorily Redeemable
Convertible Preferred Stock-Series A on February 25, 1998 (excluding detachable
warrants) for $10,060,002 in cash. The fair value of the Company's Mandatorily
Convertible Redeemable Preferred Stock was estimated to be $1.06 per preferred
share ($4.24 per common share on an as if converted basis) and its Common Stock
at $4.00 per share. The higher fair value attributable to the Mandatorily
Convertible Preferred Shares versus Common Shares is due to the
F-28
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--Continued
OVERVIEW--Continued
convertible and liquidation features of the Preferred Shares. The Company's
Class A, B, and C Warrants were determined to have a fair market value of $0,
$0, and $0.72 per share using the Black-Scholes Option Model and supported by
an independent valuation of the Warrants issued in the transaction.
Approximately $5,477,300 of the purchase price of Intelligent Interactions is
expected to be allocated to in-process technology. Because such in-process
technology had not reached the stage of technological feasibility at the
acquisition date and had no alternative future use, this amount will be
immediately written-off by the Company and has been reflected in the pro forma
balance sheet as a charge to stockholders' equity (deficit). The preliminary
fair value of purchased existing and in-process technologies were determined by
management using a risk-adjusted income valuation approach.
On June 1, 1998, the Company acquired CliqNow! for cash of $1,295,000 and
$3 million of the Company's Series B Preferred Stock (plus acquisition costs of
approximately $96,000) for a total price of $4,390,800. The Company issued
3,000 shares of Series B Preferred Shares which convert into $3,000,000 of
Common Stock at the initial public offering price, net of a 7% underwriting
discount, which for purposes of this pro forma, converts into 248,139 shares of
Common Stock. The preferred stock converts to Common Stock automatically upon
consummation of the Offering at a conversion price equal to the per share
proceeds from the Offering which was deemed to be the fair value of the
securities.
The following unaudited pro forma consolidated statements of operations
give effect to these acquisitions as if they had occurred on January 1, 1997
(or date of inception, if later) by consolidating the results of operations of
the Acquired Entities with the results of operations of 24/7 Media for the year
ended December 31, 1997 and the three months ended March 31, 1998. The pro
forma adjustments include the elimination of all intercompany transactions.
Advercomm was incorporated in November 1997 and had no operations in 1997;
however, the operation of Advercomm's network based advertising services
commenced on February 1, 1998; accordingly, Advercomm results of operations are
only included in the pro forma statement of operations for the period from
February 1, 1998 to February 24, 1998. The unaudited pro forma consolidated
statements of operations do not give effect to the conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock into
3,825,215 shares of Common Stock and the conversion of its senior convertible
notes payable into 77,450 shares of Common Stock prior to the closing of this
Offering.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The unaudited pro forma consolidated balance sheet gives effect to the
acquisitions of Intelligent Interactions and CliqNow! as if these acquisitions
had occurred on March 31, 1998. The Company's historical consolidated balance
sheet as of March 31, 1998 includes the February 25, 1998 acquisition of Petry
and Advercomm. See Notes 1 and 11 to the Consolidated Financial Statements. The
unaudited pro forma consolidated balance sheet as adjusted for IPO Conversions
gives effect to the conversion of all outstanding shares of mandatorily
redeemable convertible preferred stock into 3,825,215 shares of Common Stock
and the conversion of its senior convertible notes payable into 77,450 shares
of Common Stock prior to the closing of this Offering.
The historical financial statements of the Company, Petry, Intelligent
Interactions and CliqNow! are included elsewhere in this Prospectus and the
unaudited pro forma consolidated financial information presented herein should
be read in conjunction with those financial statements and related notes.
F-29
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------
24/7 Media, Inc.
(successor company
to Interactive Petry
Imaginations, Inc.) Interactive, Inc.
--------------------- -------------------
<S> <C> <C>
Revenues:
Advertising ....................................... $ 1,467,105 $ 1,269,261
Consulting and license fees ....................... 1,681,464 --
------------ ------------
Total revenues ................................... 3,148,569 1,269,261
Cost of revenues ................................... 1,655,340 1,174,594
------------ ------------
Gross profit 1,493,229 94,667
------------ ------------
Operating expenses:
Sales and marketing ............................... 1,672,999 1,730,511
General and administrative ........................ 2,622,743 1,245,373
Product development ............................... 1,417,750 --
Other expenses .................................... 989,099 --
Amortization of goodwill .......................... -- --
------------ ------------
Total operating expenses ......................... 6,702,591 2,975,884
------------ ------------
Operating loss ..................................... (5,209,362) (2,881,217)
Interest (expense) income, net ..................... (96,466) (6,000)
------------ ------------
Net loss .......................................... (5,305,828) (2,887,217)
Cumulative dividends on mandatorily convertible
preferred stock .................................. -- --
Net loss attributable to common stockholders ...... $ (5,305,828) $ (2,887,217)
============ ============
Basic net loss per share (F) ..................... (4.88)
Shares outstanding (F) ........................... 1,086,614
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------------------------
Pro forma Pro forma
Intelligent Acquisition consolidated
Interactions Corp. CliqNow! Adjustments 24/7 Media, Inc.
-------------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ....................................... -- $ 896,427 -- $ 3,632,793
Consulting and license fees ....................... $ 65,432 -- -- 1,746,896
------------ ---------- ----------- -------------
Total revenues ................................... 65,432 896,427 -- 5,379,689
Cost of revenues ................................... -- 479,742 -- 3,309,676
------------ ---------- ----------- -------------
Gross profit 65,432 416,685 -- 2,070,013
------------ ---------- ----------- -------------
Operating expenses:
Sales and marketing ............................... 1,249,910 417,093 -- 5,070,513
General and administrative ........................ 1,055,589 461,755 -- 5,385,460
Product development ............................... 327,995 -- -- 1,745,745
Other expenses .................................... -- -- -- 989,099
Amortization of goodwill .......................... -- -- 5,670,689(A) 5,670,689
------------ ---------- ----------- -------------
Total operating expenses ......................... 2,633,494 878,848 5,670,689 18,861,506
------------ ---------- ----------- -------------
Operating loss ..................................... (2,568,062) (462,163) (5,670,689) (16,791,493)
Interest (expense) income, net ..................... 6,861 -- -- (95,605)
------------ ---------- ----------- -------------
Net loss .......................................... (2,561,201) (462,163) (5,670,689) (16,887,098)
Cumulative dividends on mandatorily convertible
preferred stock .................................. -- -- (546,000)(C) (546,000)
Net loss attributable to common stockholders ...... $ (2,561,201) $ (462,163) $(6,216,689) $ (17,433,098)
============ ========== =========== =============
Basic net loss per share (F) ..................... $ (3.92)
Shares outstanding (F) ........................... 4,443,053
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-30
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
--------------------------------------------------------------
24/7 Media, Inc.
(successor company
to Interactive Petry
Imaginations, Inc.) Interactive, Inc. Advercomm, Inc.(1)
--------------------- ------------------- --------------------
<S> <C> <C> <C>
Revenues:
Advertising ......................... $ 1,076,250 $ 747,059 $23,439
Consulting and license fees ......... -- -- --
------------ ---------- -------
Total revenues ..................... 1,076,250 747,059 23,439
Cost of revenues ..................... 930,003 650,030 15,046
------------ ---------- -------
Gross profit (deficit) ............. 146,247 97,029 8,393
------------ ---------- -------
Operating expenses:
Sales and marketing ................. 653,460 298,430 --
General and administrative .......... 1,288,012 233,205 3,126
Product development ................. -- -- --
Other expenses ...................... -- -- --
Amortization of goodwill ............ 335,355 -- --
------------ ---------- -------
Total operating expenses ........... 2,276,827 531,635 3,126
------------ ---------- -------
Operating loss ....................... (2,130,580) (434,606) 5,267
Interest (expense) income:
Interest income ..................... 25,504 -- --
Interest expense .................... (192,762) (6,000)
------------ ---------- -------
Total interest (expense) income (167,258) (6,000) --
------------ ---------- -------
Net loss ........................... (2,297,838) (440,606) 5,267
Cumulative dividends on
mandatorily convertible
preferred stock .................... (33,500) -- --
------------ ---------- -------
Net loss attributable to common
stockholders ....................... $ (2,331,338) $ (440,606) $ 5,267
============ ========== =======
Basic net loss per share (F) ....... (0.76)
============
Shares outstanding (F) ............. 3,055,432
============
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------
Pro forma Pro forma
Intelligent Acquisition consolidated
Interactions Corp. CliqNow! Adjustments 24/7 Media, Inc.
-------------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ......................... -- $ 500,559 -- $ 2,347,307
Consulting and license fees ......... $ 88,362 -- -- 88,362
---------- --------- ---------- ------------
Total revenues ..................... 88,362 500,559 -- 2,435,669
Cost of revenues ..................... 13,200 284,452 -- 1,892,731
---------- --------- ---------- ------------
Gross profit (deficit) ............. 75,162 216,107 -- 542,938
---------- --------- ---------- ------------
Operating expenses:
Sales and marketing ................. 226,548 122,198 -- 1,300,636
General and administrative .......... 221,168 143,365 -- 1,888,876
Product development ................. 66,738 -- -- 66,738
Other expenses ...................... -- -- -- --
Amortization of goodwill ............ -- -- 1,363,402(A) 1,698,757
---------- --------- ---------- ------------
Total operating expenses ........... 514,454 265,563 1,363,402 4,955,007
---------- --------- ---------- ------------
Operating loss ....................... (439,292) (49,456) (1,363,402) (4,412,069)
Interest (expense) income:
Interest income ..................... -- -- -- 25,504
Interest expense .................... (5,434) (204,196)
---------- --------- ---------- ------------
Total interest (expense) income (5,434) -- -- (178,692)
---------- --------- ---------- ------------
Net loss ........................... (444,726) (49,456) (1,363,402) (4,590,761)
Cumulative dividends on
mandatorily convertible
preferred stock .................... -- -- (103,000)(C) (136,500)
---------- --------- ---------- ------------
Net loss attributable to common
stockholders ....................... $ (444,726) $ (49,456) $(1,466,402) $ (4,727,261)
========== ========= =========== ============
Basic net loss per share (F) ....... $ (0.75)
============
Shares outstanding (F) ............. 6,342,350
============
</TABLE>
(1) Represents Advercomm from February 1, 1998 (inception) to February 24, 1998
(date of merger).
See accompanying notes to Pro Forma Consolidated Financial Information.
F-31
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------
24/7 Media, Inc.
(successor company Intelligent
to Interactive Interactions
Imaginations, Inc.) Corp. CliqNow!
--------------------- --------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 7,764,695 $ 3,675 $ --
Accounts receivable, net .......................... 1,818,899 87,499 634,643
Prepaid expenses and other current assets ......... 52,296 13,568 12,250
-------------- ------------- --------
Total current assets .......................... 9,635,890 104,742 646,893
Property and equipment, net ....................... 630,652 129,451 36,574
Goodwill, net ..................................... 7,870,174 -- --
Deferred offering costs ........................... 13,148 -- --
Intangible assets, net ............................ 2,503 -- --
Deposits .......................................... 49,626 --
-------------- --------
Total assets .................................. $ 18,201,993 $ 234,193 $683,467
============== ============= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... -- 17,195 --
Accounts payable .................................. 813,518 121,801 183,051
Accrued liabilities ............................... 2,180,969 183,102 164,586
Loans payable--related party ...................... 283,267 -- --
Convertible note payable .......................... -- 450,000 --
Deferred revenue .................................. 41,000 -- 336,172
-------------- ------------- --------
Total current liabilities ..................... 3,318,754 772,098 683,809
Senior convertible notes payable--related
parties, net of debt discount .................... 479,408 -- --
Other liabilities ................................. 46,149 -- --
Mandatorily redeemable convertible
preferred stock .................................. 10,093,502 3,454,481 --
Stockholders' equity (deficit):
Convertible preferred stock ....................... -- -- --
Common stock ...................................... 69,267 2,412 --
Additional paid-in capital ........................ 19,919,169 135,690 --
Deferred stock compensation ....................... (87,500) -- --
Accumulated deficit ............................... (15,636,756) (4,130,488) (342)
-------------- ------------- --------
Total stockholders' equity (deficit) .......... 4,264,180 (3,992,386) (342)
-------------- ------------- --------
Commitments and contingencies
Total liabilities and stockholders' equity $ 18,201,993 $ 234,193 $683,467
============== ============= ========
<CAPTION>
Pro forma
Acquisitions Pro forma
Adjustments 24/7 Media, Inc.
---------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ (1,295,267)(B) $ 6,473,103
Accounts receivable, net .......................... -- 2,541,041
Prepaid expenses and other current assets ......... -- 78,114
------------- --------------
Total current assets .......................... (1,295,267) 9,092,258
Property and equipment, net ....................... -- 796,677
Goodwill, net ..................................... 4,391,142(B) 14,992,403
2,731,087(C)
Deferred offering costs ........................... -- 13,148
Intangible assets, net ............................ -- 2,503
Deposits .......................................... -- 49,626
------------- --------------
Total assets .................................. $ 5,826,962 $ 24,946,615
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... -- 17,195
Accounts payable .................................. -- 1,118,370
Accrued liabilities ............................... -- 2,528,657
Loans payable--related party ...................... -- 283,267
Convertible note payable .......................... (450,000)(C) --
Deferred revenue .................................. -- 377,172
------------- --------------
Total current liabilities ..................... (450,000) 4,324,661
Senior convertible notes payable--related
parties, net of debt discount .................... -- 479,408
Other liabilities ................................. -- 46,149
Mandatorily redeemable convertible 3,775,195 (C)
preferred stock .................................. 450,000 (C) 13,868,697
(3,904,481)(C)
Stockholders' equity (deficit):
Convertible preferred stock ....................... 30 (B) 30
Common stock ...................................... 9,492 (C) 78,759
(2,412)(C)
Additional paid-in capital ........................ 3,095,503 (B) 27,350,467
(135,690)(C)
3,787,476(C)
98,319(C)
450,000(C)
Deferred stock compensation ....................... -- (87,500)
Accumulated deficit ............................... 342 (B) (21,114,056)
4,130,488 (C)
(5,477,300)(C)
-------------
Total stockholders' equity (deficit) .......... 5,956,248 6,227,700
------------- --------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 5,826,962 $ 24,946,615
============= ==============
<CAPTION>
IPO Conversion Adjustments
-------------------------------------------
Conversion of
Mandatorily Pro forma
Redeemable, Conversion of 24/7 Media, Inc.
and Convertible Senior Convertible as adjusted
Preferred Stock Notes Payable for IPO Conversions
---------------------- -------------------- --------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 6,473,103
Accounts receivable, net .......................... 2,541,041
Prepaid expenses and other current assets ......... 78,114
----------- -------- --------------
Total current assets .......................... 9,092,258
Property and equipment, net ....................... 796,677
Goodwill, net ..................................... 14,992,403
Deferred offering costs ........................... 13,148
Intangible assets, net ............................ 2,503
Deposits .......................................... 49,626
----------- -------- --------------
Total assets .................................. $ 24,946,615
----------- -------- ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... 17,195
Accounts payable .................................. 1,118,370
Accrued liabilities ............................... 2,528,657
Loans payable--related party ...................... 283,267
Convertible note payable .......................... --
Deferred revenue .................................. 377,172
----------- -------- --------------
Total current liabilities ..................... 4,324,661
Senior convertible notes payable--related
parties, net of debt discount .................... (479,408)(E) --
Other liabilities ................................. 46,149
Mandatorily redeemable convertible
preferred stock .................................. (13,868,697)(D) --
Stockholders' equity (deficit):
Convertible preferred stock ....................... (30)(D) --
Common stock ...................................... 38,252 (D) 774 (E) 117,785
Additional paid-in capital ........................ 13,830,475 (D) 478,634 (E) 41,659,576
Deferred stock compensation ....................... (87,500)
Accumulated deficit ............................... (21,114,056)
----------- -------- --------------
Total stockholders' equity (deficit) .......... -- -- 20,575,805
----------- -------- --------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 24,946,615
----------- -------- ==============
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-32
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to the historical financial
statements of the Company and the Acquired Entities to arrive at the pro forma
consolidated financial information.
(A) To record amortization expense related to goodwill of the Acquired
Entities, which is amortized on an entity by entity basis, as if each
acquisition had occurred on January 1, 1997 (or inception, if later), over its
estimated useful life of two years.
(B) To give effect to the reduction of cash and issuance of $3 million of
Series B Preferred Stock, plus acquisition costs of $95,533, associated with
the CliqNow! acquisition, to record goodwill associated with the acquisition,
as if the acquisition had occurred on March 31, 1998, and to eliminate
CliqNow!'s net deficit balance using the purchase method of accounting.
(C) To (i) record goodwill associated with the acquisition of Intelligent
Interactions, as if the acquisition had occurred on March 31, 1998, (ii) record
an increase in accumulated deficit in connection with Intelligent Interactions'
write-off of acquired in-process technology of $5,477,300, (iii) record the
issuance of 949,242 shares of Common Stock at $4.00 per Common Share for a
total value of $3,796,968 with a par share value of $9,492 and 3,561,505 shares
of Mandatorily Redeemable Convertible Preferred Stock at $1.06 per preferred
share for a total value of $3,775,195, plus 265,212, 265,212 and 136,553 of
Class A , B and C Warrants with a fair value of $0, $0 and $.72 per share,
respectively, for a total value of $98,319, in exchange for all of Intelligent
Interactions' issued and outstanding shares of common and preferred stock, (iv)
give effect to the April 1998 conversion of Intelligent Interactions' $450,000
Convertible Note Payable and accrued interest into 22,432 shares of Intelligent
Interactions' Mandatorily Redeemable preferred stock at the price per share at
which preferred shares were issued to other Intelligent Interactions preferred
shareholders prior to the acquisition, which 22,432 shares were exchanged for
405,221 of the Company's Preferred Stock, and is included in the number of
shares of the Company's Preferred Stock reflected in (iii) above, (v) give
effect to the cumulative dividends at a rate of $0.04 per share per annum on
all of the Mandatorily Redeemable Convertible Preferred Stock, as if it had
been outstanding as of January 1, 1997, and (vi) to eliminate Intelligent
Interactions historical Mandatorily Redeemable Convertible Preferred Stock,
Common Stock, additional paid-in capital and stockholders' deficit using the
purchase method of accounting. The valuation of the write-off of in-process
technology in the amount of $5,477,300 in connection with the acquisition of
Intelligent Interactions is based on an independent appraisal which determined
that the Adfinity technology acquired from Intelligent Interactions had not
been developed into the platform required by the Company at the date of
acquisition. As a result, the Company will be required to expend significant
capital expenditures to successfully integrate and develop the Adfinity
technology, for which there is considerable risk that such technology will not
be successfully developed, and if such technology is successfully developed,
there will be no alternative use for the technology.
(D) To give effect to the conversion of 13,621,507 outstanding shares of
24/7 Media's mandatorily redeemable convertible preferred stock which convert
into 0.2626 shares of Common Stock (3,577,077 common shares on an as if
converted basis) (including 935,269 common shares issued in connection with the
Intelligent Interactions acquisition on as as if converted basis and 2,641,807
common shares issued in connection with the Initial Merger on an as if
converted basis) and 3,000 shares of Series B Preferred Stock (representing
248,139 common shares issued in connection with the CliqNow! acquisition on an
as if converted basis) into 3,825,215 shares of Common Stock in the aggregate
which, by their terms, are required to be converted automatically immediately
prior to the closing of this Offering.
(E) To give effect to the conversion of senior convertible notes payable
with a face value of $500,000, including interest thereon plus outstanding
warrants, for 77,450 shares of Common Stock in July 1998. In June 1998, in
connection with the proposed initial public offering by the Company, the
Company issued a notice of mandatory redemption notice to the sole holder of
the $500,000 Senior Convertible Notes Payable. As a result, the holder elected
to convert such notes, due to the pending Offering, into 77,450 shares of
Common Stock based upon its conversion price, after giving effect to
anti-dilution provisions.
F-33
<PAGE>
(F) The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting
Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. The weighted average common
shares used to compute pro forma basic net loss per share includes the actual
weighted average common shares outstanding for the historical year ended
December 31, 1997 and for the historical three months ended March 31, 1998,
respectively, plus the common shares issued in connection with the acquisition
of each of the Acquired Companies from January 1, 1997 or inception of
operations of the acquired companies, if later. The common stock issued in
connection with the acquisition of each of the acquired companies were as
follows: Intelligent Interactions' 949,242 shares, as if the acquisition
occurred on January 1, 1997; Petry's 2,623,591 shares based on the February 1,
1997 date of inception of operations and Advercomm's 1,705,334 shares based on
the February 1, 1998 date of inception of operations, all of which were
adjusted for the weighted average period such shares were considered to be
outstanding. The computation does not give effect to the conversion of the IPO
Conversion Adjustments noted in (D) and (E) above for the year ended December
31, 1997 and for the three months ended March 31, 1998. In addition, diluted
net loss per share is not presented as the inclusion of common stock issuable
upon exercise of employee stock options and upon exercise of outstanding
warrants is antidilutive.
In future periods, the weighted average shares used to compute diluted
earnings per share will include the incremental shares of Common Stock relating
to outstanding options and warrants to the extent such incremental shares are
dilutive.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of Interactive Holdings, LLC
(successor to Petry Interactive, Inc.)
We have audited the accompanying balance sheet of Interactive Holdings,
LLC (successor to Petry Interactive, Inc.) as of December 31, 1997 (Successor),
and the related statements of operations and cash flows for the period from
February 1, 1997 (inception) to September 28, 1997 (Predecessor) and for the
period from September 29, 1997 to December 31, 1997 (Successor). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interactive Holdings, LLC
as of December 31, 1997 (Successor), and the results of its operations and its
cash flows for the period February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor) in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, on September 29, 1997,
Interactive Holdings, LLC acquired Petry Interactive, Inc. As a result of the
change in control, the financial information for the period after the change in
control is presented on a different cost basis than that for the period before
the change in control and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998
F-35
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO PETRY INTERACTIVE, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
-------------
Successor
<S> <C>
ASSETS
Current Assets:
Cash ...................................................................... $ 117,849
Accounts receivable, net of allowance for doubtful accounts of $158,777 ... 803,089
Prepaid expenses and other current assets ................................. 6,449
----------
Total current assets .................................................. 927,387
----------
Other assets ................................................................. 5,000
----------
Total assets .......................................................... $ 932,387
==========
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities:
Loan payable--related party ............................................... $ 300,000
Accounts payable .......................................................... 8,875
Accrued liabilities ....................................................... 1,297,024
----------
Total current liabilities ............................................. 1,605,899
----------
Other long-term liabilities .................................................. 16,733
----------
Total liabilities ............................................................ 1,622,632
----------
Members' deficit:
Common Stock; $0.01 par value, 200,000 shares authorized, 100 shares issued
and outstanding .......................................................... 1
Paid in capital ........................................................... 6,000
Members' deficit .......................................................... (696,246)
----------
Total members' equity (deficit) ....................................... (690,245)
----------
Commitments and contingencies
Total liabilities and members' deficit ................................ $ 932,387
==========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO PETRY INTERACTIVE, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
<S> <C> <C>
Advertising revenue ..................... $ 514,982 $ 754,279
Cost of revenues ........................ 449,621 724,973
------------ ----------
Gross profit ..................... 65,361 29,306
------------ ----------
Operating expenses:
Sales and marketing .................. 1,306,125 424,386
General and administrative ........... 950,210 295,163
------------ ----------
Total operating expenses ......... 2,256,335 719,549
Interest expense ..................... -- 6,000
------------ ----------
Net loss ......................... $ (2,190,974) $ (696,243)
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO PETRY INTERACTIVE, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $ (2,190,974) $ (696,243)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................... 10,358 --
Provision for doubtful accounts ................................ 12,992 145,786
Imputed interest on loan payable--related party ................ 6,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable ........................................... (424,800) (410,861)
Prepaid assets and other current assets ....................... (5,490) (960)
Other assets .................................................. -- (5,000)
Accounts payable .............................................. 15,000 (6,125)
Accrued liabilities ........................................... 528,501 785,252
------------ ----------
Net cash used by operating activities ....................... (2,054,413) (182,151)
------------ ----------
Cash flows from financing activities:
Proceeds from loan payable--related party ....................... -- 300,000
Net cash transferred from--related party ........................ 2,180,617 --
------------ ----------
Net cash provided by financing activities ................... 2,180,617 300,000
------------ ----------
Net change in cash .......................................... 126,205 117,849
Cash at the beginning of period .................................... -- --
------------ ----------
Cash at end of period .............................................. $ 126,204 $ 117,849
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
Interactive Holdings, LLC. (the "Company") operates a network of Websites
that enables both advertisers and Web publishers to capitalize on the many
opportunities presented by Internet advertising, direct marketing and commerce.
The Company generates revenues by delivering advertisements and promotions to
Websites affiliated with the Company ("Affiliated Websites"). The Company was
formed on September 24, 1997, to acquire Petry Interactive, Inc., a wholly
owned subsidiary of Petry Media Corporation. The Company did not have any
operations prior to its acquisition of Petry Interactive, Inc. At the time of
its acquisition, Petry Interactive, Inc.'s operations consisted solely of a
network of Websites to which the Company delivered advertisements and
promotions.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
On February 24, 1998, the Company distributed all of the issued and
outstanding shares of Petry Interactive, Inc. to its members, and such shares
were exchanged by Interactive Holdings, LLC's members for 2,623,592 shares of
24/7 Media, Inc.'s stock under a Plan of Merger and Securities Purchase
Agreement.
(b) Basis of Presentation
On February 1, 1997, Petry Interactive commenced its Internet advertising
network solutions business (Predecessor). Predecessor financial statements
presented herein relate solely to that business. On September 29, 1997, the
Company entered into a Stock Purchase Agreement whereby all of the outstanding
shares of Petry Interactive, Inc. were purchased by the Company in exchange for
$100 in cash plus a warrant to purchase 20% of the Company for $0.25.
Accordingly, the statements of operations and cash flows for the period
February 1, 1997 (inception) to September 28, 1997 reflect the operations of
the Predecessor, and the balance sheet as of December 31, 1997 and the
statements of operations, members' deficit and cash flows for the period
September 29, 1997 to December 31, 1997 reflect the operations and financial
position under the ownership of the Company (Successor).
As a result of the change in control, the financial information for the
period after the change in control is presented on a different cost basis than
that for the period before the change in control and, therefore, is not
comparable.
The accompanying financial statements include certain corporate general
and administrative expenses incurred on a consolidated basis by PMC for the
period February 1, 1997 (inception) to September 28, 1997 that have been
allocated to the Company. Such allocations include corporate salaries, rent,
professional services and depreciation and are included in general and
administrative expenses in the Company's statement of operations. In
management's opinion, the basis for the allocation of such costs is reasonable
and is based upon a proportionate allocation of actual costs incurred using an
estimate of the amount of time spent and equipment and space used. However, the
expenses allocated to the Company, although made on a basis management believes
to be reasonable, may not necessarily be representative of what the Company
would have incurred on a stand alone basis.
F-39
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies--Continued
Allocated costs are as follows:
<TABLE>
<CAPTION>
Period from
February 1, 1997
(inception) to
September 28, 1997
-------------------
(Predecessor)
<S> <C>
Corporate salaries ................................. $534,686
Rent ............................................... 63,896
Professional services .............................. 23,594
Depreciation ....................................... 10,358
--------
$632,534
========
</TABLE>
The purchase of the Predecessor Interactive Holdings LLC was accounted for
using the purchase method of accounting. The estimated fair value of the net
assets acquired is as follows:
<TABLE>
<S> <C>
Accounts receivable, net .......................... $538,013
Prepaid and other current assets .................. 5,490
Accounts payable and accrued expenses ............. 543,502
</TABLE>
The estimated fair value of the net assets acquired was determined by
management by reference to the fair value of these instruments at the date of
purchase which approximated their financial statement carrying amount.
(c) Use of Estimates
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Income Taxes
For the period February 1, 1997 (inception) to September 28, 1997, federal
and state income taxes are provided as if the Company filed a separate tax
return. On a stand alone basis, the Company owes no current taxes and has not
been allocated any income tax expense (benefit) by PMC.
For the period September 29, 1997 to December 31, 1997, for federal and
state income tax purpose, the Company is treated as a partnership. The Company
incurred a net operating loss of $696,243 for the period, accordingly, no
provision has been made for income taxes, as income or loss is included in the
tax returns of the members.
(e) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page deliveries for a fixed fee to third-party Websites comprising the
Petry Network. For the period February 1, 1997 (inception) to September 28,
1997, revenues from advertising were recognized ratably over the term of the
agreement as services were performed. For the period from September 29, 1997,
to December 31, 1997, revenues from advertising are recognized in the period
the advertising impressions are delivered provided collection of the resulting
receivable is probable.
Third party Websites which register web page(s) with the Company's network
and display advertising banners on those pages are commonly referred to as
"Affiliated Websites." These third party Websites are not "related party"
F-40
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies--Continued
relationships or transactions as defined in Statement of Financial Accounting
Standards No. 57, "Related Party Disclosures." The Company pays its Affiliated
Websites a service fee for providing advertising space to the Petry Network.
The Company becomes obligated to make payments to such Affiliated Websites,
which have contracted with the Company to be part of the Petry Network, in the
period the advertising impressions are delivered. Such expenses are classified
as cost of revenues in the statements of operations.
At December 31, 1997, accounts receivable include approximately $500,700
of unbilled receivables for which revenue was recognized in 1997.
(f) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing in the statement of
operations and totaled $18,000 and $19,765 for the period February 1, 1997
(inception) to September 28, 1997 and for the period September 29, 1997 to
December 31 1997, respectively.
(g) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, accounts receivable,
accounts payable and accrued liabilities. At December 31, 1997 the fair value
of these instruments approximated their financial statement carrying amount.
Accounts receivable have been derived from advertising fees billed to
advertisers located in the United States. The Company generally requires no
collateral. The Company maintains reserves for potential credit losses. At
December 31, 1997, one customer accounted for over 10% of the Company's
accounts receivable, accounting for 12% of total receivables.
(2) Balance Sheet Components
Accrued Liabilities
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Affiliate royalties .................................. $ 684,532
Ad management fees ................................... 219,120
Employee commissions ................................. 203,729
Other ................................................ 189,643
----------
$1,297,024
==========
</TABLE>
(3) Loan Payable--Related Party
In connection with the Stock Purchase Agreement with PMC, dated September
29, 1997, PMC agreed to lend an aggregate of $300,000 during the period
September 29, 1997 to December 31, 1997. The loan is repaid at a rate of 5% of
the gross commissions or other revenues received by the Company, after
deducting advertising agency commissions and web-site royalties. The loan has
no stated interest and is expected to be paid within the next year.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%. For
the three month period ended December 31, 1997, interest expense was $6,000.
F-41
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Commitments
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company is obligated to pay PMC a royalty of 5% of the gross commissions or
other revenues received by the Company, after deducting advertising agency
commissions and web-site royalties. Total royalties to be paid will not exceed
$1,000,000. Any payments of the royalty amount commences upon full repayment of
the loan payable--related party (See note 3). As of December 31, 1997, the
Company had accrued $16,733 in royalty payments to PMC which are included in
other long-term liabilities.
(5) Legal Proceedings
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(6) Warrants
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company issued to PMC a warrant for 25 shares of common stock, $.01 par
value for $0.25. The warrant was exercised in connection with the February 1998
Plan of Merger and Securities Purchase Agreement (see Note 1).
F-42
<PAGE>
Report of Independent Public Accountants
To Intelligent Interactions Corporation:
We have audited the accompanying balance sheets of Intelligent
Interactions Corporation (a Delaware corporation in the development stage) as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for the period from inception (February
28, 1995) to December 31, 1995 and the years ended December 31, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligent Interactions
Corporation as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the period from inception to December 31, 1995 and the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
May 13, 1998
F-43
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------- ---------------
1996 1997 1998
------------- --------------- ---------------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 531,100 $ 423,548 $ 3,675
Accounts receivable .............................................................. -- 23,768 87,499
Other current assets ............................................................. 100 7,169 13,568
---------- ------------- -------------
Total current assets ........................................................... 531,200 454,485 104,742
---------- ------------- -------------
Property and equipment, at cost:
Computer equipment ............................................................... 93,243 151,163 151,163
Furniture and fixtures ........................................................... 2,329 16,648 16,648
Software ......................................................................... 2,656 22,714 22,714
---------- ------------- -------------
98,228 190,525 190,525
Less--Accumulated depreciation ................................................... (11,537) (46,073) (61,074)
---------- ------------- -------------
86,691 144,452 129,451
---------- ------------- -------------
Total assets ................................................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 27,298 $ 100,542 $ 121,801
---------- ------------- -------------
Accrued expenses ................................................................. 36,184 121,991 183,102
Line of credit ................................................................... -- 19,583 17,195
Note payable to officer .......................................................... 86,446 -- --
Convertible notes payable ........................................................ -- 450,000 450,000
Total current liabilities ...................................................... 149,928 692,116 772,098
Commitments (Note 5) ...............................................................
Convertible, redeemable preferred stock; $0.01 par value
Series A; 71,870 shares authorized; 71,870 issued and outstanding in 1996, 1997
and 1998, respectively; entitled to liquidation preference of $16.42 per share
plus unpaid dividends; 8% per annum ($1,209,075, $1,303,483 and $1,327,085
in the aggregate in 1996, 1997 and 1998, respectively) .......................... 1,209,075 1,303,483 1,327,085
Series A-1; 71,870 shares authorized; none issued or outstanding ................. -- -- --
Series AA; 54,150 shares authorized; 0 and 54,142 issued and outstanding in 1996
and in 1997 and 1998, respectively; entitled to liquidation preference of $18.47
per share plus unpaid dividends; 8% per annum ($1,056,447 and $1,076,447 in
the aggregate in 1997 and 1998, respectively) ................................... -- 1,056,447 1,076,447
Series AA-1; 54,150 shares authorized; none issued or outstanding ................ -- -- --
Series AAA; 78,304 shares authorized; 0 and 48,712 issued and outstanding in
1996 and in 1997 and 1998, respectively; entitled to liquidation preference of
$20.53 per share plus unpaid dividends; 8% per annum ($1,030,948 and
$1,050,949 in 1997 and 1998, respectively in the aggregate)...................... -- 1,030,948 1,050,949
Series AAA-1; 78,304 shares authorized; none issued or outstanding ............... -- -- --
---------- ------------- -------------
Total convertible, redeemable preferred stock value 1,209,075 3,390,878 3,454,481
---------- ------------- -------------
Stockholders' deficit:
Common stock; $0.01 par value; 930,000 shares authorized; 230,170 shares issued
and outstanding in 1996, 1997, and 1998, respectively ........................... 2,412 2,412 2,412
Additional paid-in capital ....................................................... 142,290 142,290 142,290
Treasury stock ................................................................... (6,600) (6,600) (6,600)
Deficit accumulated during the development stage ................................. (879,214) (3,622,159) (4,130,488)
---------- ------------- -------------
Total stockholders' deficit .................................................... (741,112) (3,484,057) (3,992,386)
---------- ------------- -------------
Total liabilities and stockholders' deficit .................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-44
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Revenues:
Consulting and license
fees and support ............... $ -- $ -- $ 65,432
Cost of revenues ................ -- -- --
---------- ---------- ------------
Gross profit ................. -- -- 65,432
Operating expenses:
Sales and marketing ............. -- 254,515 1,249,910
Product development ............. 21,964 92,280 327,995
General and
administrative ................. 133,238 350,368 1,055,589
---------- ---------- ------------
Total operating expenses ......... 155,202 697,163 2,633,494
---------- ---------- ------------
Loss from operations ............. (155,202) (697,163) (2,568,062)
Interest income (expense),
net ............................. 473 (1,438) 6,861
Other income ..................... -- 3,085 --
---------- ---------- ------------
Net loss ......................... (154,729) (695,516) (2,561,201)
Less dividends on
preferred stock ................. -- (28,969) (181,744)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (154,729) $ (724,485) $ (2,742,945)
========== ========== ============
<CAPTION>
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenues:
Consulting and license
fees and support ............... $ -- $ 88,362 $ 153,794
Cost of revenues ................ -- 13,200 13,200
---------- ---------- ------------
Gross profit ................. -- 75,162 140,594
Operating expenses:
Sales and marketing ............. 182,043 226,548 1,730,973
Product development ............. 91,386 66,738 508,977
General and
administrative ................. 250,165 221,168 1,760,363
---------- ---------- ------------
Total operating expenses ......... 523,594 514,454 4,000,313
---------- ---------- ------------
Loss from operations ............. (523,594) (439,292) (3,859,719)
Interest income (expense),
net ............................. 460 (5,434) 462
Other income ..................... -- -- 3,085
---------- ---------- ------------
Net loss ......................... (523,134) (444,726) (3,856,172)
Less dividends on
preferred stock ................. (23,602) (63,603) (274,316)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (546,736) $ (508,329) $ (4,130,488)
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-45
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholders'
Deficit
-------------------
Preferred Stock Common Stock
----------------------- -------------------
Shares Amount Shares Amount
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Inception, February 28, 1995 ....................... -- $ -- -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ -- -- 206,670 2,067
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... -- -- 14,500 145
Net loss .......................................... -- -- -- --
-- ---------- ------- ------
Balance, December 31, 1995 ......................... -- -- 221,170 2,212
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... -- -- 20,000 200
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ 71,870 1,180,106 -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- -- -- --
Accrued dividends on Preferred Stock .............. -- 28,969 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1996 ......................... 71,870 1,209,075 241,170 2,412
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ 54,142 1,000,002 -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... 48,712 1,000,057 -- --
Accrued Dividends on Preferred Stock .............. -- 181,744 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1997 ......................... 174,724 3,390,878 241,170 2,412
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- 63,603 -- --
Net loss (unaudited) .............................. -- -- -- --
------- ---------- ------- ------
Balance, March 31, 1998 (unaudited) ................ 174,724 $3,454,481 241,170 $2,412
======= ========== ======= ======
<CAPTION>
Stockholders' Deficit
------------------------------------------
Deficit
Accumulated
Additional During the
Paid-In Treasury Development
Capital Stock Stage
------------ ------------- ---------------
<S> <C> <C> <C>
Inception, February 28, 1995 ....................... $ -- $ -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ 121,935 -- --
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... 8,555 -- --
Net loss .......................................... -- -- (154,729)
-------- --------- ------------
Balance, December 31, 1995 ......................... 130,490 -- (154,729)
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... 11,800 -- --
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ -- -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- (6,600) --
Accrued dividends on Preferred Stock .............. -- -- (28,969)
Net loss .......................................... -- -- (695,516)
-------- --------- ------------
Balance, December 31, 1996 ......................... 142,290 (6,600) (879,214)
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ -- -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... -- -- --
Accrued Dividends on Preferred Stock .............. -- -- (181,744)
Net loss .......................................... -- -- (2,561,201)
-------- --------- ------------
Balance, December 31, 1997 ......................... 142,290 (6,600) (3,622,159)
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- -- (63,603)
Net loss (unaudited) .............................. -- -- (444,726)
-------- --------- ------------
Balance, March 31, 1998 (unaudited) ................ $142,290 $ (6,600) $ (4,130,488)
======== ========= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (154,729) $ (695,516) $ (2,561,201)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation ........................................ 2,185 9,352 34,536
Compensation expense on stock grants ................ 8,700 12,000 --
Changes in operating assets and liabilities:
Accounts receivable ................................ -- -- (23,768)
Other current assets ............................... (1,000) 900 (7,069)
Accounts payable and accrued expenses .............. 5,497 57,985 159,051
---------- ----------- ------------
Net cash used in operating activities ............. (139,347) (615,279) (2,398,451)
Cash flows from investing activities:
Purchases of property and equipment .................. (13,109) (85,119) (92,297)
---------- ----------- ------------
Net cash used in investing activities ............. (13,109) (85,119) (92,297)
Cash flows from financing activities:
Proceeds from sale of common stock ................... 124,002 -- --
Proceeds from sale of preferred stock ................ -- 1,180,106 2,000,059
Purchase of treasury shares .......................... -- (6,600) --
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... 10,000 (10,000) 19,583
Net proceeds from (payments on) note payable to
officer ............................................. 56,000 30,446 (86,446)
---------- ----------- ------------
Net cash provided by financing activities ......... 190,002 1,193,952 2,383,196
---------- ----------- ------------
Net increase (decrease) in cash ....................... 37,546 493,554 (107,552)
Cash and cash equivalents, beginning of period ........ -- 37,546 531,100
---------- ----------- ------------
Cash and cash equivalents, end of period .............. $ 37,546 $ 531,100 $ 423,548
========== =========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ -- $ 10,331 $ 15,284
========== =========== ============
<CAPTION>
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (523,134) $ (444,726) $ (3,856,172)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation ........................................ 3,815 15,001 61,074
Compensation expense on stock grants ................ -- -- 20,700
Changes in operating assets and liabilities:
Accounts receivable ................................ (100) (63,731) (87,499)
Other current assets ............................... (19,192) (6,399) (13,568)
Accounts payable and accrued expenses .............. 101,677 82,370 304,903
---------- ---------- ------------
Net cash used in operating activities ............. (436,934) (417,485) (3,570,562)
Cash flows from investing activities:
Purchases of property and equipment .................. (50,749) -- (190,525)
---------- ---------- ------------
Net cash used in investing activities ............. (50,749) -- (190,525)
Cash flows from financing activities:
Proceeds from sale of common stock ................... -- -- 124,002
Proceeds from sale of preferred stock ................ -- -- 3,180,165
Purchase of treasury shares .......................... -- -- (6,600)
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... -- (2,388) 17,195
Net proceeds from (payments on) note payable to
officer ............................................. (28,101) -- --
---------- ---------- ------------
Net cash provided by financing activities ......... (28,101) (2,388) 3,764,762
---------- ---------- ------------
Net increase (decrease) in cash ....................... (515,784) (419,873) 3,675
Cash and cash equivalents, beginning of period ........ 531,100 423,548 --
---------- ---------- ------------
Cash and cash equivalents, end of period .............. $ 15,316 $ 3,675 $ 3,675
========== ========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ 1,928 $ 6,626 $ 32,241
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(1) Business Description and Risk Factors
Intelligent Interactions Corporation (the "Company"), was incorporated on
February 28, 1995, in the state of Delaware. The Company is developing the
Intelligent Programming Engine (IPE[TM]), an enabling technology necessary to
ensure the economic viability of the information super highway. The IPE[TM]
provides targeted content delivery through interactive on-line networks. The
Company is in the development stage and has a limited operating history, has
incurred operating losses since its inception, and expects losses to continue
and increase. Since its inception, the Company has been engaged in development
and organizational efforts, including development of its IPE[TM] software
technology; creation of development and deployment plans; and recruitment of
administrative, technical, and business development staff. Many of the
Company's current and potential competitors have substantially greater
financial and technological resources, sales and marketing capabilities, and
experience than the Company. The Company's success will depend on the continued
service of its management team and technical personnel. There can be no
assurance that the Company will be successful in the development or
commercialization of its services.
In April 1998, the Company was acquired by 24/7 Media, Inc. ("24/7 Media"
See Note 8). 24/7 Media has committed to fund the future operations of
Intelligent Interactions.
Common Stock Split
Pursuant to the amendment of its certificate of incorporation in 1996, the
Company exchanged existing outstanding common stock for 241,170 shares of $0.01
par value common stock completing a 10 to 1 stock split. All amounts have been
restated to reflect the 10 to 1 stock split and change in par value.
(2) Summary of Significant Accounting Policies
Use of Estimates
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents are investments in a money market account.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over a three-year period. Depreciation expense
for 1996 and 1997 was $9,352 and $34,536, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or income tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Management has established a valuation reserve against the net deferred tax
asset related primarily to the Company's net operating loss carryforward.
The Company, with the consent of its stockholders, had previously elected
under the Internal Revenue Code to be an "S" corporation, effective February
28, 1995. In lieu of corporate income taxes, the stockholders of an
F-48
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(2) Summary of Significant Accounting Policies--Continued
"S" corporation are taxed on their proportionate shares of the Company's
taxable income. No provision or liability for income taxes has been included in
the financial statements for the period of time that the Company was a
Subchapter "S" corporation.
The Company terminated the Subchapter "S" election, by the admittance of a
nonqualified stockholder, on September 10, 1996.
Revenue Recognition
Revenue from software licenses and software support agreements is
recognized ratably over the term of the agreement. Revenue from consulting
services is recognized as the services are provided.
The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP-97-2, "Software Revenue
Recognition," and is effective for fiscal years beginning after December 15,
1997. The Company adopted SOP-97-2 effective January 1, 1998 and the adoption
did not have a material impact on the Company.
Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be capitalized when a product's technological feasibility has been established
by completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and the accompanying
statements of operations stockholders' deficit and cash flows for the three
months ended March 31, 1997 and 1998 included herein have been prepared by the
Company and are unaudited. The information furnished in the unaudited financial
statements referred to above includes all adjustments which are, in the opinion
of management, necessary for a fair presentation of such financial statements.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Increase in Authorized Shares
In March 1998, the Board of Directors increased the authorized stock of
the company to consist of 930,000 shares of common stock, $0.01 par value, and
78,304 shares of Series AAA Preferred Stock, no par value. All share amounts in
the accompanying financial statements reflect the increase in authorized
shares.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the December 31, 1997 presentation.
(3) Line of Credit and Note Payable
The Company maintains a line of credit with a bank in the amount of
$50,000. The agreement with the bank provides for a floating interest rate of
prime plus 2 percent, which was 10.25 and 10.50 percent as of December 31, 1996
and 1997, respectively. Borrowings are secured by government securities
belonging to a founder of the Company. The line of credit expires in September
1998. There were no borrowings outstanding at December 31, 1996 and 1997.
F-49
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(3) Line of Credit and Note Payable--Continued
In January 1997, the Company obtained an additional line of credit with a
bank in the amount of $400,000. The agreement with the bank provides for a
floating interest rate of prime plus one and a half percent which was 10
percent at December 31, 1997. Borrowings are secured by all assets of the
Company. The line of credit expires on July 31, 1998. As of December 31, 1997,
borrowings of $19,583 were outstanding. The line was repaid and cancelled in
April 1998.
During 1995, the Company borrowed $56,000 from the Company's founder and
principal stockholder. The note was originally due in December 1996 and accrued
interest at an annual rate of 10 percent, which was to be paid quarterly.
During 1996, the Company borrowed an additional $55,500 from the Company's
founder and principal stockholder. All amounts outstanding at September 6,
1996, under these notes as well as the 1995 note, plus accrued interest on
those amounts were converted into one instrument in the amount of $113,856.
Principal and interest at the annual rate of 10 percent is due monthly over a
12 month period that began in October 1996. During 1996, the Company paid
$27,410 and $7,052 in principal and interest, respectively, on this obligation.
During 1997, the balance of $86,446 and $3,642 in principal and interest,
respectively, was paid on this obligation.
During 1997, the Company received an aggregate of $450,000 in proceeds
from the issuance of convertible notes payable, bearing an interest rate of 9.5
percent per annum. The notes, and accrued interest, are due on June 29, 1998.
The notes are convertible into any new series of preferred stock ("New Series")
issued by the Company through June 29, 1998 at the same price at which the New
Series is issued. If the Notes are not so converted within this period,
thereafter, each holder of the notes will have the right to convert the
principal and interest of its note into the Series AAA Preferred stock with a
purchase price of $20.53. The Notes were converted as a result of the Merger
(Note 8) at the same price at which the New Series is issued.
(4) Stockholders' Equity
Common Stock
In September 1996, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock from 25,000 to 900,000
shares, as well as to effect a 10 for 1 stock split. Common shares are subject
to repurchase by the Company under certain circumstances. In the event a
stockholder terminates employment with the Company, the Company may elect to
repurchase any or all of the shares at the higher of the employee's original
purchase price per share or fair market value. To the extent the employee's
shares are not fully vested, the Company may elect to repurchase any or all of
the unvested shares at the employee's original purchase price. The Company also
has the right of first refusal to purchase a stockholder's shares for the price
offered to the stockholder in the event a stockholder elects to sell his or her
shares. This right of first refusal and repurchase upon termination expires in
the event of an initial public offering of the Company's stock. The Company
recognized compensation expense on the shares of common stock issued to
employees in 1995 and 1996 for services rendered. Compensation expense was
$8,700 and $12,000 for the years ended December 31, 1995 and 1996,
respectively.
Preferred Stock
In 1996, the Company issued 71,870 shares of Series A Convertible,
Redeemable and Voting Preferred Stock ("Series A Preferred Stock") at $16.42
per share. The Preferred Stock is redeemable at any time after September 10,
2003, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of the request. The redemption price shall
be paid in cash equal to the original issue price per share ($16.42) plus any
accrued but unpaid dividends. Dividends are cumulative and accrue at the rate
of 8 percent per share per annum.
In April 1997, the Company issued 54,l42 shares of Series AA Convertible,
Redeemable and Voting Preferred Stock ("Series AA Preferred Stock") at $18.47
per share. The Series AA Preferred Stock is redeemable at any time after April
16, 2004, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of request. The redemption price shall be
paid in cash equal to the original price per share ($18.47) plus any accrued
but unpaid dividends. Dividends are cumulative and accrue at the rate of 8
percent per share per annum.
F-50
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity--Continued
In August 1997, the Company issued 48,712 shares of Series AAA
Convertible, Redeemable and Voting Preferred Stock ("Series AAA Preferred
Stock") at $20.53 per share. The Series AAA Preferred Stock is redeemable at
any time after August 11, 2004, upon written request from not less than 67
percent of the outstanding Preferred stockholders at the time of request. The
redemption price shall be paid in cash equal to the original price per share
($20.53) plus any accrued but unpaid dividends. Dividends are cumulative and
accrue at the rate of 8 percent per share per annum.
The Series A, Series AA, and Series AAA (collectively, "Preferred Stock")
automatically converts to common stock at an initial ratio of 1 to 1 upon a
firm commitment of an underwritten public offering, at not less than $65.68 per
share or $10,000,000 in aggregate proceeds. The conversion ratio is adjustable
for certain future dilutive events. Conversion to common stock can also occur
upon written request of 67 percent of the outstanding Preferred stockholders.
In the event of liquidation, dissolution, or winding up of the Company,
the holders of each share of Preferred Stock will be paid out prior to and in
preference of holders of common stock in an amount equal to the original issue
price ($16.42 for Series A, $18.47 for Series AA, and $20.53 for Series AAA)
plus all declared but unpaid dividends.
Warrants
The convertible notes payable contained detachable warrants which can be
exercised after the first to occur of the conversion of the notes into the New
Series or June 29, 1998. If the Notes convert into the New Series, the warrants
will be exercisable for the New Series at the same price as those received by
the New Series. If the Notes do not convert into the New Series by June 29,
1998, the warrants will thereafter be exercisable for the Series AAA Preferred
Stock at a purchase price of $20.53. Such warrants will expire within five
years of the agreement. The aggregate purchase price payable upon full exercise
of the warrants equals $157,500 and the number of shares issuable upon full
exercise equals the aggregate purchase price divided by the purchase price per
share under the warrants. The warrants were deemed to have no value as the
Company believes the exercise price of the warrants is in excess of the fair
value of the Company's common stock. In addition, the warrants were terminated
as a result of the Merger (Note 8).
1996 Stock Option Plan
The Company has issued stock options to its employees under the 1996
Equity Incentive Plan. These options were issued at fair market value at the
date of grant. These options are summarized as follows:
<TABLE>
<CAPTION>
Number Weighted Average Option Price
of Shares Exercise Price Per Share
----------- ------------------ -----------------
<S> <C> <C> <C>
Company inception ............................. -- $ -- $ --
Granted ....................................... 70,700 1.09 0.60 -- 1.65
Exercised ..................................... -- -- --
Forfeited ..................................... (10,000) .60 0.60
------- ----- ------
Balance at December 31, 1996 .................. 60,700 1.17 0.60 -- 1.65
Granted ....................................... 22,500 1.77 1.65 -- 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (24,000) 1.65 1.65
------- ----- ------
Balance at December 31, 1997 .................. 59,200 1.20 0.60 -- 2.05
Granted ....................................... 2,000 2.05 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (9,600) 1.65 1.65
------- ----- ------
Balance at March 31, 1998 (unaudited) ......... 51,600 $ 1.15 $0.60 -- 2.05
======= ====== ===============
</TABLE>
No options are exercisable at December 31, 1996 and 1997. The weighted
average remaining life for options outstanding at December 31, 1996 and 1997,
was 7.14 years and 6.47 years, respectively, and at March 31, 1998 was 6.11
years.
F-51
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity--Continued
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a
"fair value based method" of accounting for an employee stock option or similar
equity instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method as defined by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and management has elected to do so. Under the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. However, entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting had
been applied. Accordingly, net loss would be as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
Year Ended Net Loss Net Loss
- ----------- --------------- --------------
<S> <C> <C>
1996 ........................... $ (695,516) $ (701,914)
1997 ........................... (2,561,201) (2,564,751)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1996 and 1997: no dividend yield, zero percent volatility, risk-free
interest rates approximating 6 percent, and the estimated life of the option is
the contractual term of the option. The weighted-average fair value of options
granted for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 and 1998, were $0.39, $0.79, $0.72 and $0.89,
respectively.
(5) Commitments
In January 1997, the Company entered into a noncancelable operating lease
for office space that expires April 30, 1998. Minimum lease payments required
under this lease are $23,576 in 1998. Total rent paid in 1996 and 1997 was
$27,086 and $69,000, respectively.
(6) Income Taxes
As of December 31, 1996 and 1997, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $213,000 and
$3,082,000, respectively, that begin expiring in 2011. Net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of significant changes in the
ownership of the Company.
SFAS No. 109 requires that the tax benefit of financial reporting net
operating losses and tax credits be recorded as an asset to the extent that
management assesses the utilization of such net operating losses and tax
credits to be "more likely than not." As of December 31, 1996 and 1997, the
Company's net deferred tax assets were approximately $81,000 and $1,171,000,
respectively, which consists primarily of the net operating loss carryforward
and a valuation reserve was recorded against the entire amount.
F-52
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(7) Accrued Expenses
Accrued expenses consists of the following as of:
<TABLE>
<CAPTION>
December 31,
March 31,
1996 1997 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Vacation $13,808 $ 33,809 $ 23,685
Accrued Compensation -- 20,000 26,000
Professional Fees -- 36,000 73,000
Travel Expenses -- 21,425 36,042
Other 22,376 10,757 24,375
------- -------- --------
$36,184 $121,991 $183,102
======= ======== ========
</TABLE>
(8) Intelligent Interactions Acquisition
During April 1998, 24/7 Media, Inc. ("24/7 Media") acquired all of the
outstanding stock of Intelligent Interactions (the "Merger").
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 4.1 shares of common stock, 0.6
Class A Warrants, 0.6 Class B Warrants and 0.3 Class C Warrants of 24/7 Media.
In the aggregate 949,243 shares of Common Stock, 3,561,505 shares of Series A
Preferred Stock, 265,152 Class A Warrants, 265,152 Class B Warrants and 136,553
Class C Warrants were issued in connection with the transaction. The Warrants
expire on April 10, 2003.
The Series A shares rank (i) prior to the Common Stock of 24/7 Media; (ii)
pari passu with any Securities (as defined in the Securities Purchase
Agreement); and (iii) junior to any Senior Securities, in each case as to
dividends and other distribution of assets and upon liquidation, dissolution or
winding up of 24/7 Media, whether voluntary or involuntary. The Series A
shareholders are entitled to receive, when and as declared by the Board of
Directors out of funds legally available, dividends at a rate of $0.04 per
share per annum. Such dividends shall be cancelled pursuant to the Securities
Purchase Agreement if 24/7 Media consummates a qualified initial public
offering (as defined in the Securities Purchase Agreement) prior to January 1,
1999.
Each share of Series A shall be convertible, at the option of the holder,
at any time and without the payment of additional consideration into common
stock determined by the sum of (i) the Payment Price of $1.00 per Series A
share divided by the conversion price of $3.81 per common share (as adjusted),
plus (ii) all accrued and unpaid dividends with respect to such share divided
by the dividend conversion price of equal to twice the conversion price of
$3.81.
Each Series A share (and, as applicable, all accrued but unpaid dividends
thereon), shall automatically be converted into common shares at the conversion
price (and dividend conversion price) immediately upon the closing of a
qualified public offering.
In the event 24/7 Media has not completed a qualified public offering on
the prior to the fifth anniversary of the original issue date, each shareholder
of record of Series A shares will have the right to cause 24/7 Media to redeem
at the option of the shareholder all or part of the shareholder's outstanding
Series A shares by paying cash of $3.81 per share plus any dividends accrued.
Additionally, if 24/7 Media fails to maintain at least $10 million of Key-Man
Life Insurance on the President and Chief Executive Officer of the Company,
each shareholder of record of Series A Shares will have the right to cause the
company to redeem at the option of the shareholder all or part of the
shareholder's outstanding Series A Shares by paying cash of $3.81 per share
plus any dividends accrued.
Series A shareholders have one vote for each full common share into which
a Series A share would be convertible.
F-53
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(8) Intelligent Interactions Acquisition--Continued
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants
(exercise price of $7.62), 2.7 Class B Warrants (exercise price of $11.42) and
1.4 Class C Warrants (exercise price of $3.81) of 24/7 Media. The convertible
note payable was also converted into Mandatorily Redeemable Convertible
Preferred Stock--Series A and the detachable warrants were terminated as a
result of the merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 4 shares of
common stock of 24/7 Media under the terms and pursuant to the conditions of
the 24/7 Media 1998 Stock Incentive Plan.
F-54
<PAGE>
Report of Independent Public Accountants
To CliqNow!:
We have audited the accompanying balance sheet of CliqNow!, a division of
K2 Design, Inc. as of December 31, 1997 and the related statements of
operations and changes in parent company's investment and advances and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CliqNow! as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 12, 1998
F-55
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash ...................................................................... $ 0 $ 0
Accounts receivable, net of allowance for doubtful accounts of $21,000..... 535,708 634,643
Prepaid and other current assets .......................................... 52,960 12,250
-------- --------
Total current assets .................................................... 588,668 646,893
Fixed Assets, net of accumulated depreciation ............................... 30,936 36,574
-------- --------
Total assets ............................................................ $619,604 $683,467
-------- --------
LIABILITIES AND PARENT COMPANY'S INVESTMENT AND ADVANCES
Current Liabilities:
Accounts payable .......................................................... $165,337 $183,051
Accrued liabilities ....................................................... 189,297 164,586
Deferred revenue .......................................................... 25,607 336,172
-------- --------
Total current liabilities ............................................... 380,241 683,809
Parent Company's Investment and Net Advances ................................ 239,363 (342)
-------- --------
Total liabilities and parent company's investment and advances .......... $619,604 $683,467
-------- --------
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-56
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
STATEMENTS OF OPERATIONS AND CHANGES IN
PARENT COMPANY'S INVESTMENT AND ADVANCES
<TABLE>
<CAPTION>
Year Ended Quarter Ended Quarter Ended
December 31, March 31, March 31,
1997 1997 1998
-------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Advertising Revenues ........................ $ 896,427 $ 15,295 $ 500,559
Cost of Revenues ........................... 479,742 4,616 284,452
---------- ---------- ----------
Gross Profit ............................. 416,685 10,679 216,107
Operating Expenses:
Sales and Marketing ........................ 417,093 60,694 122,198
General and Administrative ................. 461,755 77,073 143,365
---------- ---------- ----------
Total Operating Expenses .................... 878,848 137,767 265,563
Loss from operations ........................ (462,163) (127,088) (49,456)
Provision for Income Taxes .................. -- -- --
---------- ---------- ----------
Net loss .................................... (462,163) (127,088) (49,456)
Parent Company's Investment and Net Advances,
beginning of the period .................... -- -- 239,363
Parent Company advances (payments) .......... 701,526 147,619 (190,249)
---------- ---------- ----------
Parent Company's Investment and Net Advances,
end of the period .......................... $ 239,363 $ 20,531 $ (342)
========== ========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-57
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Quarter Ended Quarter Ended
December 31, March 31, March 31,
1997 1997 1998
-------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................. $ (462,163) $ (127,088) $ (49,456)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation ............................................. 8,809 -- 3,806
Changes in operating assets and liabilities:
Accounts receivable ..................................... (535,708) (15,295) (98,935)
Prepaid and other current assets ........................ (52,960) -- 40,710
Accounts payable ........................................ 165,337 -- 17,714
Accrued liabilities ..................................... 189,297 10,514 (24,711)
Deferred revenue ........................................ 25,607 -- 310,565
---------- ---------- ----------
Net cash provided by (used in) operating
activities ............................................ (661,781) (131,869) 199,693
Cash Flows from Investing Activities:
Purchases of fixed assets ................................. (39,745) (15,750) (9,444)
Cash Flows from Financing Activities:
Increase (decrease) in due to parent company, net ......... 701,526 147,619 (190,249)
---------- ---------- ----------
Net increase in cash ................................... -- -- --
Cash, beginning of the period .............................. -- -- --
---------- ---------- ----------
Cash, end of the period .................................... $ -- $ -- $ --
========== ========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-58
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc)
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and
As of March 31, 1998 (unaudited)
(1) Organization and Business
CliqNow! ("Cliq" or "the Company") is a division of K2 Design, Inc.
("K2"). The Company was established in 1996 with operations commencing in 1997.
The Company creates Website networks which are composed of individual,
homogenous websites joined by a link page. Each website network creates a
synergy yielding greater exposure for each website than could have been
achieved individually.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of interactive advertising. K2 also
provides various other information delivery services. K2's customers are
primarily U.S.-based corporations operating in a wide variety of industries.
(2) Summary of Significant Accounting Policies
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation
The accompanying financial statements include certain corporate general
and administrative expenses incurred on a consolidated basis by K2 that have
been allocated to the Company. Such allocations include various sales and
marketing costs, general and administrative expenses, depreciation and other
indirect costs and are included in the Company's statement of operations. In
management's opinion, the basis for the allocation of such costs is reasonable
and is based upon proportionate allocation of actual costs incurred using an
estimate of the amount of time spent and equipment and space used. However, the
expenses allocated to the Company, although made on a basis management believes
to be reasonable, may not necessarily be representative of what the Company
would have incurred on a stand-alone basis.
Allocated costs are as follows:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended March 31, December 31,
1998 1997
----------------- -------------
<S> <C> <C>
General and administrative ......... $ 85,409 $303,565
Sales and marketing ................ 1,864 --
Depreciation ....................... 3,806 8,809
Other indirect costs ............... 22,451 120,953
-------- --------
$113,530 $433,327
======== ========
</TABLE>
The allocation of costs for the three months ended March 31, 1997 was not
material.
Revenue Recognition
The Company sells advertising space for banners on all webpages in the
network. The advertisers are pre-billed based on terms of the specific
agreements entered into. Revenue is earned progressively as adviews occur. At
the end of each reporting period all unearned revenue is deferred.
Each website is paid a commission based on the number of clicks on their
respective website.
F-59
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and
As of March 31, 1998 (unaudited)
(2) Summary of Significant Accounting Policies--Continued
Fixed Assets
Fixed assets are carried at cost and depreciated using the straight-line
method over the estimated useful lives. Fixed assets are primarily comprised of
computer equipment and are being depreciated over three years.
Income Taxes
K2 has elected to be treated as a C Corporation. As a result, K2 is
subject to Federal, New York state and city income taxes on K2's taxable
income. Cliq's operations are included in the consolidated tax return of K2.
Income taxes are calculated and provided for on a consolidated basis.
Accordingly, no provision for income taxes has been recorded for Cliq for the
year ended December 31, 1997.
Federal, state and city income taxes are provided in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred taxes were not significant for
the year ended December 31, 1997.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable, and
accounts payable approximate fair market value based upon the relatively
short-term nature of these financial instruments.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and the accompanying
statements of operations and changes in parent Company's investment and
advances, and cash flows for the three months ended March 31, 1997 and 1998
included herein have been prepared by the Company and are unaudited. The
information furnished in the unaudited financial statements referred to above
includes all adjustments which are, in the opinion of management, necessary for
a fair presentation of such financial statements. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year.
Reclassifications
Certain expenses in the December 31, 1997 statement of operations of Cliq
have been classified on a basis different than those reported in the December
31, 1997 Form 10-K of K2.
(3) Parent Company's Investment and Advances
Operations of Cliq are funded through advances from K2. As of December 31,
1997, $701,526 of advances from K2 were outstanding. Those advances have no
defined repayment terms and will be repaid from the operations of Cliq. In
addition, the balance at December 31, 1997 also includes the accumulated losses
of Cliq from inception.
(4) Major Customers
During 1997, the Company had sales to 2 customers representing 23% and 11%
of revenues. The Company had accounts receivable from these customers amounting
to $307,501 as of December 31, 1997.
(5) Subsequent Event (unaudited)
In May 1998, K2 entered into an agreement with 24/7 Media, Inc. to sell
the Cliq division. K2 will receive $1 million in cash and $3 million in 24/7
Media, Inc. Series B Convertible Preferred Stock. A portion of this cash and
stock will be paid to executives of Cliq.
F-60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ............................ 1
Risk Factors .................................. 5
Use of Proceeds ............................... 14
Dividend Policy ............................... 14
Capitalization ................................ 15
Dilution ...................................... 16
Selected Pro Forma Consolidated
Financial Data ............................. 17
Selected Consolidated Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 19
Business ...................................... 27
Management .................................... 38
Certain Transactions .......................... 46
Security Ownership of Certain Beneficial
Owners and Management ........................ 48
Description of Capital Stock .................. 50
Shares Eligible For Future Sale ............... 53
Underwriting .................................. 55
Legal Matters ................................. 57
Experts ....................................... 57
Available Information ......................... 57
Index to Financial Statements ................. F-1
</TABLE>
Until , 1998 (25 days after the commencement of this offering), all
dealers that effect transactions in the Common Stock, whether or not
participating in this offering, may be required to deliver a Prospectus. This
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters or with respect to their unsold allotments or
subscriptions.
3,250,000 Shares
[LOGO OF 24/7 MEDIA]
Common Stock
----------------------------------
P R O S P E C T U S
----------------------------------
Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Part II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses and costs (other
than underwriting discounts and commissions) expected to be incurred by the
Company in connection with the issuance and distribution of the securities
being registered, all of which will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee ...................... $ 16,750
NASD fee .................................. 7,000
Nasdaq Listing Fee ........................ 50,000
Legal fees and expenses ................... 300,000
Printing and engraving expenses ........... 175,000
Accounting fees and expenses .............. 500,000
Blue Sky fees and expenses ................ 15,000
Transfer agent and registrar fees ......... 5,000
Miscellaneous ............................. 131,150
----------
Total ................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The General Corporation Law of the State of Delaware ("DGCL") permits the
Company and its stockholders to limit directors' exposure to liability for
certain breaches of the directors' fiduciary duty, either in a suit on behalf
of the Company or in an action by stockholders of the Company.
The Certificate of Incorporation of the Company (the "Charter") eliminates
the liability of directors to stockholders or the Company for monetary damages
arising out of the directors' breach of their fiduciary duty of care. The
Charter also authorizes the Company to indemnify its directors, officers,
incorporators, employees, and agents with respect to certain costs, expenses,
and amounts incurred in connection with an action, suit, or proceeding by
reason of the fact that such person was serving as a director, officer,
incorporator, employee, or agent of the Company. In addition, the Charter
permits the Company to provide additional indemnification rights to its
officers and directors and to indemnify them to the greatest extent possible
under the DGCL. The Company has entered into indemnification agreements with
each of its officers and directors and intends to enter into indemnification
agreements with each of its future officers and directors. Pursuant to such
indemnification agreements, the Company has agreed to indemnify its officers
and directors against certain liabilities, including liabilities arising out of
the offering made by this registration statement.
The Company maintains a standard form of officers' and directors'
liability insurance policy which provides coverage to the officers and
directors of the Company for certain liabilities, including certain liabilities
which may arise out of this registration statement.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
reciprocal indemnification between the Company and its controlling persons, on
the one hand, and the Underwriters and their controlling persons, on the other
hand, against certain liabilities in connection with this offering, including
liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities within the
past three years. None of the transactions set forth below involved any public
offering or any underwriter, and the Company believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder, or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701, or, with respect to paragraph 13 below, in
reliance on Rule 145(a)(2) under the Securities Act. The recipients in each
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company. The shares of common stock set forth below reflect the one
for four reverse split of the Registrant's Common Stock to be effective prior
to the closing of the offering of common stock.
II-1
<PAGE>
(1) During 1996, the Registrant issued 34,371 shares of its Class A Common
Stock (which were converted into 85,928 shares of common stock) to certain
members of senior management, including Michael P. Paolucci, immediate family
members of senior management, and certain sophisticated investors, including
The Travelers Insurance Company, for an aggregate purchase price of $4,525,000.
Each of the investors was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(2) In August 1996, the Registrant issued convertible subordinated notes to
G.E. Pension Trust, The Travelers Insurance Company and Porridge Partners II,
institutional investors, in the principal amount of $500,000, convertible into
common stock at a price of $11.48 per share and warrants to purchase 6,533
shares of common stock at a price of $11.48 per share. Each of the purchasers
was sophisticated within the meaning of the exemption provided for by Section
4(2) of the Securities Act.
(3) In November 1996 through January 1997, the Registrant completed a series
of private placements of 158,144 shares of preferred stock, to a group of
investors including The Travelers Insurance Company, convertible into common
stock at a price of $11.48 per share, subject to anti-dilution adjustment, for
an aggregate purchase price of $4,538,733. Each of the investors was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(4) During 1997, the Registrant received $2,500,000 in proceeds from the
issuance of senior convertible notes primarily to affiliates and stockholders
of the Company, including The Travelers Insurance Company, bearing an interest
rate of 8% compounded semiannually. Each of the notes was issued with
detachable warrants allowing the holder to purchase shares of common stock at
price ranges ranging from $1.60 to $11.48 per share. Each of the investors was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act. was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(5) In April 1997, the Registrant granted warrants to Hambrecht & Quist, LLC,
an investment banking firm, to purchase 4,375 shares of common stock at $49.72
per share. The recipient was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(6) In January 1998, the Registrant issued $150,000 in senior convertible
notes to The Travelers Insurance Company, convertible into 43,321 shares of
common stock at $3.48 per share. The purchaser was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(7) In January 1998, the Registrant granted warrants to purchase 28,750 shares
of common stock to Cowan and Company, an investment banking firm, in
consideration of services rendered to the Registrant. The recipient was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(8) In connection with the February 1998 merger of Petry Interactive, Inc. and
Advercomm, Inc. with and into the Registrant, (i) the Registrant issued
2,623,592 shares of common stock to former shareholders of Petry Interactive,
Inc., including David J. Moore, Mark A. Burchill and Scott E. Cohen, and
1,705,334 shares of common stock to former shareholders of Advercomm, Inc.,
including Jacob I. Friesel and Garrett P. Cecchini; (ii) the Registrant granted
a former employee (Michael P. Paolucci) warrants to purchase 625,000 shares of
common stock at a purchase price of $3.81 per share in connection with the
termination of such employee's employment with the Registrant; (iii) the
registrant issued to certain investors 10,060,002 shares of preferred stock,
convertible into common stock at a conversion price of $3.81 per share, for
aggregate proceeds of $10,000,000; (iv) the Registrant granted certain
investors warrants to purchase 1,320,904 share of common stock at $7.61 per
share and warrants to purchase 1,320,904 shares of common stock at $11.42 per
share; (v) the Registrant granted to consultants warrants to purchase an
aggregate of 18,750 shares of common stock at $3.81 per share. Each of the
recipients of securities pursuant to the Merger Agreement was sophisticated
within the meaning of the exemption provided for by Section 4(2) of the
Securities Act.
(9) In connection with the April 1998 acquisition of Intelligent Interactions,
Corp., (i) the Registrant issued 949,243 shares of common stock to certain
former shareholders of Intelligent Interactions Corp., including Yale R. Brown
and Matthew B. Walker; (ii) the Registrant issued 3,561,505 shares of preferred
stock, convertible into common stock at a conversion price of $3.81 per share,
to certain former preferred shareholders of Intelligent Interactions Corp;
(iii) the Registrant granted to certain former shareholders of Intelligent
Interactions Corp., including Yale R. Brown and Matthew B. Walker, warrants to
purchase 265,152 shares of common stock at a purchase price of $7.61 per share,
warrants to purchase 265,152 shares of common stock at a purchase price of
$11.42 per share and warrants to purchase 136,553 shares of common stock at a
purchase price of $3.81 per share.
II-2
<PAGE>
Each of the recipients of securities pursuant to the Merger Agreement was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(10) In April 1998, the Registrant issued 5,909 shares of common stock to
Heritage Capital Corp., an investment banking firm, in consideration of
services rendered to the Registrant. The recipient was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(11) In June 1998, the Registrant issued to K2 Design, Inc. 3,000 shares of
the Registrant's Series B Convertible Preferred Stock, automatically
convertible into common stock upon consummation of the Offering at a conversion
price equal to the price per share to the Underwriters, in connection with the
acquisition of the CliqNow! division of K2 Design, Inc. The recipient was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(12) The Registrant from time to time has granted stock options to employees
in reliance upon an exemption under the Securities Act of 1933 pursuant to Rule
701 promulgated thereunder. From January 1996 through August 1998 an aggregate
of 1,307,164 shares of common stock were issued pursuant to option exercises at
exercise prices ranging from $0.16 to $13.00 to employees, directors and
consultants.
(13) In connection with the reincorporation of the Registrant from a New York
corporation to a Delaware corporation in March 1998, the Company issued shares
of its Common Stock and Series A Convertible Preferred Stock in exchange for
the issued and outstanding capital stock of its predecessor corporation. In
addition, in connection with such reincorporation, all options and warrants to
purchaser common shares of the predecessor were converted into options or
warrants to purchase shares of Common Stock.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 +Form of Underwriting Agreement.
1.2 +Form of Lock Up Agreement.
3.1 +Amended and Restated Certificate of Incorporation of the Company.
3.2 +By-laws of the Company.
5.1 +Opinion of Proskauer Rose LLP.
10.1 +1998 Stock Incentive Plan.
10.2 +Form of Stock Option Agreement.
10.3.1 +Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.3.2 +Lease Option Notice, dated July 7, 1998 between the Company and 38-32 Associates.
10.4 +Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 +Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 +Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 +Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 +Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 +Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 +Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 +Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 +Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 +Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 +Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 +Form of Indemnification Agreement.
10.16 +GlobalCenter Master Service Agreement, dated May 1, 1998.
10.17 +Operating Lease agreement dated June 1, 1996 between Brentwood Credit Corporation, AT&T
Systems Leasing and Interactive Imaginations, Inc. (including amendments thereto).
10.18 +Operating Lease agreement, dated May 18, 1998, as amended on July 7, 1998 between Sun
Microsystems and 24/7 Media, Inc. and as amended on July 7, 1998.
10.19 +Pledge and Security Agreement, dated as of November 11, 1997, between Interactive
Imaginations, Inc. and The Travelers Insurance Company.
10.20 +Senior Convertible Note with Warrants Purchase Agreement, dated as of June 11, 1997,
between Interactive Imaginations, Inc. and The Travelers Insurance Company.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.21 +Amended and Restated Stockholders' Agreement by and among 24/7 Media, Inc. and certain
investors named therein.
11.1 +Statement regarding computation of per share earnings.
21.1 +Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 +Consent of Proskauer Rose LLP (included in Exhibit 5.1).
23.5 +Consent of Media Metrix.
23.6 +Consent of Jupiter Communications.
23.7 +Consent of International Data Corporation.
23.8 +Consent of Network Solutions.
23.9 +Consent of Direct Marketing Association.
24.1 +Powers of Attorney (included with signature page).
27.1 +Financial Data Schedule.
</TABLE>
- ----------------
+ Previously filed.
II-5
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
a registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, State of New York on August 12, 1998.
24/7 MEDIA, INC.
By: *
-----------------------
David J. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on August 12, 1998 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
David J. Moore
* Chairman of the Board
- -------------------------
R. Theodore Ammon
* Executive Vice President--Technology and Director
- -------------------------
Yale R. Brown
* Executive Vice President and Director
- -------------------------
Jacob I. Friesel
* Director
- -------------------------
John F. Barry
* Director
- -------------------------
Michael P. Paolucci
* Director
- -------------------------
Jack L. Rivkin
* Director
- -------------------------
Arnie Semsky
* Director
- -------------------------
Charles Stryker
* Executive Vice President, Treasurer & Chief
- ------------------------- Financial Officer (Principal Financial Officer)
C. Andrew Johns
* Controller (Principal Accounting Officer)
- -------------------------
Stuart D. Shaw
</TABLE>
*By: /s/ Mark E. Moran
Mark E. Moran
Attorney-in-Fact
II-7
<PAGE>
Exhibits and Financial Statement Schedule/Index
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 +Form of Underwriting Agreement.
1.2 +Form of Lock Up Agreement.
3.1 +Amended and Restated Certificate of Incorporation of the Company.
3.2 +By-laws of the Company.
5.1 +Opinion of Proskauer Rose LLP.
10.1 +1998 Stock Incentive Plan.
10.2 +Form of Stock Option Agreement.
10.3.1 +Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.3.2 +Lease Option Notice, dated July 7, 1998 between the Company and 38-32 Associates.
10.4 +Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 +Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 +Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 +Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 +Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 +Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 +Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 +Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 +Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 +Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 +Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 +Form of Indemnification Agreement.
10.16 +GlobalCenter Master Service Agreement, dated May 1, 1998.
10.17 +Operating Lease agreement dated June 1, 1996 between Brentwood Credit Corporation, AT&T
Systems Leasing and Interactive Imaginations, Inc. (including amendments thereto).
10.18 +Operating Lease agreement, dated May 18, 1998, as amended on July 7, 1998 between Sun
Microsystems and 24/7 Media, Inc. and as amended on July 7, 1998.
10.19 +Pledge and Security Agreement, dated as of November 11, 1997, between Interactive
Imaginations, Inc. and The Travelers Insurance Company.
10.20 +Senior Convertible Note with Warrants Purchase Agreement, dated as of June 11, 1997,
between Interactive Imaginations, Inc. and The Travelers Insurance Company.
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C>
10.21 +Amended and Restated Stockholders' Agreement by and among 24/7 Media, Inc. and certain
investors named therein.
11.1 +Statement regarding computation of per share earnings.
21.1 +Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 +Consent of Proskauer Rose LLP (included in Exhibit 5.1).
23.5 +Consent of Media Metrix.
23.6 +Consent of Jupiter Communications.
23.7 +Consent of International Data Corporation.
23.8 +Consent of Network Solutions.
23.9 +Consent of Direct Marketing Association.
24.1 +Powers of Attorney (included with signature page).
27.1 +Financial Data Schedule.
</TABLE>
- ----------------
+ Previously filed.
II-9
Exhibit 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
24/7 Media, Inc.:
The audits referred to in our report dated June 2, 1998, except for Note
13, which is as of July 20, 1998, included the related financial statement
schedule of 24/7 Media, Inc. as of December 31, 1997, and for each of the years
in the three-year period ended December 31, 1997, included in the Registration
Statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to the use of our reports included herein related to the audits
of 24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.) and
Interactive Holdings, LLC (successor to Petry Interactive, Inc.) and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
New York, New York
August 12, 1998
<PAGE>
SCHEDULE
24/7 MEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $0 $10,000 $--- $10,000
Year ended December 31, 1996 $10,000 $66,000 $10,000 $66,000
Year ended December 31, 1997 $66,000 $--- $2,277 $63,723
</TABLE>
S-2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report dated May 13, 1998 on the Intelligent Interactions Corporation financial
statements and to all references to our Firm included in or made a part of this
24/7 Media, Inc. Form S-1 Registration Statement (File No. 333-56085).
Arthur Andersen LLP
Washington, D.C.
August 12, 1998
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report dated June 12, 1998 on the CliqNow! division of K2 Design, Inc. financial
statements and to all references to our Firm included in or made a part of this
24/7 Media, Inc. Form S-1 registration statement.
Arthur Andersen LLP
Roseland, NJ
August 12, 1998
